[House Hearing, 111 Congress]
[From the U.S. Government Publishing Office]



   FINANCIAL SERVICES AND GENERAL GOVERNMENT APPROPRIATIONS FOR 2010
_______________________________________________________________________

                                HEARINGS

                                BEFORE A

                           SUBCOMMITTEE OF THE

                       COMMITTEE ON APPROPRIATIONS

                         HOUSE OF REPRESENTATIVES

                      ONE HUNDRED ELEVENTH CONGRESS
                              FIRST SESSION
                                ________
       SUBCOMMITTEE ON FINANCIAL SERVICES AND GENERAL GOVERNMENT 
                             APPROPRIATIONS
                   JOSE E. SERRANO, New York, Chairman
 DEBBIE WASSERMAN SCHULTZ, Florida   JO ANN EMERSON, Missouri
 ROSA L. DeLAURO, Connecticut        JOHN ABNEY CULBERSON, Texas
 CHET EDWARDS, Texas                 MARK STEVEN KIRK, Illinois
 ALLEN BOYD, Florida                 ANDER CRENSHAW, Florida
 CHAKA FATTAH, Pennsylvania
 BARBARA LEE, California
 ADAM SCHIFF, California            

 NOTE: Under Committee Rules, Mr. Obey, as Chairman of the Full 
Committee, and Mr. Lewis, as Ranking Minority Member of the Full 
Committee, are authorized to sit as Members of all Subcommittees.

                   David Reich, Bob Bonner, Lee Price,
                    Karyn Kendall, and Andria Oliver,
                           Subcommittee Staff

                                ________

                                 PART 5
                                                                   Page
 SEC Actions Relating to the Financial Crisis.....................    1
 Federal Trade Commission.........................................   63
 Federal Communications Commission................................  125

 

                                ________

         Printed for the use of the Committee on Appropriations



   FINANCIAL SERVICES AND GENERAL GOVERNMENT APPROPRIATIONS FOR 2010
_______________________________________________________________________

                                HEARINGS

                                BEFORE A

                           SUBCOMMITTEE OF THE

                       COMMITTEE ON APPROPRIATIONS

                         HOUSE OF REPRESENTATIVES

                      ONE HUNDRED ELEVENTH CONGRESS
                              FIRST SESSION

                                ________

       SUBCOMMITTEE ON FINANCIAL SERVICES AND GENERAL GOVERNMENT 
                             APPROPRIATIONS
                   JOSE E. SERRANO, New York, Chairman
 DEBBIE WASSERMAN SCHULTZ, Florida    JO ANN EMERSON, Missouri
 ROSA L. DeLAURO, Connecticut         JOHN ABNEY CULBERSON, Texas
 CHET EDWARDS, Texas                  MARK STEVEN KIRK, Illinois
 ALLEN BOYD, Florida                  ANDER CRENSHAW, Florida
 CHAKA FATTAH, Pennsylvania
 BARBARA LEE, California
 ADAM SCHIFF, California           

 NOTE: Under Committee Rules, Mr. Obey, as Chairman of the Full 
Committee, and Mr. Lewis, as Ranking Minority Member of the Full 
Committee, are authorized to sit as Members of all Subcommittees.

                   David Reich, Bob Bonner, Lee Price,
                    Karyn Kendall, and Andria Oliver,
                           Subcommittee Staff

                                ________

                                 PART 5
                                                                   Page
 SEC Actions Relating to the Financial Crisis.....................    1
 Federal Trade Commission.........................................   63
 Federal Communications Commission................................  125


 
                               ________

                     U.S. GOVERNMENT PRINTING OFFICE
 50-865                     WASHINGTON : 2009




                                  COMMITTEE ON APPROPRIATIONS

                   DAVID R. OBEY, Wisconsin, Chairman

 JOHN P. MURTHA, Pennsylvania           JERRY LEWIS, California
 NORMAN D. DICKS, Washington            C. W. BILL YOUNG, Florida
 ALAN B. MOLLOHAN, West Virginia        HAROLD ROGERS, Kentucky
 MARCY KAPTUR, Ohio                     FRANK R. WOLF, Virginia
 PETER J. VISCLOSKY, Indiana            JACK KINGSTON, Georgia
 NITA M. LOWEY, New York                RODNEY P. FRELINGHUYSEN, New
 JOSE E. SERRANO, New York              Jersey
 ROSA L. DeLAURO, Connecticut           TODD TIAHRT, Kansas
 JAMES P. MORAN, Virginia               ZACH WAMP, Tennessee
 JOHN W. OLVER, Massachusetts           TOM LATHAM, Iowa
 ED PASTOR, Arizona                     ROBERT B. ADERHOLT, Alabama
 DAVID E. PRICE, North Carolina         JO ANN EMERSON, Missouri
 CHET EDWARDS, Texas                    KAY GRANGER, Texas
 PATRICK J. KENNEDY, Rhode Island       MICHAEL K. SIMPSON, Idaho
 MAURICE D. HINCHEY, New York           JOHN ABNEY CULBERSON, Texas
 LUCILLE ROYBAL-ALLARD, California      MARK STEVEN KIRK, Illinois
 SAM FARR, California                   ANDER CRENSHAW, Florida
 JESSE L. JACKSON, Jr., Illinois        DENNIS R. REHBERG, Montana
 CAROLYN C. KILPATRICK, Michigan        JOHN R. CARTER, Texas
 ALLEN BOYD, Florida                    RODNEY ALEXANDER, Louisiana
 CHAKA FATTAH, Pennsylvania             KEN CALVERT, California
 STEVEN R. ROTHMAN, New Jersey          JO BONNER, Alabama
 SANFORD D. BISHOP, Jr., Georgia        STEVEN C. LaTOURETTE, Ohio
 MARION BERRY, Arkansas                 TOM COLE, Oklahoma
 BARBARA LEE, California
 ADAM SCHIFF, California
 MICHAEL HONDA, California
 BETTY McCOLLUM, Minnesota
 STEVE ISRAEL, New York
 TIM RYAN, Ohio
 C.A. ``DUTCH'' RUPPERSBERGER, Maryland
 BEN CHANDLER, Kentucky
 DEBBIE WASSERMAN SCHULTZ, Florida
 CIRO RODRIGUEZ, Texas
 LINCOLN DAVIS, Tennessee
 JOHN T. SALAZAR, Colorado          

                 Beverly Pheto, Clerk and Staff Director

                                  (ii)

 
   FINANCIAL SERVICES AND GENERAL GOVERNMENT APPROPRIATIONS FOR 2010

                              ----------                              

                                       Wednesday, March 11, 2008.  

              SEC ACTIONS RELATING TO THE FINANCIAL CRISIS

                                WITNESS

MARY L. SCHAPIRO, CHAIRMAN, U.S. SECURITIES AND EXCHANGE COMMISSION

                       subcommittee introduction

    Mr. Serrano. What we are going to do is upset the camera 
view only by taking a little time to welcome the members of the 
subcommittee.
    This is our first official hearing of the subcommittee for 
the year, and I am very pleased to welcome Mrs. Emerson as our 
Ranking Member to the subcommittee. She and I have worked on 
many issues before, and if I had to choose a Ranking Member 
this session, she would have been the one. So the Republican 
leadership listened to me.
    We also want to just say that on our side, I believe there 
is one returning member, and all the others chose to go to the 
Defense subcommittee. I cannot blame them--or maybe they knew 
that any subcommittee that has the name ``Financial Services'' 
in it is one that you either have a lot of fun with or that you 
stay far away from during this time.
    Debbie Wasserman Schultz, from the State of Florida, is 
with us. We have Rosa DeLauro from Connecticut, Mr. Chet 
Edwards from the great State of Texas, Allen Boyd from Florida, 
Chaka Fattah from Pennsylvania, Barbara Lee from California, 
and Adam Schiff from California.
    So, on this side, there is one New Yorker, two from 
Florida, two from California. I am outnumbered, but as you well 
know, I have the gavel.
    Would you like to speak to the subcommittee?
    Mrs. Emerson. Thank you, Mr. Chairman. We have one 
returning member, Mr. Kirk, Mark Kirk, from Illinois. John 
Culberson from Texas is also on the subcommittee, and we have 
Ander Crenshaw from Florida. So we actually have three 
Floridians who outnumber us, I suppose.
    I also would like to introduce my staff: John Martens, who 
is our Minority Staff Director, and Justin Rone from my office 
who handles all of our work on financial services issues and 
who is our counsel.
    Mr. Serrano. They are all on Facebook.
    Mrs. Emerson. I do not know. I do not belong to Facebook, 
so I have not ever gone and looked.
    Mr. Serrano. You should try. I just told them I am on TV at 
10 o'clock, and they are all watching.
    We have our committee clerk, David Reich, who is sitting 
over to my right. Bob Bonner and Karyn Kendall also work on the 
subcommittee, and Ed O'Kane is right here behind me. Lee Price 
is over to my right. Everybody is to my right. There is Andria 
Oliver, who is to my left.
    We want to take this opportunity to welcome all of you. 
This is, unfortunately, an exciting time to be chairing this 
committee, and I say ``unfortunately'' because we wish it were 
during wonderful times. What we will be doing during the next 2 
years will be very difficult, and the role that I see for this 
committee, Mrs. Emerson and members, I think was best said by 
Barney Frank, the Chairman of the Financial Services Committee, 
when he said, ``I authorize it and Serrano has to pay for it.''
    It is more than pay for it. We also have to supervise it 
and we have to oversee it, and it is our oversight role in the 
Appropriations Committee that, I think, will play a major role 
in what we do this year. These will be exciting times, and I 
look forward to working with all of you to do the right thing 
for our country.

                  chairman serrano's opening statement

    I welcome you to this hearing of the Financial Services and 
General Government Subcommittee. Today, the subcommittee will 
hear testimony from the Chairman of the Securities and Exchange 
Commission, the Honorable Mary Schapiro. Chairman Schapiro was 
nominated by President Obama, was unanimously confirmed by the 
Senate and was sworn into office on January 27, 2009. Chairman 
Schapiro, I congratulate you on your appointment, and I welcome 
you to this hearing.
    The SEC plays an essential role in our economy by 
protecting the public through the enforcement of our securities 
laws. Given this important mission, I am troubled by reports 
that an environment of lax oversight and enforcement at the 
Commission was a contributing factor in the financial crisis 
now facing the country today. For example, investment banks 
were allowed to become overextended, which led to the eventual 
collapse of three of Wall Street's largest banks. A major Ponzi 
scheme went undetected, causing $50 billion in investor losses. 
The SEC started, then stopped, an investigation into fraud 
allegations of a financial services company in Texas. Investor 
losses in that case are now believed to exceed $8 billion. 
Which brings us to today's hearing.
    The purpose of today's hearing is two-fold. First, I am 
interested in hearing more about the lessons the SEC has 
learned from the experience leading up to and during this 
financial crisis. We are in the midst of the worst economic 
downturn since the Great Depression 80 years ago, and it is 
important to fully understand how we got here and how to avoid 
repeating past mistakes.
    Second, looking forward, I would like to hear more about 
your ideas regarding government-wide regulatory reform and what 
principles you believe should govern that reform.
    I would like to hear more about your priorities at the 
Commission, particularly your plans to rebuild the Commission's 
oversight, inspection and enforcement capabilities. I know you 
have an ambitious agenda of changes you are working to 
implement, and I look forward to hearing more about them in 
your testimony.
    The subcommittee stands ready to assist the Commission as 
it moves forward under your leadership. I would note that in 
the just completed 2009 omnibus bill, which I believe the 
President will sign today, the subcommittee provided the 
Commission with an additional $30 million above the requested 
level to enhance oversight, inspection and enforcement 
activities and for management initiatives.
    Chairman Schapiro, for the upcoming fiscal year 2010 budget 
cycle, I ask that you work closely with the subcommittee to 
advise us of your resource needs.
    If I may depart from my prepared statement, you know I have 
been in public office for 35, going on 36 years. I have never 
heard an agency say, ``We do not want money.'' Traditionally, 
every agency, whether in the State assembly where I was for 16 
years, or here, where I have been for 20 years, tells us that 
they need money. I have to say that the last administration at 
the SEC was the only agency I ever ran into where we would sit 
here and say, ``How much do you need?'' and they would say, 
``We have enough.''
    ``We are willing to give you some more.''
    ``Okay. We do not need any more.''
    ``Do you have need to hire some more people to do the 
oversight?''
    ``No. We are fine.''
    When you look at everything that has happened, you know 
that something was up that we did not understand, but they were 
the first agency I have ever met that just did not want any 
more resources.
    Now, I am not suggesting that you should ask us for 
everything in the Treasury, because you know that we have 
financial difficulties, too, in terms of what we can allocate, 
but it is our intent to make sure you have the resources 
necessary to do the work you have to do.
    We live in difficult economic times. Commercial banks are 
failing every week, unemployment is up sharply, and home 
foreclosures are mounting. Confidence in our credit rating 
agencies is sinking, and evidence of major securities fraud is 
growing. We need to restore the health of our financial system 
to put us on a path to economic recovery. To accomplish this, 
we need an SEC that is equipped to handle the regulatory 
challenges of the 21st century.
    Mr. Serrano. With that, I would like to recognize our 
Ranking Member, Mrs. Emerson.

               Ranking Member Emerson's Opening Statement

    Mrs. Emerson. Thank you, Mr. Chairman.
    Since this is our first hearing, I do want to say for the 
record that it is an honor to be the Ranking Member of the 
subcommittee. I thank you for having said those kind words 
about me, and it is going to be especially challenging during 
this very trying economic time.
    The subcommittee has jurisdiction over a diverse group of 
agencies, many of which that do have a profound impact on 
Americans' lives and on the financial stability of our economy. 
I really do look forward to working cooperatively with you, 
Chairman Serrano, to improve the operations of the Federal 
Government and the workings of our economy as well as to help 
all Americans through this economic crisis.
    Chairman Schapiro, welcome and congratulations on your 
confirmation. As Chairman Serrano has described, our current 
economic crisis has left markets in turmoil, losing trillions 
of dollars in value, hurting every segment of our economy, 
including family savings, small business, and retirement and 
pension funds. So I know that you are quite well aware of the 
challenging task that you have in front of you to improve the 
transparency in the securities markets, to uncover fraud and 
deception, while not at the same time overregulating markets 
and hindering economic recovery.
    So I look forward to working with you and with Chairman 
Serrano to make sure that you have all the tools and resources 
necessary to ensure investors are protected and that markets 
are functioning properly.
    However, I do want to point out that, since the failure of 
companies such as Enron, Global Crossing and Arthur Andersen, 
the Congress has provided the SEC with additional regulatory 
tools with the enactment of the Sarbanes-Oxley legislation and 
has more than doubled the SEC's annual appropriations. So under 
those circumstances, it is a bit difficult to see how the SEC 
was not better positioned to deal with our current economic 
turmoil and how the SEC allowed the Madoff scandal to continue 
for so many years. Yet I do want to be helpful to you and 
provide the SEC with the tools and the resources that you 
believe are needed, and at the same time, I want some 
assurances that the resources we give you and any additional 
help that you need, even beyond that, will be effectively 
utilized.
    So welcome once again. I look forward to your testimony.
    Thank you, Mr. Chairman.
    Mr. Serrano. Thank you.
    Before we begin, just a little housekeeping.
    I will be pretty strict to the 5-minute rule only because 
we usually get a good turnout. We have two Chairmen of 
subcommittees here--Ms. DeLauro and Mr. Edwards--so you know 
that the Chairman and the Ranking Member get a little leeway; 
but after that, the gavel gets pretty strict. We will recognize 
members, after the Ranking Member and the Chairman speak, for 
questions based on when you arrived at the hearing, alternating 
between both sides of the dais. So once again, we thank you for 
listening to our opening statements and for putting up with a 
little housekeeping.
    Before we go on, I would like to recognize two people from 
my personal staff who will be working with us all year long. 
They are Nadine Berg, who is sitting quietly in the audience, 
listening to what you guys are saying about me, and Philip 
Schmidt, who is also a member of my staff.
    We thank you for being with us today. We thank you for 
taking on this major responsibility. We stand ready to assist 
you.
    If you would summarize your testimony, your full statement 
will go in the record. We would like you to keep your summary 
down to 5 minutes.

                 Chairman Schapiro's Opening Statement

    Ms. Schapiro. Thank you, Mr. Chairman, Ranking Member 
Emerson and members of the subcommittee. I very much appreciate 
the opportunity to be here today to testify. This is the first 
time I am testifying on behalf of the Securities and Exchange 
Commission.
    I just want to add, Mr. Chairman, that I greatly appreciate 
your remarks. I am fairly confident you will never hear me say 
that this agency cannot use more resources and more tools to do 
a better job.
    Mr. Serrano. I was afraid of that.
    Ms. Schapiro. As we all know, these past 12 months have 
been a wrenching time for all Americans. Trillions of dollars 
of wealth have been lost, and millions have seen their 
retirement funds, savings and college tuition funds shrink. 
This crisis has challenged our citizens' faith in our market 
system.
    As the new Chair of the Securities and Exchange Commission, 
whose primary responsibility is protecting investors, I know 
that we must act promptly and decisively to re-earn investors' 
confidence. To that end, since taking office just a few weeks 
ago, I and my colleagues on the Commission have already taken 
action to begin to help restore confidence in the markets.
    First, we ended the 2-year penalty project which had 
weighed down our enforcement staff and had acted as a 
disincentive to bringing crucial enforcement actions.
    Second, we instituted a new process that enables us to much 
more rapidly initiate investigations.
    Third, I have hired a seasoned and well-respected Federal 
prosecutor to head our enforcement division, and he begins in 2 
weeks.
    Fourth, we launched a review that will ultimately revamp 
the way we sort through and handle the more than 700,000 tips 
and complaints and referrals that this agency receives each 
year.
    Fifth, we are working to incorporate a more sophisticated 
risk-based methodology into our inspections and examination 
programs that oversee broker-dealers and investment advisers.
    Sixth, we are vigorously pursuing our responsibilities to 
oversee credit rating agencies, as provided in the Credit 
Agency Reform Act. In the next month, we will hold a roundtable 
to examine what additional steps may be necessary in the 
oversight of ratings agencies.
    Important questions have been raised both by Members of 
Congress and by the citizens whom we all serve about the job 
that the SEC has been doing. The Commission and our staff are 
committed to restoring the SEC's reputation as the investors' 
advocate--facilitating capital formation and maintaining fair, 
orderly and efficient markets.
    As we move forward to restore investor confidence, however, 
we find ourselves digging out of a deep hole. Between 2005 and 
2007, when the SEC should have been growing and changing to 
meet increasingly complex markets, the agency's budget was 
flat, and even declining. This necessitated significant 
staffing cuts implemented through a hiring freeze as well as a 
two-thirds reduction in investments in information technology 
over a 4-year period. I am very grateful for both the support 
of this committee over the past 2 years and for the President's 
request of 1.026 billion dollars for fiscal year 2010.
    With these additional funds, we plan to add both 
enforcement and examination staff, focusing on detecting and on 
deterring fraud. We will also invest in our risk assessment 
programs, adding staff and incorporating risk assessment into 
all aspects of our operations.
    Finally, we will continue to build the technology that will 
enable us to better mine the data that is filed with the SEC 
and to evaluate the tips and complaints that we receive.
    To be the investors' advocate, we must regain our position 
as a tough cop on the beat. Your support for the 2009 
appropriation of $943 million is a very, very important step in 
that direction, and I very much appreciate the subcommittee's 
leadership in this regard. These funds will be enormously 
helpful as we work to reinvigorate and strengthen the SEC.
    Unfortunately, I have learned during my short tenure that 
this funding level will still require the agency to make some 
cuts in its current operations. Because I do not believe it 
would be wise for the SEC to retrench during these perilous 
times, I have submitted to you a reprogramming request to use 
$17 million in fiscal year 2009 from the SEC's unspent prior 
year funds.
    Let me please be clear. I am not asking for new funds. 
Rather, we are seeking authority to spend money that was 
approved but unspent in prior years. This investment could pay 
substantial dividends in the years the come. With these funds, 
we will not have to wait until 2010 to build out our technology 
and further strengthen our risk-based surveillance tools. We 
can early-hire enforcement and examination staff, significantly 
increasing our presence within the investment adviser, broker-
dealer, and mutual fund communities.
    When I served on the SEC 15 years ago, the organization was 
considered one of the gems of the Federal Government. Since 
returning a few short weeks ago, I have found an organization 
that, while admittedly harmed by missteps of the past, is 
committed to restoring its reputation. We will work hard to re-
earn your faith and the confidence of the investing public.
    Again, I thank you for your continued strong support of the 
SEC and of its critical mission. I welcome your questions. 
Thank you.
    Mr. Serrano. Thank you so much.
    [The information follows:]

 

                        SEC REGULATORY FAILURES

    Mr. Serrano. As I said before, we are excited at your 
approach to making changes. With that in mind, my first 
question would be a general question.
    The global financial crisis had its roots in the general 
regulatory failures of the last decade or more. The lack of 
Federal regulations of financial derivatives and of other 
complex investment vehicles, the willingness of rating agencies 
to assign investment-grade status to high-risk securities, and 
an SEC oversight program that allowed investment banks to 
become overleveraged all contributed to the crisis we find 
today.
    So, in your opinion, how did we allow the regulatory 
failures to occur? Was it just general policy or was it people 
not being on top of things or was there something where people 
were inventing new schemes and new ways of investing, if you 
will, and government or regulatory agencies could not keep up 
with it?
    Secondly, how would you then turn the Commission around to 
make sure that we are on top of these issues as we face new 
challenges--if I may say, new schemes? Because I assure you--
and you know this well--as we are sitting here today, there are 
a bunch of guys, and maybe ladies too, trying to figure out how 
to beat the system again. In fact, as we know, there are people 
trying to beat the system with the monies that we just 
allocated to help the system recover. That as long as we are 
alive in this world, as long as there is a world, somebody is 
going to try to figure out how to try to beat the system.
    So what happened? How do you turn this around?
    Ms. Schapiro. It is such a great question, and we could 
probably spend the whole day talking about it. I think there 
are so many causes to the financial crisis that we are now 
trying to resolve. I guess I would chalk it up to a few things.
    One is the very rapid growth of the size and complexity of 
the markets and regulators who did not either fully appreciate 
the complexity or the connectedness of financial institutions 
as they engaged in all kinds of new and highly leveraged 
financial activities. I do not think regulators fully 
understood the financial impact of all of that.
    As you might recall, just a year ago, we were all talking 
about competitiveness and the U.S. position in the world as the 
leader in financial markets and what could we do to even 
further reduce regulation in order to ensure that listings came 
to the New York Stock Exchange and not to London, or that 
businesses were started in the United States and not in other 
countries, and that new financial products would be invented in 
the U.S. and not in other places. Our focus as a society and as 
a regulatory community very much was on how do we maintain 
competitiveness, which is very important, but to the exclusion 
of a tight and rigorous regulatory regime. So I think that also 
contributed.
    We also have a regulatory system that has gaps. We have 
vast parts of the financial system that are unregulated, as 
with hedge funds. We have enormously popular products, like 
credit default swaps, which currently have $25 trillion in 
notional value that are virtually unregulated. So we had gaps 
in the system as a third contributing factor, I think.
    Fourth, I would say--and this is very much my personal 
view--that regulators lost their skepticism and thought that 
market discipline was what was really necessary, that nobody 
would ever bet the ranch, that nobody would take a foolish 
economic risk that might put the franchise in danger. I think 
what we have learned is that people either did not understand 
the risks or assumed that, at the end of the day, everything 
would work out all right. So we as regulators lost our 
skepticism about the real effect of market discipline in 
corralling risky behavior.
    I think there are so many causes, and those are just very 
few. We could also talk about lax underwriting standards in the 
mortgage industry. We can talk about investment banks that 
securitized away mortgages and other products in order to 
spread the risk, thinking that spreading the risk would save 
their institutions. But in fact, of course, as we know, that is 
not at all what happened.
    How we turn it around is really the challenge we at the SEC 
and throughout the Federal Government and you as Members of 
Congress are really grappling with right now.
    For the Securities and Exchange Commission, it very much 
means a real and genuine recommitment to serving investors. 
That is what we are there for. We are the only agency in the 
Federal Government solely charged with the protection of 
investors and with maintaining the integrity of the capital 
markets, the public disclosure system that allows investors to 
allocate their capital based on informed consent and the 
understanding about the financial situation of companies. It is 
about writing rules that govern the interaction between brokers 
and advisers and their customers. It is about ensuring that we 
have adequate resources to make sure that people are, in fact, 
playing by the rules.
    So we have to recommit. We have to get back to basics. We 
have to build our enforcement capability. We have to have a 
sense of urgency in dealing with these problems. We have to be 
smarter and more efficient. We have to look at risks and focus 
our examination program and our enforcement program on the 
risks, not just on what the calendar tells us about it is time 
to walk back into this firm and look at their operations. So we 
need new skillsets. We need new tools. We need additional 
resources, and we need a recommitment and a refocus on what 
these markets exist for. It is to raise capital, to create jobs 
to build businesses, and to allow investors to share in that 
wealth creation. These markets at the end of the day exist for 
the investor.
    Mr. Serrano. I have really one more question before I turn 
it over to Mrs. Emerson, but I want to ask you, on a personal 
level, sort of your personal opinion.
    You do not have to name names. We know of a couple of 
people who will or who have been indicted for Ponzi schemes and 
so on. The mood in Washington seems to be let's move forward; 
let's not look back. But when you do not look back, some people 
get away with things they did which caused the problem.
    Without naming names, do you think some folks on Wall 
Street and at other places are going to get away with what 
otherwise would have been a crime?
    Ms. Schapiro. I would certainly hope not. I said in my 
confirmation hearing--and I believe this deeply--that there can 
be no sacred cows. We have to look at the failures at every 
level of our system, whether it is on Wall Street within the 
firms, or at the mortgage companies, or at the rating agencies 
throughout the financial system to understand what went wrong, 
because we will repeat the mistakes of the past if we don't 
understand them. And we have to hold those accountable who are 
responsible for putting us in the situation we are in right 
now. We are highly committed to doing that.
    Mr. Serrano. Okay. So when we hear people say let's move 
ahead, let's look forward, you are saying that as you look to 
see what went wrong and you stumble onto people who made it go 
wrong, if there is criminal damage there, you will deal with 
that?
    Ms. Schapiro. We will never be effective at deterring 
fraudulent conduct if we do not prosecute it when we find it, 
so we have to look back, but we have to plan to move ahead as 
well. I think we are capable of doing both of those things.

                           REGULATORY REFORM

    Mr. Serrano. Let me ask my last question for this round.
    The Emergency Economic Stabilization Act requires the White 
House to make recommendations to Congress by April 30 for 
improving the United States' financial regulatory system.
    From the perspective of the SEC, what are the principles 
that you believe should govern regulatory reform? In your view, 
how would the type of regulatory reform that you would like to 
see impact the funding and staffing needs at the Commission?
    Ms. Schapiro. I think it is really important that we have 
the focus we do right now on the creation of a systemic 
regulator, and that there is some entity within the Federal 
Government that is monitoring and keeping a check on the risks 
that exist in our system with the largest financial 
institutions. I think it is equally important that we have a 
focus on investor protection and on the protection of the 
capital markets, through which I mean increased transparency 
and disclosure.
    So while I think the focus on systemic risk is important 
right now, I would be very concerned if we lost our focus on 
ensuring that there is an investors' advocate in the Federal 
Government who will bring the big enforcement cases, who will 
pursue the Ponzi schemes, who will go into the investment 
advisers, the brokerage firms, the mutual funds and ensure that 
they are playing by the rules and that the hard-earned assets 
and earnings of American citizens are being protected with all 
of those different entities. I think that is an equally 
important pillar of financial regulation. I know it is not the 
focus at the moment, but we absolutely cannot lose sight of 
that.
    Mr. Serrano. Thank you. Thank you so much.
    Mrs. Emerson.

                          MADOFF PONZI SCHEME

    Mrs. Emerson. Thank you, Mr. Chairman.
    Chairman Schapiro, I want to ask you a few questions about 
the Madoff scheme, but really as it applies to how you want to 
move forward, if you will, because obviously we all know that 
you were not at the helm of the SEC during such time that this 
occurred. And I do appreciate the fact that you are trying to 
rework the mix of skills among the staff people to try to 
better uncover complex securities fraud.
    But let me just ask you these three questions--or four, 
perhaps--and then you can answer them all at one time.
    First of all, have now your enforcement supervisors begun 
conducting regular reviews of all pending cases so that we can 
ensure that a case like the Madoff one will not languish on a 
lower level staff person's desk who really does not understand 
that there might have been potential fraud committed?
    Have you been working closely with the inspector general to 
understand what went wrong?
    Lastly, what incentives do people have to come forward with 
information regarding potential securities fraud? Hopefully you 
all will be protecting whistleblowers' identities, but I assume 
you all are working on that. I know that most people really 
want to do the right thing, to identify wrongdoing, but they 
are nervous about getting their names in the paper or they are 
going to be sued or some such thing. So just share with us how 
you plan to work through all of this, if you will.
    Ms. Schapiro. Sure. I am happy to do that.
    As you can imagine, it is unfortunate that the SEC is 
currently being defined more by what it has missed than by what 
it has done, and certainly Madoff is an enormous component of 
that.
    As I mentioned, we have hired a new enforcement director 
who has spent 11 years as a Federal prosecutor, running the 
Securities and Commodities Fraud Task Force in the Southern 
District of New York. He is tremendously experienced in 
securities fraud prosecutions, and he will begin in a couple of 
weeks.
    As I have talked with him since we convinced him to join 
the team, we have talked a lot about getting through the cases, 
understanding those thousand or so outstanding cases and making 
sure we are moving to the front of the line as quickly as 
possible those that are likely to really impact investors in a 
meaningful way.
    I will say that 2 weeks ago, we filed three TROs in one day 
for Ponzi schemes, and there is no doubt but that the 
enforcement division is a bit on fire with respect to Ponzi 
schemes, and we could talk more about that.
    As you also know, we have an inspector general 
investigation ongoing about what went wrong with Madoff, and we 
look forward very much to his report and to his findings. I do 
talk with him on a fairly regular basis. His report will not be 
done for months, and I feel I have to run the agency in the 
meantime, and we do not have the luxury of waiting months to 
start to make some of the structural changes that I think are 
really critical to addressing what went wrong with Madoff.
    As you point out, we received a tip, information that was 
quite creditable and fairly complete, outlining why the returns 
that were promised by Madoff were highly unlikely to be 
legitimate. We get, as I said, 700,000 to 1.5 million 
complaints a year and tips a year. We have to figure out a way 
to deal with that volume of information. So I contracted in the 
last week with the Center for Enterprise Modernization, who has 
worked with other Federal agencies to do just this sort of 
process review for the handling of data coming into the agency, 
and then to make some short-term and longer-term 
recommendations to us on how we might better mine that data, 
understand what is important in it, and then jump on those 
matters as a priority to try to head off Ponzi schemes and 
problems like that much earlier.
    We are also working on a package of proposed regulatory 
reforms that would deal with issues like the custody of 
customer assets, potentially an independent audit by an 
accounting firm of investment advisers--such a requirement does 
not exist--and so there is also a regulatory reform package 
that we are working on, and our examination program is 
refocused on a number of these kinds of issues.
    Your final question: What incentives exist?
    At the SEC, the only financial incentive for whistleblowing 
is actually limited to the insider trading area where the 
agency can, in fact, pay a bounty for insider trading tips. We 
are actively discussing within the agency whether we should 
propose to Congress that we have a broader whistleblower 
statute for the Securities and Exchange Commission. Our 
thinking is very early at this point, but we will certainly be 
back to talk about that in more detail.

                              SEC STAFFING

    Mrs. Emerson. I appreciate that. Thanks.
    When you are talking about attracting new people and 
competent staff, I mean most people, I think, do not realize 
that you all are able to pay your staff significantly more than 
many government agencies. I am curious, though. Do you all lose 
staff to the private sector? I should say the private sector 
now probably has plenty of staff from whom you could call.
    I mean, obviously, number 1: Do you lose staff to the 
private sector? Number 2: Are there more Wall Street veterans, 
for example, looking for employment with you all? Third: Has 
the Special Inspector General for TARP asked for your 
assistance in conducting his investigations? Have you been able 
to detail staff to him?
    Ms. Schapiro. Let me start with the last first.
    I have met with the Special Inspector General for TARP, SIG 
TARP, I think they shorthand themselves. I personally met with 
him. He has met with our enforcement people. We expect a very 
close working relationship. I think they need to rely on us 
because we have the bodies and the capability to bring civil 
actions for the misuse of the TARP funds by financial 
institutions, so we are forging a very strong and positive 
relationship, and we are looking forward to working together.
    We have traditionally lost people significantly to the 
private sector. While the SEC can pay better than many other 
Federal agencies, we do not compete with Wall Street, for sure. 
Pay parity has made an enormous difference. We have reduced our 
attrition rate from about 12 percent, on average, between 1994 
and 2000 to somewhere between 5.5 and 8.5 percent. I would 
guess that in recent months, it has been a good bit lower than 
that because Wall Street is not really hiring. That makes this 
a wonderful opportunity for us to attract people who both need 
jobs, but also who are kind of ready to sit on the other side 
of the table, maybe who have been a little bit unhappy with 
their Wall Street experience and who therefore can bring 
skillsets to us that we might not otherwise ever be able to 
attract: financial analysis, trading, forensic accounting kinds 
of experiences. It would be my hope that we can bring in 
exactly those kinds of people.
    Mrs. Emerson. Thank you so much, Mr. Chairman.
    Mr. Serrano. Thank you.
    Mr. Edwards.

                         GRAMM-LEACH-BLILEY ACT

    Mr. Edwards. Chairman Schapiro, obviously our financial 
markets and private enterprise system depend on trust, and that 
trust has been lost. I want to thank you for taking on the 
tremendously important responsibility of trying to restore that 
trust, and I hope we on a bipartisan basis will be partners 
with you in that effort.
    I would like to ask about your opinion in regard to the 
impact of the Gramm-Leach-Bliley law passed in 1999.
    To what extent, in your opinion, did that have an impact on 
the meltdown in our financial services markets and among 
financial services firms? Do you think we should revisit that 
law? If so, could you mention one or two specific items in that 
law that we ought to reconsider?
    Ms. Schapiro. That is a terrific question, and it is a hard 
one to answer. I guess I would love to think about it and 
perhaps come back to you with some more careful thoughts.
    I mean, clearly, we have a situation that has evolved in 
part because of Gramm-Leach-Bliley, where the size of financial 
institutions has grown to extraordinary dimensions, and that 
may be one of the issues here as we think about systemic risk. 
But if you will indulge me, I would love to come back to you in 
a more thoughtful way on that question.
    [The information follows:]

 

    
              CREATING AN EFFECTIVE WHISTLEBLOWER PROGRAM

    Mr. Edwards. Okay. Could I ask you then about 
whistleblowers? You referenced that in your review of that.
    I would have to believe instinctively that without an 
effective whistleblower system, we just could never provide you 
enough resources to effectively regulate such a massive number 
and size of firms throughout the country.
    Can you tell me how the present whistleblower laws work? 
What kind of a reward is offered? How is the system working? It 
looks like there are nearly 2,000 tips a day that you get.
    How do you ferret out the good from the bad there?
    Ms. Schapiro. Right now, the main reward for being a 
whistleblower is the good feeling you get of having done 
something important, because we do not have the authority to 
pay except where the whistleblowing relates to insider trading. 
So that is one reason we are considering whether we should ask 
Congress to expand our capability in that area.
    I have talked with other agencies, including the IRS, which 
has a very well-defined whistleblower function. I think that we 
might benefit enormously from that. Whistleblowers tend to do a 
lot of the work for you--hand you something that is pretty 
fully baked. Then it would enable us to run with that kind of 
information and to pursue cases in a much more aggressive way.
    We have to leverage third parties to do our job. There are 
3,600 employees at the SEC. We are responsible for over 30,000 
regulated entities, and those are the 12,000 public companies. 
But even if we take them out of the mix, there are 11,000 
investment advisers, there are 8,000 mutual funds. Think of the 
impact on American citizens from the conduct of those people. 
There are 5,000 brokerage firms. You can give us all the money 
and all the people in the world, and we are still going to need 
to rely on citizens, on the private sector, on accounting firms 
and others to be able to do our job effectively, given the 
number of registrants that we have responsibility for. So we 
are trying to be very creative and think about how we can both, 
through whistleblower authority potentially but also through 
other mechanisms, leverage others' efforts to do our jobs.
    Mr. Edwards. I will finish, as my 5 minutes are about up, 
by just saying that I hope you will also look at the judicial 
system as also a tool that we can use as part of the system of 
checks and balances. I know we voted for litigation reform in 
financial services a number of years ago. Like most laws, I am 
sure it was not perfect, and perhaps we need to leverage the 
private sector. We hear a lot of talk about frivolous lawsuits, 
but in this particular arena, it might be that we need some 
serious lawsuits that again bolster the resources you have 
within your agency to keep these firms honest and to restore 
trust.
    Thank you, Mr. Chairman.
    Mr. Serrano. Thank you.
    As I said before, California has two members on the 
committee. Texas has two members. New York has only one. 
Florida has three. So we recognize Mr. Crenshaw.

                    MORE EFFECTIVE REGULATION NEEDED

    Mr. Crenshaw. Thank you, Mr. Chairman.
    Thank you for being here today.
    We are talking a lot about confidence and credibility, and 
you are part of that in your new role. I guess, in the big 
picture, the lack of credibility comes right now on account of 
the Department of Treasury. They are there, and have got the 
big job to kind of figure out how to restore confidence. You 
know, there seems to be a lack of direction, but underneath all 
that, you have got your own problems in how we deal with just 
the regulatory aspect. So I want to ask you a couple of 
questions about that.
    One of the things--when they talk about restoring 
confidence, they look at the SEC, and they say, ``Well, gee, 
the investors really have not been protected. So do we need 
more regulation or do we not need more regulation?''
    I want to ask you about that, because some would argue that 
right now it is not so much whether we need more regulation 
but, rather, more effective regulation. I hear stories of 
smaller firms, that they have got regulators just swarming like 
fire ants, looking at all of the records, seeing if everybody 
passed their tests and filed their forms and signed their 
documents.
    Then on the other hand, you see in the big picture these 
things like Madoff and these huge violations that occurred that 
do not seem to get the focus. Then on the other hand, I read an 
article just not long ago that kind of, I think, tracks this. I 
think it was a Harvard study that looked at some of the 
regulation, and it found out that the big firms that are 
headquartered in money center areas tend to have lower levels 
of sanctions once an investigation takes place than do some of 
the smaller firms that are in outlying areas. It talked about 
the fact that sometimes the way that happens is, instead of 
having a judicial proceeding if it is a big firm that is kind 
of in a money center, then they will go to administrative 
hearings, number 1, as opposed to judicial hearings. Then 
number 2, the sanctions that are actually levied tend to be 
lower. I guess the inference there is if you are an enforcer 
and someday you want to go to work for a big Wall Street firm, 
you may tend to be lax in terms of your regulation.
    So, if you could, comment on both of those: number 1, if 
you think that is true, if you have seen those studies, and if 
it is true, what are you going to do to make sure that does not 
happen? Then the bigger picture in regulation, some would say 
right now, is that we have got to put the fire out, that we 
need more regulation, that it is okay to have regulators doing 
all kinds of things, maybe overdoing regulation in one area. It 
is probably okay to do that, but if we are not regulating in 
other areas, we ought to do more than that. But some would 
argue we have got to get the financial crisis solved before we 
kind of get too involved in some of the technical aspects of 
additional regulations.
    So could you comment on those two? Number 1, do you think 
we are getting the kind of oversight fairness that we ought to 
get? If not, are you going to kind of work on that?
    Number 2, where do the priorities fit in terms of making 
sure that we expand the regulation or we do not expand the 
regulation, but make sure that we kind of solve the crisis 
first?
    Ms. Schapiro. Well, let me take the last part first.
    I think it is a great question. Do we need more regulation 
or not? The tendency is to assume, since things went wrong, we 
must.
    I think there are gaps we need to fill that are fairly 
targeted. They relate in the narrow world of the SEC to things 
like the custody of assets and the certification that assets 
exist and so forth. And we are looking at a fairly targeted 
package of regulatory reforms. What I think we really need is 
more boots on the ground.
    If I can give one example, there are 11,300 investment 
advisers, of which Madoff was one. The riskiest 100 of those 
will be examined once every 3 years. The risk is 1,000 of those 
will be examined once every 3 years. The other 10,000 will be 
examined on a random sampling basis, which means it may be 10 
years before we show up. There is a real deterrent effect to 
knowing that there is a high likelihood that a regulator is 
going to show up and look at the books and records and 
understand whether your people are properly licensed and 
whether the assets exist and whether the account statements are 
truthful.
    So I think it is not that we need a lot more rules, but 
that we need a lot more people or capability through technology 
at the SEC to understand whether the rules that exist are being 
followed, and then the capability to enforce them when they are 
not.
    You know, I have a lot of sympathy for the point with 
respect to whether sanctions against small firms are 
disproportionate to those against large firms. In my prior 
position, I worked very closely with something called a small 
firm advisory board, which was made up of brokerage firms from 
around the country that had fewer than 150 employees, and many 
had as few as 5 or 6 or a dozen employees. We had to get a lot 
of feedback from them about what the impact of regulation was 
on them and what their views were with respect to whether 
sanctions were disproportionate. From that learning, I know 
that there is absolutely that perception, and it may, in fact, 
be a reality in some instances. And we need at the SEC to be 
highly sensitive to that.
    If our goal is to put somebody out of business, then we 
should put somebody out of business. But if our goal is to 
create a deterrent effect through our conduct, then we have to 
do that in a measured way. We are working on the concept of a 
small business advisory committee to work with us on some of 
those issues going forward. We have one now that works with us 
on Sarbanes-Oxley-related issues, and we are looking at 
expanding that so we can be sure we get that input.
    Mr. Crenshaw. Thank you.
    Mr. Chairman, where is the clock?
    Mr. Serrano. How is that?
    Mr. Crenshaw. Is there a clock somewhere that is turning 
yellow and red?
    Mr. Serrano. I have the clock.
    Mr. Crenshaw. Okay.
    Mr. Serrano. I have the gavel. I have the title.
    Mr. Crenshaw. Do your eyes start blinking after 4 minutes?
    Mr. Serrano. In fact, it is interesting that Mr. Crenshaw 
brings that up, because you got 6 minutes.
    Mr. Crenshaw. You know, if I had an extra minute--
    Mr. Serrano. No. Seriously, we do keep a clock back here. 
Here is the the clock. Costco, I think.
    They are unionized, right?
    Mrs. Emerson. Yes, they are unionized.
    Mr. Serrano. Really, we would not cheat you out of any 
time.
    Mr. Crenshaw. Just for the witness as well, I didn't know 
was I missing something.
    Mr. Serrano. No. That is fine. That is fine. I like 
oranges, by the way.
    Mr. Crenshaw. Thank you. Grapefruit.
    Ms. Wasserman Schultz. We will have to get together on that 
in the next meeting.
    Mr. Serrano. Mr. Schiff.
    Mr. Schiff. Thank you, Mr. Chairman, and please let me know 
when my 15 minutes are up.

                       ENFORCEMENT AND DETERRENCE

    Mr. Serrano. Mr. Schiff, you get 5.
    Mr. Schiff. Madam Chair, I wanted to ask you about a couple 
of things.
    One is you point out that a big part of what you need are 
more resources for enforcement. You need simply more eyes on 
those who are practicing in this area to make sure we uncover 
when there are frauds before they get to the level of the 
Madoffs. I wonder, too, whether there is adequate deterrence, 
because no matter how many people you hire, you are never going 
to be able to keep an eye on everyone. When you consider that 
Mr. Madoff was involved in defrauding more money than probably 
every bank robber in the history of the country has ever stolen 
put together, he has probably defrauded more than that, and you 
wonder whether it is possible that the penalties are 
proportionate to the level of the harm that he has done.
    We talked a little bit earlier this week at a meeting of 
the New Democrats where I shared my--and I think it is widely 
felt throughout the country--anger over the fact that he is 
still free in his penthouse apartment when he should be in a 
cell somewhere. He may be there very shortly. But the magnitude 
of this harm was so great that it makes me wonder whether we 
need to--and I say this as a former prosecutor--rewrite the 
rules regarding detention, to take into consideration not just 
flight risk but the gravity of the harm that has been caused; 
because I think to the rest of the country, it looks horribly 
inequitable that someone who has committed this kind of crime 
is confined to a multi-multimillion dollar penthouse apartment 
while people who commit garden-variety burglaries go to jail 
without bail.
    So in any event, I would be interested to know whether you 
are giving any thought to whether the penalties provide a 
sufficient deterrent or whether this is simply an enforcement 
and not a deterrence issue.

                             MARK-TO-MARKET

    Then on a very unrelated topic, I would like to ask your 
thoughts on mark-to-market. Many of us have been concerned. I 
know there is a Financial Services authorization hearing on 
this tomorrow. But with the role that it played in the downward 
spiral of the markets, I understand that the SEC completed a 
study earlier this year on mark-to-market accounting and 
suggested that the existing fair value of mark-to-market 
requirements should not be suspended since they would 
potentially erode confidence in what these balance sheets were 
really worth.
    How do you balance the present pitfall against what we have 
seen in terms of the recent history?
    So, if you could address those two issues.
    Ms. Schapiro. Sure. There could not be two more different 
issues.
    Let me say on the first--and this is a purely personal 
view--I would agree very much with you that we ought to look at 
the question of detention. I do not know the thinking with 
respect to why he was permitted to remain free or as a prisoner 
in his penthouse during this period. SEC penalties, as you 
know, are limited. We can fine. We can get an injunction 
against one's continuing to violate the law. We can expel 
somebody from the securities industry. We can get a bar that 
prohibits one from being an officer or a director of a public 
corporation. We cannot send people to jail, although we work 
actively and aggressively with the criminal authorities to 
support their prosecution of securities fraud, as is happening 
in the Madoff case. And we will be at the beck and call, 
frankly, of the criminal authorities whenever and wherever they 
need our support, whether it is expertise or companion civil 
cases to go with their criminal cases, because the deterrent 
effect of a prison sentence is undoubtedly greater than the 
deterrent effect of a civil injunction.
    So I agree with you. And our new enforcement director, I am 
confident, with his 11 years as an assistant U.S. Attorney, 
will have very much the same approach to cooperative efforts 
with criminal authorities at the State level and at the Federal 
level as well.
    On fair value accounting, you take this question up really 
so perfectly. Investors have told us that fair value is 
important to them because it gives them transparency and a real 
insight into the financial statements, and that is information 
they need to make decisions about how to allocate capital. That 
said, there is undoubtedly--and I have a lot of sympathy for 
this, and the agency does as well--a lot of difficulty in 
determining the value of illiquid assets in the kinds of 
markets we are experiencing right now. I want to say 
unequivocally it is not our intention that these assets be 
written down to zero just because the markets are illiquid, or 
to fire-sale prices, let alone zero.
    We have asked FASB, through our recent study on fair value 
accounting and through virtually daily contact, to get on with 
providing guidance to businesses about how to apply fair value 
accounting, particularly in distressed and illiquid markets, so 
that we can have a bit more of a rational approach going 
forward. FASB has committed to us that this guidance will be 
out in the second quarter, and we are continuing to push them 
very hard, but we think it will be very helpful in valuing 
these Tier 3 or illiquid or, as Chairman Bernanke said 
yesterday, idiosyncratic assets that are hard to value right 
now.
    Mr. Schiff. So your recommendation, rather than doing away 
with the mark-to-marketing rule, would be to have a better 
definition of what the market value is?
    Ms. Schapiro. I think that is right. A better application 
and more judgment in the application, so that assets are not 
being written down to fire-sale prices.
    Mr. Schiff. Thank you, Mr. Chairman.
    Mr. Serrano. I apologize for the sound of the gavel. We 
usually do not gavel while the witness is speaking. It is just 
that I thought Schiff was going to get in another question.
    While you were making your opening comments, I could not 
help but think that at yesterday's Commerce, Justice, Science 
hearing, we learned what we knew ahead of time, but we 
reaffirmed that the Latino population in the Federal prison has 
grown dramatically because 48 percent of all Latinos in Federal 
prison are there on immigration violations while this gentleman 
is sitting in a penthouse.
    Mr. Kirk.

              WORK OF THE FINANCIAL SERVICES SUBCOMMITTEE

    Mr. Kirk. Thank you, Mr. Chairman.
    Mary, you have a lot of fans in Chicago, so we are thrilled 
at your appointment.
    I want to thank the Chair for this hearing. Except for 
cable television, the last major hearing of this committee was 
April 10, almost a year ago. I think we should operate very 
independently from the authorizing committee. I know 
authorizers would like us just to go away and that they would 
like this subcommittee to be in a state of blissful inaction, 
so I am thrilled that we are actually now having a hearing. We 
have seen TARP I and TARP II let over $1 trillion in money go 
without any hearings by this subcommittee, and I think it is 
really good that you are getting back in the game here. I hope 
we are going to be extremely active.
    Mr. Serrano. If the gentleman would yield on my time.
    Mr. Kirk. On your time. Great.
    Mr. Serrano. Most of what you saw with TARP and all that 
happened after the season ended. It is our intent to be very 
much involved. If you will see a statement that I made just 
this morning regarding the Treasury Department, you will see 
that this Chairman and this committee will not play ball with 
anyone who does not want to do the right thing.
    Secondly, the Financial Services Committee does not really 
want us to go away. In fact, this subcommittee was homeless, 
and we are using one of their rooms, so it is a good 
relationship. I understand what the gentleman is saying, and I 
am sure at the end of the season you will realize that we will 
be involved to the point that we are supposed to be involved. I 
thank you for your concern.

                      REINSTATING THE UPTICK RULE

    Mr. Kirk. Well, I would just say that the jurisdiction of 
the subcommittee should never have a season. It is 365, 24/7.
    We have seen problems with the Geithner plan, or just in 
general the direction of the stock market, the stock market's 
dropping 5 percent from year end to the inauguration. It 
dropped 12 percent after the Geithner plan. It dropped another 
11 percent after the budget. The Wall Street Journal reports we 
have now under this Congress experienced the fastest drop of 
the stock market of any Congress ever, including the Congresses 
under Hoover and Roosevelt. John Prestbo of Dow Jones, I guess, 
reports that he is now considering delisting GM and Citi from 
the Dow. So this is a pretty big issue.
    Barney told us that you were considering reimposing the 
uptick rule, which your great, great, great, great predecessor, 
the legendary Joe Kennedy when he first created this job, 
imposed in 1938. So let me put it to you directly:
    Did you tell Barney you are going to reimpose the uptick 
rule? Because I am thrilled that you did.
    Ms. Schapiro. What I told the Chairman--and I said this in 
my confirmation hearing--is that I was interested in 
reexamining the entire area of short selling. I think that 
while the agency engaged in somewhat of a model rulemaking when 
they eliminated the uptick rule--they did a pilot program; they 
took 3 years to study it; they did all of those things--that 
the world has changed rather dramatically in the past year.
    We have our scheduling for early next month, assuming that 
I have the votes on the Commission--I cannot do it on my own--
to propose reinstating the uptick rule and to potentially look 
at some other alternatives as well with respect to short 
selling, and hopefully, we will get that proposal out in April. 
That is exactly what I told the Chairman, but the Commission, 
obviously, needs to concur in that. It is a rulemaking process, 
but my view is that the world did change and we need to relook 
at that.
    I hear from thousands of investors a week on this issue, 
but I hear from sophisticated investors, retail investors, 
institutions. There are some people who are strongly opposed as 
well, but there is clearly interest in our reexploring this.
    Mr. Kirk. Right. Thank you.
    The last thing: We are worried about not-as-tough 
enforcement as we should have on the ban on naked short 
selling, and I think this committee would be very interested in 
what resources you need to enhance enforcement there.
    Ms. Schapiro. I would love to come back to you specifically 
on resources. But prior to my coming to the agency in 2008, two 
rules were enacted to try to restrict the damage from naked 
short selling, including a specific antifraud rule that would 
have dealt with deceiving brokers or dealers or others with 
your ability or your intent to deliver on a short sale when 
you, in fact, were not capable of doing that.
    We have made it a very big focus in our examination 
program. In fact, we have just concluded an examination sweep 
solely focused on naked short selling. I have not seen the 
results of that yet, but I can assure you it is an area we are 
looking at carefully and are taking very seriously.
    Mr. Kirk. Thank you, Mr. Chairman.
    Mr. Serrano. Thank you.
    Ms. DeLauro.
    Ms. DeLauro. Thank you very much, Mr. Chairman.
    Congratulations to you, Madam Chairman.
    I am a new member to this committee, and am delighted to 
serve, Mr. Chairman, with you and with my other colleagues.
    I would not have opened my remarks with this comment, but I 
guess I can't help but not let this go by to my colleague, Mr. 
Kirk: President Obama has been in office for 52 days. It is the 
prior administration that brought us to our knees financially 
over a period of 8 years. If someone had been minding the store 
at that particular time, we would not be in this financial mess 
that we are today.
    Given that, Madam Chairman, let me ask my questions, and I 
will try to move quickly.
    Mr. Kirk. I actually agree with you.

                     CREATION OF A SUPER-REGULATOR

    Ms. DeLauro. I have 5 minutes. I have 5 minutes, and I was 
not intending to take that time because of my questions.
    The Chairman of the Federal Reserve, Mr. Bernanke, talked 
about the creation of a U.S. super-regulator. What he says is, 
``The international multibusiness scope of today's financial 
firms leaves open too many loopholes that the regulators can 
cover. Lack of regulation left government regulators with 
little ability to control what has become known as a too-big-
to-fail institution--Citigroup, AIG.''
    He also says that the Federal Reserve has a central role, 
given its broad expertise, and that expertise is needed to 
create such a regulator. He believes that the Fed should play 
an important role in the creation of such a position.
    I do not know what your views are on that. Where do you see 
the SEC fitting into this structure? What role would the SEC 
play if a super-regulator were established?
    Ms. Schapiro. I have sort of a preliminary concern about 
the creation of a single monolithic regulator. They exist in 
some countries. The U.K., notably, with the Financial Services 
Authority has a single regulator who has both systemic, 
prudential, and investor protection considerations. I think our 
markets, though, are very, very different here. We have 
enormous retail participation.
    Ms. DeLauro. Has it worked in the U.K?
    Ms. Schapiro. Well, they are talking about dismantling it 
and revisiting that entire idea, so I think the jury is 
probably out there as well.
    My concern about a single monolithic regulator is that, 
while I do believe we need a systemic regulator, we need an 
entity with the ultimate responsibility for the protection of 
the financial system, for the monitoring of it and for checking 
the excesses in it.
    A systemic regulator will always trump an investor-
protection regulator's concerns, I fear. And I do not think 
that that would be good in our market, given the level of 
retail participation that we have. I much more favor an 
approach where there is an SEC, perhaps combined with some 
other agencies that are there to ensure disclosure by public 
companies, high standards of corporate governance, transparency 
in stock market transactions, the credibility and the fiscal 
soundness of clearing agencies and exchanges, writing the rules 
that govern the conduct of brokerage firms, mutual funds, 
investment advisers, and enforcing those rules. I think that in 
a massive regulator, those functions get pushed to the side 
while we worry about the integrity of the entire system.
    So I feel quite strongly that we need an SEC, or something 
that looks very much like it, whether it is combined with other 
agencies or not, that is on the front line of capital markets 
regulation and investor protection.
    Ms. DeLauro. The resources and the enforcement tools.
    Ms. Schapiro. Absolutely.

                     RESTORING INVESTOR CONFIDENCE

    Ms. DeLauro. I will ask you a very, very basic question, 
which has to do with my constituency.
    It has been hard enough for folks to understand the bailout 
of Wall Street, and you know what this has meant to their own 
economic prospects. You know they see hundreds of billions of 
dollars in taxpayers' money which is looking as if--to them--
that we have not improved the quality of the equity markets or 
have eased the credit crunch.
    When it comes to the SEC and to regulation reform, it 
becomes more difficult to communicate what we are doing here. 
Short selling, mark-to-market accounting, an uptick rule, 
credit default swaps, short selling, these are not words that 
people talk about around their kitchen tables. So I am asking 
in simple English--and I do not know if I ask this for myself 
or for my other colleagues--how do we explain what happened and 
what we are trying to do in order to help us restore this 
confidence in the financial sector so that people get some idea 
of what track we are on, how we are trying to do this and that 
we are actually trying to do a job out here that is going to 
alleviate the problem?
    Ms. Schapiro. That is a very hard question.
    I think we talked in the very beginning of the hearing 
about the causes, in response to the Chairman's question, of 
the situation we are in now. You start with the lax 
underwriting of mortgages, and you carry that all the way 
through the securitization process, the excessive leverage on 
Wall Street, the fact that we have vast parts of the financial 
system that are completely unregulated, as in hedge funds or as 
in credit default swaps.
    The glue that helped hold all of these things together and 
made them such a massive problem is really the 
interconnectedness of all of the financial institutions that 
are engaged in this activity, so that when problems begin in 
one, they radiate immediately into multiple other financial 
institutions. Our banking system, our financial system, cannot 
afford for all of those institutions to fail, and so TARP and 
TALF and all the other programs are really geared towards 
stabilizing the financial system so that we can then go and get 
back to a more rational place with less leverage, with less 
complexity, with less interconnectedness, and with potentially 
less size so that ``too big to fail'' can maybe someday pass 
back out of our lexicon the way it has passed in so easily in 
the last several years.
    Ms. DeLauro. Thank you, Mr. Chairman.
    Mr. Serrano. Thank you.
    Before some of the members came in, I had welcomed Mr. 
Edwards. I want to welcome Ms. DeLauro, who is a new member of 
the committee and who is Chairwoman of the Agriculture 
Subcommittee of Appropriations; Ms. Debbie Wasserman Schultz 
who is Chairwoman of the Legislative Branch Appropriations. In 
fact, there are more cardinals at this hearing today than at 
the Archdiocese of New York right now.
    Ms. DeLauro. Or of Connecticut.
    Ms. Wasserman Schultz. Or a Jewish one.
    Mr. Serrano. You are the first Jewish cardinal, right?
    Ms. Wasserman Schultz. No. No.
    Mr. Serrano. With that in mind, we do welcome a new member, 
our friend from California, where the World Baseball Classic 
will finally end. Notwithstanding how we New Yorkers feel about 
you guys taking the Giants and the Dodgers both--we have 
forgiven you since 1957, I think--Ms. Barbara Lee, it is an 
honor to have you on the committee.
    Ms. Lee. Thank you very much. Is it my turn, Mr. Chairman?
    Mr. Serrano. Yes, it is. Do you think I was just saying 
that to be nice? That was the intro.
    Ms. Lee. I see how you run this committee, and I love it. 
Thank you, Mr. Chairman.
    First, this is my first committee hearing, and I really do 
look forward to working with you, Mr. Chair, and with the 
Ranking Member, Congresswoman Emerson, as we tackle these very 
challenging financial issues.
    I served on the Financial Services Committee for 8 years 
and saw this coming, and there were a few of us who raised 
these issues for many, many years with regard to the 
deregulation of the financial services industry and as to what 
was going on with regard to the SEC with its lack of resources 
for enforcement and as to many of the difficulties now, 
unfortunately, that our country is faced with, and you, Madam 
Chair. But I am very delighted that you are there, and 
congratulations. I look forward to working with you.
    Ms. Schapiro. Thank you.

                  TROUBLED ASSET RELIEF PROGRAM (TARP)

    Ms. Lee. I wanted to ask you again about TARP, just how the 
SEC and TARP kind of work together if at all.
    I mean what is the relationship there? I ask you this 
because I know in TARP we do not see a lot of enforcement 
mechanisms, and I am wondering what the SEC's role is with 
regard to any enforcement of TARP funds.
    Then specifically my staff has met with many of our 
community banks that have been recipients of TARP funding. They 
are considering now giving back that money because of the 
onerous restrictions that the smaller community banks are 
subjected to; the reporting requirements and all of the issues 
that the larger banks have had to deal with. They are sort of 
painted with a bad brush.
    So, if you were weighing in on this, how do you see that 
relationship? What do you think we could do to help the 
community banks ensure that they are not painted with the same 
brush as the bad actors were?
    Ms. Schapiro. I have tremendous sympathy, and I have heard 
concerns expressed articulately and broadly about community 
banks, that have kind of stuck to their knitting and who knew 
their customers and who did not create a lot of issues, that 
are being sort of embroiled in the same controversy and issues 
as the larger money center banks.
    I will say the SEC has two main interactions with TARP. One 
is that because we write the rules that require disclosure by 
public companies--and many banks are in fact public companies 
whose shares are traded--we have disclosure rules that are 
impacting what they are reporting in their quarterly and annual 
filings that are then made public.
    So just as a specific example, when the executive 
compensation limitations were put in the bill that require a 
sale and pay, the ability of shareholders to provide an 
advisory vote on compensation for recipients of TARP funds, the 
SEC will in fact review that disclosure. We will ultimately 
pass rules. We could not do it on the weekend between when the 
bill was passed and when it was effective, but we will 
ultimately write rules that will govern the disclosure about 
executive compensation and the ability of shareholders to have 
an advisory vote on executive pay.
    The other main way we interact is really through working 
with what is called SIG TARP, the Special Inspector General for 
TARP funds. I have met with him and with some of his team. He 
has met with our enforcement team. We are working together, and 
we will work together very closely to ensure that to the extent 
there is any misuse of TARP funds or fraud in the use of TARP 
funds, that we are able to support them rapidly with both 
expertise and the capability to go to court and get redress. We 
have, actually, already done one case where somebody was lying 
about his receipt of TARP funds in order to attract other 
investment, and that case was brought several weeks ago. But we 
expect that we will have plenty of work to do in this area.

                     VICTIMS OF MADOFF PONZI SCHEME

    Ms. Lee. Thank you. One more quick question.
    In terms of the victims of Bernard Madoff, what is going on 
and how are they going to be compensated?
    Ms. Schapiro. That is a very good question and one that is 
on many people's minds.
    SIPC, the Securities Investor Protection Corporation, which 
is responsible for taking over a financial firm in bankruptcy, 
is now corralling all of the assets of Mr. Madoff's, locating 
assets and securing those assets. It has begun a process where 
they have mailed out, to all of the customers that they can 
identify, claim forms. It has asked that those claim forms be 
submitted to them; and they have, in fact, begun to make 
payments on claims under the SIPC insurance fund to some of the 
victims of Bernard Madoff.
    As you can imagine, because all of the recordkeeping 
appears to have been false, it is an enormously complex task to 
dissect and then to put back together a clear picture of all of 
the activity and of all of the potential victims. But SIPC has 
indeed, I believe this week, started to pay out on the very 
first of those claims, which are limited to $500,000 per 
customer. So certainly for many people, it is nowhere near the 
money they may have lost.
    Ms. Lee. Thank you very much, Mr. Chairman.
    Mr. Serrano. There will be, by the way, a second round of 
questions.
    We now go to Ms. Wasserman Schultz, the young woman from 
Florida. I like oranges, and I like grapefruit and stone 
crabs--and key lime pie.
    Ms. DeLauro. Sounds good.

                         CREDIT RATING AGENCIES

    Ms. Wasserman Schultz. Thank you, and welcome, Madam Chair. 
It is good to be with you.
    One of the things that has not been focused on is the role 
of credit rating agencies. I want to get a better understanding 
of your plan to--I mean much of the problem was caused by the 
credit rating agencies' running amuck, essentially, and not 
doing their jobs appropriately, and their ratings essentially 
becoming meaningless.
    Does the SEC currently have sufficient statutory authority? 
Are they regulated enough? Are there any steps that you can 
take? What are the basic principles that you are going to use 
to guide the discussion about that?
    Ms. Schapiro. Until 2006 when the Credit Rating Reform Act 
was passed, the SEC had virtually no authority. It designated 
rating agencies as nationally recognized statistical rating 
organizations, but it was a pretty meaningless designation, and 
there was very little competition.
    Congress passed that law, and in 2008 the SEC actually--and 
this, again, is before my time--engaged in fairly extensive 
rulemaking for rating agencies. But again, this was in 2008, so 
we were well into the crisis at that point. It was really 
requiring record retention, explanations of when they deviated 
from their model in giving a rating, lots of disclosure about 
the performance of ratings over time. They prohibited rating 
agencies from rating a product that they had helped to 
structure, and tried to deal with that conflict.
    So there was pretty extensive rulemaking done by the 
agency, and there were actually a couple of more pending rule 
proposals that were in the pipeline when I arrived.
    I am not sure if it is enough, to be perfectly honest. We 
are holding a roundtable on April 15. We have invited all of 
the rating agencies to come and talk about what went wrong and 
shed some light on the issues there. We are asking them what 
have they done on their own to try to improve the situation. We 
are inviting a lot of the people who have had some very 
interesting ideas about what would be a better model than the 
issuer pays for the rating, which is conflicted in lots of 
obvious ways. There have been some very thoughtful proposals 
put out there, and we have invited those people to come and 
speak about them.
    We have a panel to talk about how to inject more 
competition into this space so that perhaps we could have 
higher-quality ratings and a less captive industry, and we have 
invited investors, users of ratings pension funds.
    Ms. Wasserman Schultz. So from all this information 
gathering, you plan to----
    Ms. Schapiro. We hope to come back and say we think we need 
to do rulemaking in this area, or come back to Congress and say 
we would like authority to move forward in the following way.

                          SEC STAFFING RATIOS

    Ms. Wasserman Schultz. Just very quickly, Mr. Chairman, 
before my time expires:
    I wanted to talk to you. Since this is the Financial 
Services Appropriations Committee, at the New Dems' meeting 
that we had with you the other day--which thank you very much 
for being there--you talked about your employee-to-regulated-
entity ratio. I just wanted to tell you that was really 
informative, and I think it would be helpful to hear from you 
on that.
    My understanding is that in the last fiscal year, the SEC 
had only around 400 FTEs tasked with managing 11,300 investment 
advisers. Do you have the resources? I mean you used the FDIC 
as a comparison where they actually have one to one.
    Ms. Schapiro. I did. On a full staff basis, the FDIC has 
about 5,000 employees and about 5,100 banks. We have in total 
about 3,600 employees and about 30,000 regulated entities. But 
when you get down into the examination program, there are 
11,000 investment advisers, of which Madoff was one, and we 
have about 400 examiners in that space. So we examine about 14 
percent of advisers every year. That is a long time before they 
may have a visit from the SEC.
    The numbers for mutual funds are equally scary, in some 
ways more scary, given the extent to which we all rely on 
mutual funds for our investments. There are a couple hundred 
inspectors for 8,000 mutual funds holding many trillions of 
dollars.
    Ms. Wasserman Schultz. Therein lies the problem.
    So, Mr. Chairman, I know that the Chairwoman is hopeful 
that we will be able to assist her with that ratio and so are 
the many millions of investors who have been wronged or who may 
be being wronged who we might not be aware of.
    Thank you. I yield back.
    Mr. Serrano. Thank you. We certainly will be very vigilant 
in trying to be helpful.
    If you are from the Bronx, as I am, you are very sad about 
the fact that the Yankees have not won the World Series in a 
while, but if you are from Pennsylvania or anywhere near 
Philadelphia, you are very, very happy. Notwithstanding that, 
we welcome a great member, a great American, a great 
Pennsylvanian, Mr. Fattah, to the committee. He is recognized 
for 5 minutes.
    Ms. DeLauro. Connecticut is unhappy as well.
    Mr. Fattah. Mr. Chairman, we did not win the Super Bowl 
yet, but we did win the World Series. We are coming after the 
Super Bowl.
    Mr. Serrano. You want to win both?
    Mr. Fattah. Yes.
    Mr. Serrano. You know, we are here because greed got us in 
trouble. That is why we are holding this hearing. You know 
that.
    Mr. Fattah. Madam Chairman, welcome back to the Commission. 
You were first appointed by President Ronald Reagan. Then you 
were appointed Chair by President Obama. So you are someone who 
should give everyone across the political spectrum a great deal 
of confidence.

                            INVESTING ABROAD

    The markets have not given a lot of people confidence in 
many respects because of some of the issues that have been 
raised, but I am interested--as people have sought to make 
investments, a lot of people are now looking offshore to make 
investments, and I note your investment in terms of the 
international association.
    If you would, give the committee any thoughts about what 
can be done at the SEC to help Americans think through any of 
the challenges that they face in looking to make investments in 
markets abroad.

                    RELIEF FOR MADOFF FRAUD VICTIMS

    Secondly, on the Madoff matter in particular, one of the 
things that happened is a lot of people lost money. The 
government actually gained some money since their taxes were 
paid on these supposed profits. As we try to figure out how 
victims are going to be made whole, it would seem that perhaps, 
given the government's failure to properly regulate this 
matter, that there may be some role in terms of putting into 
this fund the taxes that were paid that were obviously part and 
parcel to the scheme that was afoot.
    So I would be interested in your thoughts on those.
    Ms. Schapiro. That is actually a very interesting idea. I 
had not thought about it, and we obviously are not involved in 
the tax issues. I have read many articles debating whether 
people should be seeking to file amended tax returns now, or 
whether they should wait, and what they should do about taxes 
that may have been paid on fraudulent or on nonexistent 
profits. I think it is an interesting idea to think about 
whether some of that tax money should be set aside, but I would 
leave that to all of you.
    I think we have a lot of issues internationally, and we 
have a very active international office. It started out, 
really, as a mechanism to cooperate on enforcement matters 
across borders. There are a number of jurisdictions where 
Americans invest actively, and there are a number of 
jurisdictions where the foreign residents invest actively in 
U.S. markets. So it is very important for us to work 
cooperatively with other regulators to share information, 
particularly when we think there may be illegal conduct 
emanating from their country into our markets. That is a big 
area of emphasis for us.
    We also want to make it easy for Americans to invest safely 
in foreign markets at the lowest possible cost, but not at the 
risk of their being taken advantage of, or of not having 
adequate protection and regulation in those markets.
    So we work extensively with foreign regulators towards a 
goal of trying to have the highest possible regulatory 
standards, enforcement programs, and levels of protection 
around the world so that U.S. Citizens can have some sense of 
comfort that if they are investing in a foreign market, they 
have somewhat similar protections that they would have here 
when they are investing.
    Mr. Fattah. Thank you.
    Thank you, Mr. Chairman.

        DECLINING STAFFING LEVELS IN SEC'S ENFORCEMENT DIVISION

    Mr. Serrano. Thank you.
    As I stated earlier, there was this whole issue with the 
SEC in the past where it really was difficult for the committee 
to assist the Commission because it was the only Federal 
agency, or agency anywhere, that I have met in my 35 years in 
public office that did not want any more resources. They 
actually thought that they had enough. So the subcommittee is 
concerned regarding staffing levels at the Commission.
    In recent congressional testimony, senior SEC officials 
stated that the Commission's enforcement division currently has 
1,150 employees, 80 fewer than at its peak in 2005, and that 
the Office of Compliance, Inspections and Examinations has 790 
employees, 90 fewer positions than it had at its peak in 2006.
    What impact, in your opinion, has this staffing decline had 
on the SEC's mission?
    Ms. Schapiro. Well, you are absolutely right. Enforcement 
is down about 4.5 percent from its peak, and the Inspections 
group is down about 7.5 percent. But that actually only tells 
part of the story because the industry for which we have 
responsibility has also grown enormously during that period, so 
it is a bit of a double hit when we look at the decline in our 
resources.
    I would never sit here and tell you that I think, had we 
had more resources, the agency would have caught the Madoff 
fraud earlier on. I cannot say that. I do not know the answer 
to that. I do know--and this is an eternal question for 
enforcement programs--that more people will allow us to make a 
bigger dent in the fraud and will allow us to have a greater 
deterrent effect. That does not mean we need unending numbers 
of resources--we can't probably train and manage those--but I 
do know it means that if we could have more people inspecting 
firms and on site and prosecuting cases much more quickly, we 
can be a more effective agency. We could get money back to 
investors faster. We could stop ongoing frauds faster. We could 
catch problems before they become the $50 billion Ponzi scheme.

           IMPROVING STAFF TRAINING AND RECRUITING NEW STAFF

    Mr. Serrano. You know, I told you when we met in my office 
that I met a young man on the train coming from New York this 
week who told me his concern.
    He said, ``I cannot believe I am actually going to tell you 
that this is a concern of mine because it works in everybody's 
favor and the industry's.''
    He is in the financial services industry. He said when the 
people came to audit on many occasions, he would have to tell 
them--fill them in--on what they were supposed to be looking 
for. It is like my telling a reporter what to ask me, which I 
have tried and it does not work. They usually ask what they 
want to ask.
    So is this a general situation at the Commission or is it, 
with the lack of staff numbers where they are supposed to be 
and the levels at which they are supposed to be, that there are 
not enough people to go around; and when people go out, they 
are not as well-versed or as experienced as others?
    Ms. Schapiro. I think it is probably a combination of 
things. I think our training has been inadequate. These markets 
have evolved so rapidly. Keeping people up to speed and capable 
of what is happening in brokerage firms really requires a very 
robust training program. That takes people out of the field and 
in the office, which means they are effectively reducing their 
presence and their deterrent effect within the firm. So I think 
we need to improve our training.
    I think we need--and we have a phenomenal opportunity right 
now--to bring in much more current and useful skillsets with 
people who have lost jobs on Wall Street and who are anxious to 
do something and to do something very constructive. So 
financial analysts, people with trading backgrounds, and people 
with forensic accounting backgrounds, I think would also be 
very helpful here. We have historically had high turnover. 
Although as I said earlier, pay parity has helped us enormously 
in the last several years in dealing with that problem.
    We are also looking at something, and we have launched this 
week the opportunity for our examiners to become certified 
fraud examiners and take a course that will get them that 
certification, and that will hopefully build the skillsets of 
some of the younger people who are already on the staff and who 
are very committed to doing a good job, but we have not always 
given them the tools that they need to do that job.
    So we need to bolster our training, bring in some 
additional skills and give people the time to let their 
intellectual curiosity take them where an investigation ought 
to go. Because sometimes you are busy checking the boxes to get 
done what you have to get done, you do not take a step back and 
think about they might have violated a rule; but is this firm 
doing something that, at the end of the day, because it is 
leveraged 30 to 1, for example, is going to have a profound 
impact on the firm and on its customers? They might not have 
violated a rule, being leveraged 30 to 1, but that is the kind 
of thing you want your examiners to stop and think about, not 
just the rule set. And we need to help our people get there. 
They are capable, they are hardworking, but we have not always 
given them the tools.
    Mr. Serrano. So it is a situation where, in many cases, it 
is not that they are not prepared to look for something. It is 
that the people there, auditing, have the advantage of being 
involved in a new, innovative way of investing, if you will, 
and of running markets and institutions and that they still are 
not up to date?
    Ms. Schapiro. It has got to be a continuous learning 
process to keep up with Wall Street.
    Mr. Serrano. It reminds me of the time that I got stuck in 
my car. I left my keys inside the car on the Grand Concourse in 
the Bronx. The cops were there with me, the police department, 
and a guy who was with me. An hour and a half later, we could 
not get in my car, and some guy rode by on a bicycle and said, 
``If I don't get in trouble, can I help you?''
    I said, ``No, you won't get in trouble,'' and the police 
said, ``Yeah, you won't get in trouble.'' He did it in 30 
seconds, you know. He opened the car for me. It was wonderful. 
I will bet you--maybe it is a blessing in disguise--that some 
of these guys are not employed, that they can come and show us 
what to look for.
    Ms. Schapiro. That is exactly right.

              BLAME PLACED ON CAREER STAFF IN MADOFF FRAUD

    Mr. Serrano. Your predecessor, Chairman Christopher Cox--
and I realize that you cannot comment on an ongoing inspector 
general investigation--placed the blame for the Madoff fraud's 
going undetected squarely on SEC career staff.
    What is your reaction to such a charge? Isn't it unfair to 
put the entire blame on the career staff?
    Ms. Schapiro. I think it is unfair. The career staff of the 
SEC are hardworking. They are smart, and they are as committed 
to the protection of the public interest as any group of people 
I have ever worked with anywhere in government or in the 
private sector. So I think it is a very unfair rap.
    Clearly, the SEC missed Madoff and potentially had multiple 
opportunities to put an end to the fraud. I would characterize 
our issues as being more about having a bit of a stovepipe 
organization where there is not enough communication from 
region to region or from department to department. I would 
characterize it as a problem of needing the right skills, so 
that when data or information is handed to people they 
understand what they are looking at, or they know where to go 
to get help, and understand whether they have been given 
something that is really meaningful and needs to be pursued. I 
would chalk it up to a pretty extraordinary amount of data that 
we have talked about, this 700,000 to 1.5 million tips and 
complaints, that come in every year and not having any rational 
process for really figuring out what to do with those and how 
to handle them and track them.
    So I think it is a grossly unfair rap against the career 
staff. Clearly, there were some mistakes, and we have to learn 
from those mistakes. And we have to be willing to look very, 
very clear-eyed at what went wrong so we can fix it. But I 
think it is unfair to blame career staff or any staff.
    Mr. Serrano. I have one last question, though. Maybe you 
spoke about this already. If you did, I apologize.
    Did Mr. Madoff have any legal--or association with the SEC? 
Did he have any relationship? Did he have to be registered with 
you in any way?
    Ms. Schapiro. His brokerage firm, which was largely a 
proprietary trading operation, was registered as a broker-
dealer. The money management business, which was off to the 
side, not conducted through the brokerage firm, was not 
registered until 2006 when, I understand, the agency required 
it to register as an investment adviser. But prior to 2006 it 
was unregistered.
    Mr. Serrano. Thank you.
    Mrs. Emerson.
    Mrs. Emerson. Thank you, Mr. Chairman. I forgot to mention 
to you that I am a rabid St. Louis Cardinals fan, so I think we 
will have a lot of fun going back and forth on your team versus 
others.
    Mr. Serrano. You have my deepest sympathies.
    Mrs. Emerson. You know, I am a National leaguer, so you are 
the American Leaguer. What can I say?
    Mr. Serrano. I am a good American.

                     TECHNOLOGY UPGRADES AT THE SEC

    Mrs. Emerson. Anyway, I just needed to tell you that before 
I forgot.
    Chairwoman, when we talked in my office, you started 
talking a little bit about how you wanted to modernize your 
information technology systems, particularly the EDGAR system, 
which allows companies to file information with the SEC 
electronically and provides access to investors and to the 
general public on the filings.
    Can you talk a little bit about the long-term plan you 
might have, an estimate of how much funding will be required to 
implement the technology upgrades that will provide greater 
access and search capabilities to investors? Do you believe 
that the SEC has the program and contract management and 
technical expertise to successfully implement such a major IT 
project?
    Ms. Schapiro. Well, a lot of our technology program 
management is outsourced. I appreciate, having presided over 
about a $150 million a year technology budget at my former 
employer's, the importance of terrific program management and 
the responsible stewardship of technology dollars, because 
projects have a way of growing and growing and growing and of 
getting away from you. They need tremendous management.
    The priorities that I have set for our technology budget 
right now would include--and of which we have taken the first 
step--trying to deal with these tips and referrals and this 
data coming in so that we can modernize our business processes 
and can utilize technology to find the more profitable or 
useful bits of information to follow up on from an examination 
enforcement perspective.
    We also have multiple internal repositories of data that 
come from the exams we have performed and from the 
investigations we have done. It is information that is filed 
with us by public companies, by accounting firms and others, 
and by our own economic analysis team. We have no capability to 
link that data and to mine it effectively, to look for trends 
or patterns or interesting issues that we ought to be following 
up on. So risk analysis and risk surveillance capability would 
be my second priority.
    The third is that our enforcement program goes up against 
the best Wall Street law firms and the best law firms around 
the country. Yet we have very rudimentary case management 
technology and very rudimentary technology for e-discovery and 
to manage all of the millions of pages of documents that come 
in in the course of litigation.
    Finally, the last technology focus that I think we need to 
have is on our core financial systems within the agency so that 
we are sure that our systems are well integrated and that we 
are performing the way we would expect a public company to 
perform in the control of its financial management systems.
    Mrs. Emerson. So is it possible that you have this ongoing 
upgrade, if you will? Is it being built or will it be built 
side by side to the system that you already have? Because I am 
just curious how, at the end of the period of which you think 
you have gotten all of the pieces together, you integrate it 
with the system you have now; or are you building something 
new, side by side, that might then not necessarily replace but 
integrate what you have got and add new things?
    Ms. Schapiro. I think it is a combination of integrating 
existing systems and putting systems in place where we still 
have many manual processes in the financial management area. 
But if you took an area like the tips and complaints, as I 
said, they come into virtually every office. Some are phone. 
Some are e-mail. Some are FedEx. Some are carrier pigeon. Some 
do not go into systems. Some are paper records that are kept.
    So there is no single system, and there is certainly no 
integration of any existing system. So that is an area where we 
really need to build from scratch. I do not know that that 
means we need a customized system. I am a big fan of off-the-
shelf technology solutions with minimal customization. If you 
can make that work for you, it is a far cheaper way to go, and 
there is support out there for that product, but those are 
things we will have to work through.
    You know, of our $103 million or so technology budget last 
year--I think I mentioned this to you--87 percent of that was 
for the steady-state maintenance of our technology, which left 
us with about $13 million or $14 million for enhancements, new 
development. For an agency as focused on financial systems, 
trading systems and clearinghouses as the SEC is, so dependent 
upon an industry that is highly technical, for us to not have 
any more capability than $13 million or $14 million a year just 
does not make any sense.
    Mrs. Emerson. Well, it doesn't, but it seems awfully 
expensive just to keep things going as they are, too. But I 
hope that you will feel free to really just give us the bottom 
line.
    Ms. Schapiro. I will do that.
    Mrs. Emerson. That is not something on which I think you 
should shortchange yourself, if you will, just because we might 
think it sounds like too much money; because it seems that if 
you did have a better integrated system, certainly it would 
allow you not only to be more efficient in your jobs but also 
perhaps to find more bad guys at the same time.
    Ms. Schapiro. Absolutely.

                      REGISTRATION OF HEDGE FUNDS

    Mrs. Emerson. So I thank you for that. I have got one quick 
other question, and then I will hand it back to the Chairman.
    Back in 2004, the SEC implemented a regulation requiring 
hedge funds to register investment advisers and to follow some 
basic disclosure requirements. Obviously, you said that there 
is no regulation, truly, of hedge funds because this was struck 
down in the courts. So does the SEC oversee hedge funds at all? 
If you do, do you think that the extent to which you do is 
enough to protect investors?
    Ms. Schapiro. Well, there are some hedge funds that, even 
though the rule was struck down, remain voluntarily registered 
with the SEC, but I think we have learned a lot about the value 
of voluntary regulation over the last year.
    Our authority for unregistered hedge funds relates to being 
able to prosecute them essentially for fraud, as we can any 
citizen or entity that engages in fraud in the purchase or sale 
of securities. So we have a very, very limited scope there. I 
have supported for a long time the Federal registration of 
hedge funds, and then the authority for the SEC to determine 
what kinds of rulemaking might be appropriate to sort of fill 
out that registration requirement, whether it is reporting or 
qualifications for people running hedge funds or whatever.
    Mrs. Emerson. Thank you very much.
    Mr. Serrano. Thank you.
    With the committee's permission, I am going to go a little 
out of order and recognize the gentleman from Florida, Mr. 
Boyd, due to the fact that in about 10 minutes we are going to 
start a series of votes, and we would like to wrap up as soon 
as we can.
    Mr. Boyd, I have been telling all the Florida members that 
you have more members on the committee than any other State. I 
like oranges, stone crabs and grapefruit.
    Mr. Boyd. Thank you, Mr. Chairman.
    Mrs. Emerson. He has got cotton up there, too.
    Mr. Serrano. That takes care of me.
    Mr. Boyd. Mr. Chairman, I am delighted to be a new member 
on your committee. I want to apologize to you, to the 
committee, and to Chairman Schapiro for being late. I had a 
role in chairing the Budget Committee hearings which are going 
on now. So I hope you will indulge me for being late.
    Mr. Chairman, I do not want to tread into water that has 
already been treaded on and take the committee's time if you 
have already answered this question. I can check the record and 
check the answers. But I did want to get into the mark-to-
market and ask the Chairman if that subject has not been 
explored too deeply.
    Mr. Serrano. Go ahead.

                    MARK-TO-MARKET ACCOUNTING RULES

    Mr. Boyd. Chairman Schapiro, the mark-to-market accounting 
rules have been somewhat controversial since the September 
crash.
    Could you enlighten the committee on your feelings about 
mark-to-market accounting rules and what you think their role 
may or may not be relative to the current situation?
    Ms. Schapiro. I would be happy to do that.
    The SEC, shortly before I arrived in January, did a study 
on fair value accounting that was transmitted to Congress. The 
study said, and I believe this to be true, that investors who 
have to make decisions about how to allocate their capital and 
where to invest, support fair-value accounting and mark-to-
market accounting because they believe it does give them the 
best view into the financial condition of the company, and it 
gives them the kind of transparency they really want to make 
informed decisions.
    That said, there is absolutely, particularly right now, a 
lot of difficulty in valuing illiquid assets and there is a 
real concern in how fair-value accounting has been applied. 
Does it force people to write illiquid assets down to fire-sale 
prices? Is it creating more volatility than is really 
appropriate?
    Our study requested that FASB, which is the accounting 
standard setter, get to work on providing guidance that will 
help people understand how to value illiquid assets in 
distressed markets.
    I said earlier that Chairman Bernanke called them 
idiosyncratic assets, which is, perhaps, every asset right now, 
but to provide much greater guidance in how to value illiquid 
assets in this kind of market so that we can get the disclosure 
that we need, but without creating a situation of really dire 
consequences.
    FASB has made a commitment to provide this guidance on how 
to measure in these markets and how to apply judgment, because 
accountants need to be applying judgment here, not just taking 
the simple way. And they have committed to give us guidance in 
the second quarter, and we are pushing them very, very hard to 
do that.
    Mr. Boyd. The problem continues to be, I know in many of 
the instances, a requirement on the part of the regulator to 
the lender that additional reserve be set aside even for those 
loans that are performing.
    Is there some way to solve the mark-to-market disclosure 
transparency problem without creating a problem for the lender 
and borrower?
    Ms. Schapiro. I think it is the interplay of the accounting 
rules and the capital requirements that I think are really an 
important issue here, that we need to be taking a look at, and 
whether they are encouraging what has come to be known as a 
word I never thought would come out of my mouth, 
``procyclicality,'' which is the tendency to ease up and to 
make credit readily available in boom times and then restrict 
it dramatically in times like we are experiencing, but restrict 
it more than perhaps changes in the borrower's credit would 
really argue for.
    So I think it is an area where we need to look at the 
interaction of those two things because I think that is a 
contributing factor to the current situation.
    Mr. Boyd. Thank you, Mr. Chairman.
    Is my time up?
    Mr. Serrano. Just about.
    Mr. Boyd. Okay, Mr. Chairman. I yield back.
    Mr. Serrano. Thank you so much.
    Mr. Edwards.

                     NEW WHISTLEBLOWER LEGISLATION

    Mr. Edwards. Chairman Schapiro, let me go back to the 
whistleblower issue.
    You said you are in the process of reviewing ideas 
regarding whistleblower legislation or rules. Can you tell me 
what the timing of that review is and when you will be at a 
point where you could make specific recommendations?
    Ms. Schapiro. I have not thought about the timing. I would 
hope that we could be prepared to come back up here within the 
month and have a conversation about that.
    Mr. Edwards. Okay.
    Ms. Schapiro. My chief of staff actually starts on Monday, 
and my legislative staff is still being built out, but I would 
love to be able to come back within a relatively short time 
period and understand, you know, what the implications are.
    It is important to have a program that has contour and 
definition to it so that we do not go from 1.5 million tips and 
referrals a year to 2.5 million that we cannot handle. So we 
want to have some structure to it that, really, in order for 
there to be any kind of a payment associated with being a 
whistleblower, requires that you bring us something that is 
quite meaningful and leaves the agency with some discretion in 
this process. So we are looking at what other agencies are 
doing.
    Mr. Edwards. In your opinion, could effectively written and 
implemented whistleblower legislation actually save taxpayers 
money? Could one employee's providing documents showing fraud 
perhaps be a lot more of an efficient use of taxpayers' dollars 
by rewarding him for that versus having dozens of investigators 
out, combing the books of complicated businesses?
    Ms. Schapiro. It certainly seems as a theoretical matter 
that it ought to be able to be an efficient way to get to the 
meaningful cases quickly.
    Mr. Edwards. I would hope we could look at this fairly 
quickly.
    Excuse me for the analogy, but as a father of two young 
boys, I notice that they clean their rooms a lot better when 
they know Mom or Dad is going to come look at them. I would 
think just the passage of whistleblower legislation, if 
legislation in fact is needed--if you do not have the 
regulatory authority to do it on your own, just the fact that 
we would have whistleblower laws on the books, with significant 
compensation for those who could provide documents to the SEC, 
proof of fraud, would immediately begin to impact behavior and 
would cause those who might otherwise carry out fraudulent 
actions to think twice about doing so.
    So I would just thank you for looking at that, and I would 
welcome the opportunity, along with the Chairman and the 
Ranking Member, to hear your recommendations when you are 
comfortable.
    Ms. Schapiro. Thank you. We will look at it very, very 
carefully. We really just began this process of thinking about 
it. I do not even know what my fellow commissioners think about 
the issue, but we will look at it very seriously and will come 
back.
    Mr. Edwards. Thank you.
    Thank you, Mr. Chairman.

                                FACEBOOK

    Mr. Serrano. Thank you.
    You were saying before how part of what has to happen is is 
that you have to be able to be prepared to deal with new ways 
of people doing business, to find out who is doing something at 
risk or creating a problem.
    Just to give you an example, the world has changed a lot. 
On Facebook, a message comes in. ``Congressman, as you continue 
this work, please do not forget the role of the rating agency, 
Standard & Poor's as an example, who allowed credit default 
swap transactions to be valued as AAA investments as opposed to 
below junk bond status. This is a key reason there was so much 
money that flowed into a financial house of cards built on a 
sandcastle foundation.''
    So not only is the public watching on C-SPAN, but they are 
watching. They are paying attention, and they want results from 
us.
    Mr. Crenshaw.

          USING SEC RESOURCES MORE EFFECTIVELY AND EFFICIENTLY

    Mr. Crenshaw. Thank you, Mr. Chairman.
    I think, Mr. Chairman, you are right. I think people want 
results. Our job is to provide the funds for you to provide the 
enforcement and regulation. And it is obvious that either the 
SEC was ill-equipped or it was misguided in monitoring these 
firms that it is supposed to monitor. That is kind of 
elucidating the obvious. And I guess when I listen to you and 
your testimony, you would say certainly, in part, ill-equipped; 
more boots on the ground; more people to help do the things.
    On the misguided part, I want to press you a little bit 
because it seems like the easy answer to all of these problems 
is just pass another law or spend some more money, and 
everything will be fine.
    Are there things that you are doing--when you come in and 
you see this and you ask yourself what is wrong here and part 
of it is not enough money, but part of it may be--and this is 
my question--is it kind of the way the resources are allocated? 
You know, if we spend a lot of time and energy--and I read 
reports where the SEC will investigate someone for 3 years and 
will spend lots of time and energy and whatever, and there is a 
$5,000 fine at the end.
    On the other hand, you have got Bernie Madoff--and not to 
beat a dead horse, but if you have got somebody who is 
registered with you and they are making 12 percent returns for 
an extended period of time, they have got a three-man 
accounting firm, you know, doing their accounting, they have 
not made a trade in a decade, it seems like in today's 
technological world, you could have a computer program that 
just went through and said everybody making a 12 percent return 
for 10 straight years gets popped up or people who have three-
man accounting firms.
    But I guess the question is: Have you looked enough to 
see--and I am sure you have and maybe you can share with us--to 
do the things that you need to do more efficiently, more 
effectively you know, allocating those resources you have in 
the most efficient way before you come in? What are some 
examples or maybe some things you have seen that maybe were 
misguided as part of the problem?
    Ms. Schapiro. It is a great question.
    You know, there is always a desire for a law enforcement 
agency to try to have a presence across a broad spectrum of 
potential misconduct so that people don't think that we are not 
watching insider trading right now, so that is an opportunity 
to do that while we are focused on Ponzi schemes.
    So you try to have a presence across the full range, but 
the fact is we do not have enough resources to always have a 
presence across the full range, and we have to select our cases 
based on the risk the potential conduct creates for the 
investing public.
    I know that the new enforcement director who is coming in 
is really very committed to this process of taking apart the 
pipeline and of looking at what is old and is of minimal 
deterrent or punitive value, and pushing those things either 
out or shutting them down, knowing that somebody might have 
done something wrong. We are just not going to deal with that 
right now.
    We are converting our resources to what I would describe as 
a higher and better use, the higher impact, better investor-
protection kinds of cases. I think we will never have enough 
resources, any of us, to do all of the things we would like to 
do. We must be risk-based in our approach to enforcement.
    Mr. Crenshaw. Thank you.
    Thank you, Mr. Chairman.
    Mr. Serrano. Thank you, sir.
    Ms. DeLauro.

                        MERGING THE SEC AND CFTC

    Ms. DeLauro. Thank you, Mr. Chairman.
    I have a quick question, Madam Chair, and that is about--
since I chair the Appropriations Subcommittee on Agriculture, 
where we have jurisdiction over the CFTC, I wanted to get your 
view on whether or not you think that a merger between the SEC 
and the CFTC is appropriate. We had Secretary Paulson 
suggesting such a move, and my understanding--I have not spoken 
to him recently--is that Chairman Frank of Financial Services 
is saying that is not being discussed.
    Do you think combining the activities of these two efforts 
would make sense in terms of a merger?
    Ms. Schapiro. You know, I chaired the CFTC at some time in 
my life, and I have watched the debate, particularly in 
Congress, over this issue over many, many years, and I 
recognize that it is a very difficult issue.
    Ms. DeLauro. Its jurisdiction is very interesting as well 
as to how it is spread out.
    Ms. Schapiro. It is as the futures markets have evolved and 
have become highly financial markets.
    Frankly, I have tremendous admiration for the way those 
markets have developed with a genuine entrepreneurship and 
creativity, and they are among the most successful markets in 
the world, equity or derivative.
    I think there is logic to bringing the two agencies 
together. I think there are some gaps between us. I think there 
are some overlaps. I think there is some frustration on the 
part of the industry that we can have identical products 
trading under a securities regime and under a commodities 
regime with slightly different rules. I think that there are 
sometimes real delays in getting products to market because 
both regulators have to agree.
    At the same time, I also think that we can work very well 
with the CFTC as a separate and independent agency, and we can 
have a partnership that is more effective going forward than 
perhaps it has been historically, and that should not stop us 
from doing what is right to protect investors. I know the new 
CFTC Chair nominee is very much committed to that as well.
    So I guess I am going to dodge your question a little bit 
and say it could be done, and it would make a lot of sense. But 
if it is not done, I think there is a lot we can do to work 
together and be more effective as co-regulators.
    Ms. DeLauro. If you were thinking about its being done, 
would you separate it out, agricultural commodities?
    Ms. Schapiro. You know, I think that is a harder question 
because I think traditionally the way it has been thought about 
is that it is the mechanism of the futures markets that 
matters, not the underlying commodity that is being traded. I 
would have to think about that a lot more carefully, whether 
you would want to create a little agricultural sort of trading 
oversight agency versus financial. I am not sure that makes 
sense.
    Ms. DeLauro. Thank you very much.
    Thank you, Mr. Chairman.
    Mr. Serrano. Thank you.
    Now we recognize my compadre, Mr. Kirk.

                   ENFORCEMENT OF NAKED SHORT SELLING

    Mr. Kirk. Thank you.
    I wanted to go back to, obviously, the point that resources 
are only part of the picture. Aggressiveness in corporate 
culture at the Commission is key. Of course, AIG had oversight 
by the Office of Thrift Supervision, which actually has a 
higher staffed entity ratio than the Commission, and they still 
missed it.
    Back to my point on the better enforcement on naked short 
selling. My understanding is that the Commission is not really 
taking an aggressive position on enforcing the rule on new 
exchange-traded funds. We have on Wall Street some very 
leveraged, uber short funds.
    For example, one that I noticed was called SKF, whose 
mission is ultrashort financial positions. Their mission 
statement is, ``Our fund seeks daily investment results that 
correspond to twice the inverse of daily performance on the Dow 
Jones financial.''
    So it is a heavy, short position on the short term, but it 
appears they are using credit default swaps as their short 
position, so they are not actually in a traditional shorting of 
the market. They may be doing this through London.
    The way I would explain it to Congressmen is that you are 
taking out life insurance on everybody in the neighborhood, and 
then suddenly there are a lot of deaths in the neighborhood, 
and you are collecting on all of these, so this is a de facto 
short.
    I am wondering if you could look into this, because you 
mentioned $25 trillion in the CDS market, and you are actually 
a language leader. There may be a point where we do not call 
them ``CDS's'' and we call them ``bond insurance'' so we can 
then begin to think of them for what they actually are. Then a 
life insurance concept is that I cannot take out a life 
insurance policy on someone I am not related to. Yet these CDS 
positions are taken out, creating an enormous interest in 
destroying the assets so you can collect on the policy. By the 
way, that collection has been courtesy of the U.S. taxpayer 
lately.
    Can you talk about using CDS's and shorts and enforcing 
naked short selling on this tactic?
    Ms. Schapiro. This is an issue, actually, that has only 
really come to my attention in the last couple of weeks, this 
idea of having a short position and then utilizing the CDS in 
this way.
    I do not have any answer for you to the extent to which it 
is actively being pursued in the agency. I would like to get 
back to you on that. I know that I have passed the information 
that I have received in the last 2 weeks from a couple of 
different people on to our trading and markets division to take 
a look at it and see if we can understand the extent to which 
it is happening. I would be happy to come back to you with 
that.
    [The information follows:]

 

    Mr. Kirk. I appreciate that.

                   APPLICATIONS FOR CDS CLEARINGHOUSE

    Also, I know we have the CDS clearinghouse, or I would call 
it the bond insurance clearinghouse program.
    Can you give us a timeline on how you are doing in 
approving applications?
    Ms. Schapiro. Yes.
    Mr. Kirk. Because making sure that positions are exactly 
defined, knowing who the parties are and the prices exchanged, 
give the kind of transparency and reassurance the market needs 
in this; and then rapidly approving this so we can bring all 
this out in the open, I think.
    Ms. Schapiro. I completely agree with you. I think it is 
critically important that we get this sort of central 
clearinghouse, central counterparty system up and operating. As 
you may know, the Commission approved, as the Fed did, the ICE 
Trust about a week ago. There is an application from the CME, 
and I expect a decision on that imminently.
    Mr. Kirk. I am totally in favor of good financial 
investment in the city of New York, so I congratulate ICE. I 
would just say that having full competition getting CME on line 
so these two can go at it is what we would like.
    Ms. Schapiro. Absolutely. We have resolved, I think, all of 
the decisions and we will have a decision very soon, I expect, 
but I think competition in this space will be a very healthy 
thing.
    Mr. Kirk. Absolutely. Thank you.
    Thank you, Mr. Chairman.
    Mr. Serrano. Thank you.
    Ms. Lee.

                SUDAN INVESTMENT AND ACCOUNTABILITY ACT

    Ms. Lee. Thank you, Mr. Chairman.
    Madam Chair, let me first just say, in listening to you and 
given the fact that you have not fully staffed up, this may be 
a question for which we can wait to get the response back, but 
I was just going to put it out there.
    Many of us have been involved for many years now in trying 
to end the horrific genocide that is taking place in Darfur. I 
authored legislation that would allow cities, States and 
universities to divest assets from companies doing business in 
the Sudan. It passed, and it was signed into law by President 
Bush. The Sudan Accountability and Investment Act was signed 
into law at the end of 2007 and, quite frankly, reluctantly by 
President Bush because he did issue a signing statement when he 
signed this bill. It was bipartisan. It is a good bill.
    It does allow for safe harbors. There is a safe harbor 
provision that allows for investment companies making 
divestment decisions to not be faced with potential lawsuits. 
The SEC was charged with developing the regulations to allow 
these companies to divest so that they could take advantage of 
the safe harbor provisions. The SEC followed through, issued 
the regulation, and, to my knowledge, no company has taken 
advantage of this regulation.
    So I am not sure if you are aware of this regulation and if 
there are any roadblocks. If we could get the status of that, 
it would be very useful because this was an important tool for 
us to use to help once again make our declaration of genocide 
in our statement and in our policy very clear to the Government 
of Sudan.
    Ms. Schapiro. I would be happy to get back to you on that. 
I have no idea what the status of it is, but I would be more 
than happy to provide that.
    [The information follows:]

 

    
    Ms. Lee. Thank you very much.
    Thank you, Mr. Chairman.
    Mr. Serrano. Thank you.
    Ms. Wasserman Schultz.

                       REGULATION OF HEDGE FUNDS

    Ms. Wasserman Schultz. Thank you.
    I know we touched on hedge funds a little bit this morning, 
but what is your view on the regulation of hedge funds and how 
we would go about making them more transparent?
    Ms. Schapiro. They are enormous players in the capital 
markets. I think one of the lessons again from the last year is 
that great swaths of unregulated institutions and products can 
create problems as much because we don't know what they are 
doing as because they might be doing something that is 
problematic.
    So I think it is really important for hedge funds to be 
registered, certainly, at least systemically important ones. 
They ought to be subject to inspection and examination by the 
SEC, and the SEC probably needs sort of plenary authority to 
enact whatever other rules seem appropriate. Certainly, at a 
minimum, disclosure to the regulators about the trading 
practices, activities and holdings would be valuable. Whether 
there is a public disclosure component to that or not, I guess 
I don't know the right answer to that question, but I think we 
have got to develop a regulatory regime that is meaningful for 
hedge funds at this point.

                      IMPROVING INVESTOR LITERACY

    Ms. Wasserman Schultz. The other question I had was, 
although it is not really something that you are directly 
responsible for, what can the SEC do about improving investor 
literacy? I mean most people are completely in the dark about 
the investments that they are making. They do not understand 
them. It is very hard to get their minds around what decisions 
are being made on their behalf or the ones that they should 
make.
    Ms. Schapiro. We see every day, at a time like this, the 
sort of tragedy play out at the lack of investor literacy in 
our population generally. This is way beyond the SEC's purview.
    My personal view is that we should have a mandatory 
requirement for graduation from high school that you achieve a 
certain level of financial literacy. But that is way beyond my 
either expertise or authority.
    Ms. Wasserman Schultz. Is there anything that the SEC can 
specifically do?
    Ms. Schapiro. We do have a very small investor education 
office. It does provide materials on a Web site. We reach about 
8 million to 9 million investors a year who either visit the 
Web site, who call our office for information, or who we meet 
through investor forums that we hold around the country on a 
relatively small scale.
    We are also partners with other Federal agencies, and that 
has been, you know, somewhat successful. We could do much more, 
I think, again with resources. I am sorry to say that. We could 
be partnering more with the States which I think have a great 
capability to deliver financial education. We could be 
partnering with AARP and groups like that. There is a 
tremendous need among senior citizens who are 
disproportionately taken advantage of by fraud centers. We 
could partner with other organizations, I think, more 
effectively than we have been able to; but, in part, because we 
just have not had the resources to dedicate to it. It is 
absolutely essential, I think, to the economic future of the 
country.
    Ms. Wasserman Schultz. It really is.
    Mr. Chairman, it is such a dice roll when people have their 
entire life savings tied up in the decision-making of a person 
whose decisions they just completely do not understand. I think 
even though it is not something they have been able to do, we 
should try when we craft our budget to make it more possible 
for them to reach more people so that they can keep track of 
their own investments.
    Thank you. I yield back.
    Mr. Serrano. Thank you.
    I would agree that what changes now is that when we craft 
this bill, we do it with the full understanding that everyone 
is hurting and that we have to find ways to prevent the past 
from taking place again, and look to the future with vigor and 
with strength, but with the ability to catch these things 
before they become a problem.
    Mr. Boyd, you will be our last to ask questions.

                 CONSOLIDATION OF FINANCIAL REGULATORS

    Mr. Boyd. Thank you, Mr. Chairman.
    Chairman Schapiro, on the super-regulator issue or the fact 
that the industry is regulated by six or seven different 
regulators?
    Ms. Schapiro. Well, there are 50 State insurance 
regulators.
    Mr. Boyd. But at a Federal level.
    Ms. Schapiro. Yes. At the Federal level, there are a dozen 
or so.
    Mr. Boyd. Is that part of our problem? Would it be good for 
this Congress to consider some consolidation?
    Ms. Schapiro. I think it is part of our problem on a couple 
of different levels.
    One is when you have multiple regulators, you undoubtedly 
have gaps between them and are not clear as to who is 
responsible. Sometimes you have the ability of regulated 
entities to select their regulator, which creates a whole set 
of issues as well. Then we have areas where multiple regulators 
are doing the same thing, vis-a-vis the same institutions, so 
now you are wasting your resources.
    So I think we have to take a look at how rational is the 
structure that built up, in a way, logically over 70 years of 
economic history. You know, most of the agencies were created 
in the early part of the last century, and they built up around 
the type of institution or the type of product that was being 
sold. But it is time to take a fresh look at that because the 
lines between products don't make sense anymore, and 
institutions are in multiple lines of business.
    Mr. Boyd. Of course you are not suggesting that people in 
the industry would learn how to game that system?
    Ms. Schapiro. No. No. No. Of course they would not.
    Mr. Boyd. Thank you. Thank you, Madam Chairman.

                    QUESTIONS FOR THE HEARING RECORD

    Mr. Serrano. Thank you, Mr. Boyd.
    I want to let the committee members know that we have the 
ability to insert questions for the record. I have five that I 
will insert for the record, Chairman Schapiro.

                           Concluding Remarks

    Mr. Serrano. Look at that timing. There goes the bell.
    I have to tell you something. Your testimony today was 
frank, was strong, and it gives us a lot of hope. I have to 
tell you that the young woman to my left--I do not mean my 
political left, although she is--anyway, I am not going to ruin 
her Republican career here. She leaned over to me and said, 
``Isn't it nice to have someone who answers the question you 
ask?''
    Ms. Schapiro. Although, I tend to go on a little too long.
    Mrs. Emerson. Actually, not on this subject.
    Mr. Serrano. Not on this subject. We cannot go long enough.
    So I really feel good about today's hearing, and I feel 
good about having you in this position, and I feel good about 
the fact that everything you told us today indicates that you 
know there is a huge problem, that major mistakes were made in 
the past, that some criminal acts were committed in the past, 
and that you want to get to the bottom of it all.
    I know you have the support of this subcommittee. You have 
the support of the full committee. You have the support of even 
people who in the past, I believe, did not want certain 
oversight and who now know that their constituents have told 
them we have got to have oversight, that we have got to have 
controls. I know you have the President's support.
    So I congratulate you on your testimony today. We will stay 
close as this process goes on. We will try to get you the 
resources for you to do the job you have to. We in all honesty 
cannot promise you anything because, as the economy hurts, so 
does the ability of Congress to come up with money. Not lately, 
but wait. When we ask, they will tell us, oh, we gave it all 
out to some other people, to the banks, months ago.
    But I really congratulate you, and I thank you for your 
testimony today. I thank you for your service to our country.
    Ms. Schapiro. Thank you very much.

 

                                           Tuesday, March 31, 2009.

                     FEDERAL TRADE COMMISSION (FTC)

                                WITNESS

JON LEIBOWITZ, CHAIRMAN, FEDERAL TRADE COMMISSION

                  Chairman Serrano's Opening Statement

    Mr. Serrano. The subcommittee will please come to order. 
Today we will be hearing from Jon Leibowitz, and I hope he is 
hearing us, the new Chairman of the Federal Trade Commission. 
The FTC has all sorts of interesting and important 
responsibilities, ranging from reviewing mergers and enforcing 
antitrust laws, to operating the National Do Not Call Registry 
that shields us from telemarketers to preventing deceptive 
practices in advertising, to name just a few.
    Today, though, we have asked Chairman Leibowitz to focus on 
a particular set of FTC responsibilities, protecting consumers 
of financial services, a group that includes just about all of 
us. Unfortunately, consumer protection and financial services 
is a very timely topic.
    We are in the midst of a financial crisis, a crisis that 
can be traced in part to an explosion of questionable mortgage 
lending practices. The end result is that our financial system 
is facing piles of toxic mortgage-related securities while 
millions of homeowners are facing the prospect of foreclosure 
and loss of their homes.
    The Federal Trade Commission has regulatory responsibility 
for part of the mortgage industry, the part not run by banks or 
other depository institutions. Thus, the commission has 
jurisdiction over mortgage brokers and other nonbank lenders 
and servicers of mortgages, and these have been a growing and 
problematic force in mortgage lending.
    The commission has taken enforcement action against some 
mortgage lenders engaged in unfair or deceptive practices. It 
has also done valuable public education work. But the problem 
of reckless and predatory lending seems to have pretty much 
continued unabated until the whole thing finally came crashing 
down last year.
    Now that hard times are spreading, other aspects of the 
FTC's consumer protection role are becoming critically 
important. The Commission has the job of helping to protect the 
public from schemes that feed off financial misery, from 
foreclosure rescue scams that leave the homeowner in an even 
worse position than before; or debt settlement and credit 
repair services that take badly needed cash and deliver little 
or nothing in return; or abusive and illegal debt collection 
tactics.
    At today's hearing, we would like to hear about the 
Commission's role in dealing with these sorts of problems, what 
has worked well in the past, what hasn't worked so well, and 
what are your plans and priorities going forward?
    I should also note that this subcommittee, working with our 
Senate counterparts, has recently taken action to strengthen 
the FTC's enforcement powers. Our part of the Omnibus 
Appropriations Act, which was just signed into law, provides 
the Commission with some new authorities in the area of 
mortgage lending, including new rulemaking authorities and 
expanded powers to seek monetary penalties against wrongdoers. 
The legislation also confers new powers on State Attorneys 
General to bring suit to enforce mortgage lending standards set 
by the FTC and other Federal agencies. We would be interested 
in hearing about how the FTC plans to make use of these new 
authorities.
    Our witness, Jon Leibowitz, has been a member of the 
Federal Trade Commission since 2004. He was elevated to the 
chairmanship by President Obama on March 2nd. He has previously 
served in a number of staff positions with the United States 
Senate, including as staff director of the Subcommittee on 
Antitrust and chief counsel to Senator Herb Cole. He is a 
graduate of the University of Wisconsin and, of course, I have 
to mention, New York University School of Law.
    Welcome to our subcommittee, and congratulations to your 
appointment as Chairman of the FTC. We look forward to your 
testimony today and look forward to closely working with you as 
time goes on.
    With that, I would like to have our charming, debonair----
    Mrs. Emerson. I was just going to show you where to turn 
your microphone on.
    Mr. Serrano. Before I finish introducing you?
    Mrs. Emerson. No, after. Of course I want to hear all the 
nice things you are going to say about me. 
    Mr. Serrano. Our ranking member, Mrs. Emerson.

                    Mrs. Emerson's Opening Statement

    Mrs. Emerson. Thank you very much, Chairman, for those very 
nice words.
    And Chairman Leibowitz, a warm welcome and many 
congratulations on your appointment to Chair the Federal Trade 
Commission.
    I like the mission of the FTC because of its diversity and 
its importance in promoting competition by enforcing our 
Nation's antitrust laws and protecting consumers from fraud and 
deception.
    As the Chairman noted, our current economic crisis has 
resulted in growing unemployment, the loss of trillions of 
dollars in the stock market, including the savings of so many 
Americans for retirement and for college, and also a 6.2 
percent decline in GDP last quarter.
    As we have learned over the past several months, this 
crisis was caused by greed that led to risky practices on Wall 
Street and in some banks and financial institutions across the 
country. Of course, I realize that some Americans could be to 
blame for buying houses they knew they couldn't afford, but so 
many more were victims of predatory and deceptive lenders.
    I appreciate, too, Chairman Serrano, that you have been 
scheduling the oversight hearings on the financial crisis while 
we wait for the administration's formal budget request. We had 
a very informative session with the SEC earlier this month on 
our securities markets. So I look forward today to hearing what 
the FTC is doing to improve the practices of nonbank lending 
institutions and what you all are doing to educate Americans to 
be more responsible consumers.
    Mr. Chairman, I must just add, too, I will look forward to 
rounding out our financial services with the appearance of 
Secretary Geithner. Hopefully the next time you schedule that 
won't get canceled.
    Thank you so much for being here today.
    Mr. Serrano. We will keep scheduling until we get it right.
    Please, if you could limit your testimony to 5 minutes and 
the whole thing will go in the record. This way we can grill 
you with some hard questions.

                    Testimony of Chairman Leibowitz

    Mr. Leibowitz. I will wait for you to bring down the 800 
watt klieg lights. I may ask for an additional 45 seconds, but 
I will go through it.
    Chairman Serrano, Ranking Member Emerson, Mr. Edwards, I am 
Jon Leibowitz. I am Chairman of the Federal Trade Commission. I 
do appreciate the opportunity to testify today to talk to you 
about the FTC's role in protecting consumers from predatory 
mortgages and also to discuss our antitrust agenda and our 
resources.
    The Commission's views are set forth in the written 
testimony, which you put in the record, but my answers to your 
questions are my own.
    The FTC, as you know, is a small agency with a vast 
mission. We have about 1,100 FTEs working on both consumer 
protection and competition matters. We are heavily engaged in a 
wide range of areas, as both of you noted, from merger 
enforcement to privacy, from Do Not Call, which, by the way, 
Dave Barry referred to as the most successful government 
program since the Elvis stamp, to spam and spyware, from health 
care competition to deceptive calling cards, which, as you 
know, Mr. Chairman, are often marketed to low-income Hispanic 
consumers and recent immigrants.
    If I can just give an aside, that is a poster for some of 
the calling cards that we brought an action against. And I 
left, between the two of you, a copy of some of the calling 
cards that were deceptive. And if you look at the back of that 
one, on the one you are holding, Congresswoman Emerson, in 
about a 1 point font, and I underlined it on the card over 
here, it says, ``prices and terms subject to change without 
notice.'' Of course, these consumers were getting half of the 
time they bargained for, and there were a bunch of fees as 
well.
    Mr. Serrano. I apologize for interrupting you, but this is 
very courageous. We have discussed this in past hearings. There 
are a couple of issues in my community which are very touchy, 
and unless you know how to deal with them, you could run into 
trouble. One of them is the calling cards, which we know are 
ripping people off, but everybody in my district uses it to 
call mom back home.
    Number two, which is a very touchy one, and you are hearing 
it from a Catholic, is all these crosses and rosaries that are 
advertised as curing everything that is happening in the world. 
I know that is a very touchy one. But if you watch Spanish TV, 
for $49.99, all your troubles go away.
    Mr. Leibowitz. I would convert from Judaism if that were 
true.
    Mr. Serrano. In the Argentine community, they also have 
them. But that one is a real touchy subject, because, you know, 
faith is something where the cross to us is a symbol of faith, 
but not at $49.99 and guaranteeing a new house and whatever 
else.
    Anyway, thank you.
    Mr. Leibowitz. In those cases, by the way, we have 
partnered with Attorneys General, which is very, very important 
for us in leveraging our fairly limited resources.
    Mr. Serrano. Are these charged? Are they full?
    Mr. Leibowitz. They may be. I wouldn't call them full. I 
would call them half full, actually.
    Mr. Chairman, the title of your hearing is, ``How does the 
FTC leverage its resources?'' And let me assure you that during 
these very difficult times for so many Americans, the FTC will 
make protecting consumers from predatory lending and deceptive 
financial practices a critical priority.
    In the past 10 years, we have provided $465 million in 
redress to American consumers in connection with financial 
services cases. In the past 5 years, the FTC has brought more 
than 70 financial services enforcement actions. In the past 2 
years, we have increased by more than 50 percent the number of 
FTEs that are working on financial services matters.
    Just last week, our agency announced two more cases against 
so-called mortgage rescue operations that allegedly charged 
thousands of dollars in up front fees but failed to provide any 
assistance in saving people's homes. Even worse, these 
scurrilous companies impersonated a HUD-endorsed, nonprofit 
Hope Now Alliance which helps borrowers by offering free debt 
management and credit counseling services. I am pleased to 
report to the subcommittee that the courts issued temporary 
restraining orders stopping these fraudulent claims and 
freezing the company's assets.
    This morning, we are announcing the launch of the FTC's new 
financial services education campaign ``Money Matters'' to give 
people useful information and resources about dealing with 
today's pressing financial issues, that is using credit, 
managing debt, paying the mortgage, and, of course, avoiding 
getting fleeced.
    Do we have a copy? I think you guys have copies of the 
brochure on your desks.
    We will be promoting this site through the media, both 
online and off, and through partner organizations that deal 
with folks face-to-face. You have all received paper copies 
today, as I just mentioned. The home page is on the poster over 
there. We hope you will link to it on your own Web sites so 
that your constituents can more easily benefit from it. It is 
at FTC.gov/moneymatters.
    Moreover, as you mentioned, Mr. Chairman, the 2009 Omnibus 
Appropriations Act gave us new authority to issue regulations 
that will protect consumers from other predatory mortgage 
practices of nonbanks. We are very grateful for your efforts.
    To start, we are looking at clearer rules on mortgage 
servicing which we recognized as a major and significant 
problem when we brought an action late last year against EMC, 
which is a subsidiary of Bear Sterns. In that case, the FTC got 
$28 million and distributed 86,000 redress checks to American 
consumers. It is something we are very, very proud of at the 
agency.
    Beyond our consumer protection mission, we actively enforce 
the antitrust laws in a range of industries of critical 
importance to American consumers, including health care, 
energy, technology, real estate and retail goods, and the past 
12 months have been particularly active for the Bureau of 
Competition, with more than 30 new enforcement actions.
    More important, the agency has ramped up our attack on 
collusive pay-for-delay settlements in the pharmaceutical 
industry. Under these agreements, brand-name drug companies 
literally pay their generic competitors to stay out of the 
market. It is win-win for the companies, but it is lose-lose 
for consumers because it costs billions of dollars for them and 
also the Federal Government, which buys about 40 percent of all 
pharmaceuticals. In fact, my colleague, Tom Rosch, who is a 
Republican, is testifying today before the Energy and Commerce 
Committee about this issue. Every commissioner, Democrat, 
Republican and independent, over the last 10 years, has opposed 
these anticompetitive deals--every commissioner on the FTC.
    Mr. Chairman, since 1990, as you know, a significant 
portion of our budget has been derived from fees collected for 
pre-merger notification filings under the Hart-Scott-Rodino 
Act, as well as a smaller amount of fees from the National Do 
Not Call Registry. HSR fees offset the Commission's annual 
appropriations, and they are used to fund both our consumer 
protection and our competition missions.
    In about half of all the years, the fees are under the 
estimate, and in other years, they are over. The agency's 
fiscal year 2009 appropriations assumes an offset in collection 
of $168 million through the first 5 months of fiscal year 2009. 
Not surprisingly, the credit crisis has had an effect, and we 
have collected only about $16 million in HSR fees. But when the 
economy improves, we do expect the merger volume to surge. This 
year's likely shortfall, though, will clearly result in more 
funds having to be drawn from the Treasury's General Fund.
    One final point, at our peak in the late 1970s, the 
Commission had nearly 1,800 FTEs, but during the 1980s, the FTE 
level was decreased by nearly half. Today, the Commission has 
only about 1,100 FTEs. To this committee's credit, you have 
recognized the demands placed on the agency and the way we have 
honored our commitment to American consumers, and you have 
responded by providing additional resources. This will greatly 
help us to fulfill our mission which is, of course, to help 
consumers.
    Thank you for the opportunity to speak today. We look 
forward to speaking with the committee. I would be pleased to 
answer any questions you have.
    [The information follows:]

 

                      MATERIALS IN OTHER LANGUAGES

    Mr. Serrano. Thank you very much for your testimony.
    A quick question, are you allowed or do you have the 
resources to put these materials in languages other than 
English?
    Mr. Leibowitz. Yes, I think most of our consumer protection 
materials are also in Spanish. I believe this is in Spanish, 
too--it isn't yet. It will be shortly.

                             APA RULEMAKING

    Mr. Serrano. Okay. Thank you.
    As far as the rulemaking abilities that we gave you in the 
omnibus, I would like to ask you a few questions on that.
    Could you please explain the importance of rulemaking in 
your enforcement strategy and why it is important that the 
Commission be allowed to make use of your Administrative 
Procedures Act process?
    Mr. Leibowitz. Well, we are basically an enforcement 
agency. We do have rulemaking authority, but it is under the 
Magnuson-Moss Act, which is kind of a medieval form of 
rulemaking. It places a number of obstacles on the agency to do 
rulemakings. Rulemakings can take 6 or 8 years sometimes to do.
    So, for example, in the context of the mortgage crisis, we 
had looked at issuing rules. Commissioners talked about this as 
far back as a year and a half ago. Really before the mortgage 
crisis entirely kicked in, we had done a sweep of mortgage 
advertisements on the Internet, and we found 200 companies with 
facially invalid advertisements. But we knew we could not do a 
rulemaking in this area.
    So in a reauthorization, we will be looking at something 
closer to APA rulemaking, but it was enormously important that 
you gave us this authority in the omnibus to do rulemakings in 
the financial services area for nonbank-issued mortgages, 
because people are hurting. They need a response quickly, and 
with APA rulemaking, we can do that.
    One of the areas we are going to be looking at is mortgage 
servicing. The EMC case involved mortgage servicing, and we 
found lots of hidden fees, lots of problems, and we think we 
can help to clean up this industry going forward.
    Mr. Serrano. Just a side question. Why does it take so long 
for the rulemaking process?
    Mr. Leibowitz. Because we don't have APA standard 
rulemaking, which is notice and comment rulemaking. We have 
Magnuson-Moss rulemaking. And I think Congress designed it, in 
all fairness, I think it was designed because we are an agency 
with very, very broad jurisdiction, but fairly limited 
remedies. I think Congress designed it to create some 
impediments on our rulemaking authority.
    Having said that, whenever you have passed a major law, 
CAN-SPAM, Gramm-Leach-Bliley, FACTA, you have given us APA 
rulemaking, and that has made it much easier for us to 
effectuate what Congress wants us to effectuate. And I think if 
we had relief as a general matter from Magnuson-Moss, we would 
be able to move faster and would be more agile.

                         CIVIL MONEY PENALTIES

    Mr. Serrano. The omnibus also gives the FTC the power to 
seek civil money penalties when it is enforcing certain 
mortgage rules, including rules issued by the Federal Reserve. 
Why is it important that the Commission have this power? 
Without authority for civil money penalties, what kind of 
sanctions could you impose on wrongdoers?
    Mr. Leibowitz. Well, that is a great question. Forty-seven 
State Attorneys General have fining authority. We do not, for 
violations of our bread and butter statute, which is section 5, 
Unfair and Deceptive Acts and Practices. Without it, we can 
sometimes get redress for consumers. We can sometimes disgorge 
profits. But the thing that we can't do without fining 
authority is punish malefactors. Of course, we have to ask the 
court to fine someone, unlike the FCC, for example, which can 
fine someone, and then it just simply goes to an appellate 
court for review.
    And so fining authority is enormously important for us to 
have an effective deterrent, Mr. Chairman. And we are going to 
use it here.
    Mr. Serrano. And you are. In all cases?
    Mr. Leibowitz. In appropriate cases. Right. Of course, we 
will have to get the court's imprimatur in order to effectuate 
a fine. But it gives us more leverage in negotiating 
settlements. It makes sure that malefactors don't have two 
bites at the apple.
    Mr. Serrano. Well, my next question was going to be, how 
did you plan to use it, but I don't know how specific that 
would be. I mean, what kind of behavior stands out that you 
want to move on?
    Mr. Leibowitz. At 20,000 feet, I think we want to use it 
aggressively but appropriately. And then we have to look at the 
facts of each specific potential case. But if a company is 
clearly ripping off consumers through deceptive advertisements, 
or through hidden fees, fining might be appropriate. And again, 
we can't fine a malefactor unilaterally. We have to go to the 
court.
    Mr. Serrano. Mrs. Emerson.
    Mrs. Emerson. Thank you, Chairman.

            PROPOSALS FOR SINGLE CONSUMER PROTECTION AGENCY

    I want to ask you two or three questions about the concept 
of a Financial Product Safety Commission. Since we have had 
legislation introduced to create one, and I guess the mission 
would be of such a Commission to ensure that the offering of 
financial products to consumers is responsible, accountable, 
transparent. And while you all have some responsibility for 
that mission for nonbanks, there are obviously other agencies 
who deal with the banks themselves.
    So my questions are, one, is creating a single Consumer 
Protection Agency for financial products necessary? Then how 
would such an agency interact with you all at the FTC and bank 
regulators? And then could one say, possibly, that this 
proposal creates yet another regulator whose efforts may or may 
not be coordinated with other financial regulatory agencies?
    Mr. Leibowitz. Well, let me just start with this. Those are 
all good questions. There is a lot of balkanization in the 
oversight over mortgages and financial instruments. Mr. Serrano 
mentioned that we will be enforcing fining authority that the 
Fed gave us with its APA rulemaking under the FTC Act. We 
couldn't do APA rulemaking for ourselves without the Congress 
giving us that specific authority, but the Fed can do it, and 
we can impose, under the FTC Act, the Fed's rules.
    So, if you are a consumer and you have a deceptive loan or 
have been ripped off by a mortgage company or bank, it doesn't 
really make a difference to you who ripped you off. You just 
want to know where to go. And I think the notion--and the 
Commission believes this, I think, as well--that there should 
be one entity or one place that consumers can go is probably a 
good one. Is it necessary? No. Could it be an improvement on 
the existing crazy quilt patchwork of laws? Probably.
    Then the question is how might they work with us? I think 
it depends.
    So, Elizabeth Warren, a professor at Harvard, the leading 
proponent of this idea, has said it should be either a newly 
created entity that does consumer protection, or possibly it 
should reside in the FTC. Of course, our sense is that if you 
are going to create such an entity, it probably should be 
within the FTC, because we have experience we can build on; we 
are a consumer protection agency.
    I would say this, speaking only for myself about the 
banking agencies, if some sort of entity like this is created, 
and certainly if it is created in the FTC, you may not want to 
give us safety and soundness authority because that is not 
something we do well in our core competency. I am not sure, if 
you look at it in retrospect, that the banking agencies are 
necessarily very good at consumer protection. That is something 
we are very good at.
    Mrs. Emerson. Personally, I think it would make more sense 
to enhance your authorities to do it, as opposed to setting up 
a whole new agency and adding just one more layer of 
bureaucracy. It seems you all are on the right track, and 
rather than do something new, we might as well just give you 
all an enhancement.
    Mr. Leibowitz. Well, Congresswoman, we like to think we 
are, and it is good to have your imprimatur. So thank you.
    Mrs. Emerson. You are welcome.

               CIVIL ENFORCEMENT VS CRIMINAL PROSECUTION

    Let me ask you several other questions. During economic 
downturns like we are in today, do you all see an increase in 
the number of unscrupulous people taking advantage of those 
less fortunate through foreclosure rescue schemes, mortgage 
servicing deception and abusive debt collection actions? And 
when you come across those, how do you determine when the FTC 
should take the case to civil court versus referring it to the 
Department of Justice for criminal prosecution? So if you could 
just do those two for now?
    Mr. Leibowitz. I think the answer is more anecdotal than 
empirical, but it is a general sense that, yes, when you see an 
economic downturn like this, you see bad guys and fraudsters 
preying much more on consumers, so particularly, we are seeing 
more of this in the financial services area.
    A lot of what we do, and this is true both in the financial 
services area and outside of it, is bring fraud cases civilly, 
because we can't get criminal authorities to bring them. If a 
case is particularly egregious, we have a criminal liaison 
unit, which was set up by Tim Muris, our first chairman, a 
terrific chairman under President Bush who started the Do Not 
Call list, and if a case is particularly egregious, we will try 
to get the Feds or Justice Department interested in prosecuting 
it, or we will refer it over to them.
    When we do things like phishing cases and a lot of the 
identity theft cases, we will generally, because those are 
truly criminal, refer those over through our criminal liaison 
unit to criminal authorities.
    Mrs. Emerson. Do you have to jump through lots of hoops to 
get them to agree to do it?
    Mr. Leibowitz. You know, it sort of depends. I think it is 
not, and understandably not, the largest priority or the 
highest priority for the Justice Department, but they have been 
pretty good about doing this. I have talked to Eric Holder and 
his staff about doing more in the civil area. We are 
resurrecting a working group that was very active in the 1990s 
between us and State AGs, which is really useful.
    So, no, I don't think we always have to jump through hoops. 
I just think that all of us deal with limited resources, and 
you have to prioritize them. And generally they have been 
pretty good over the past few years about taking the most 
important cases, and we are pretty aggressive in trying to get 
them to do that.
    Mrs. Emerson. Thank you.
    Thanks Chairman.

                          ``DO NOT CALL'' LIST

    Mr. Serrano. Thank you. We mentioned the Do Not Call list a 
lot, and although that is not the focus of the hearing, I just 
have to ask you: Do you know if there was a period of time of 
adjustment? I remember, after I signed up, I got calls all the 
time, and then, now, it is very lonely. No one calls me.
    Mr. Leibowitz. Well, we are delighted to hear that. We keep 
the sanctity of your private phone numbers, we won't release 
them to the press. But, yes, there was a period of adjustment. 
I think we might have had a phase-in for a period of time.
    Of course, there are still violators. More and more, they 
are coming from overseas. But it has been very, very helpful in 
ensuring the sanctity of Americans' dinner hours, and it has 
worked really, really well for consumers.
    It is one of the areas where we feel really, really proud 
and one of the areas where consumers may not notice it on a 
day-to-day basis, but I think all of our lives have been 
improved by the fact that we are not being besieged by 
telemarketers.
    Mr. Serrano. Except politicians and elected officials.
    Thank you very much.
    Mr. Edwards.

                          FTC STAFFING LEVELS

    Mr. Edwards. Thank you, Mr. Chairman.
    Chairman Leibowitz, thank you for being here today and for 
your important work.
    I want to just go back for the record and clarify what the 
staff levels have been at the FTC, just approximations, if you 
could.
    In 1980, approximately how many FTC staff did we have?
    Mr. Leibowitz. I want to say it was something short of 
1,800, around 1,752 in 1979.
    Mr. Edwards. About 1,800, that is a good enough 
approximation.
    How about 1990?
    Mr. Leibowitz. A little over 900; 940. I actually have this 
in my briefing book somewhere.
    Mr. Edwards. Nine hundred and forty, and today it is around 
1,100?
    Mr. Leibowitz. It is around 1,100. Starting around the time 
I came to the Commission, we developed a sort of consensus that 
we needed to grow the agency. It was down to 894 at its lowest 
level in 1989.
    Mr. Edwards. So our country's GDP has grown significantly 
in the last 29 years; the complexity of our economy has grown 
much more complex; and yet your staff is almost cut in half 
compared to where it was in 1980, is that correct?
    Mr. Leibowitz. Right. Now we have grown by about 200 since 
our lowest level and about 100 or a little bit more FTEs over 
the last 5 years. And we are grateful for that. Again, we think 
that we can reasonably effectuate our mission with the staff we 
have. We have terrific attorneys, terrific employees.
    But having said that, as you point out, the population of 
the United States in 1980 was about 225 million. Now it is 
about 305 million. And because we are known to be a 
responsible, reasonably competent agency, we are tasked with 
effectuating or enforcing a lot of new laws. So CAN-SPAM, 
Gramm-Leach-Bliley, FACTA, these are all laws where we are the 
lead or a lead enforcement agency, and we are worried that the 
quality of our work is going to be strained by the quantity of 
demands placed upon us.
    Mr. Edwards. Right. My point would be that it should be no 
surprise to American citizens that we have had a challenge of 
the title of this hearing being to protect consumers of 
financial services and promote competition. Without being any 
reflection on the hardworking boys at the FTC, our Federal 
government hasn't done a very good job of protecting consumers 
from financial service problems, and I am not sure we have done 
a very good job in promoting competition. I would liken it to 
people working awfully hard with a city on fire, and we are 
giving you buckets of water. I just want to be sure that we 
provide the resources that are needed to protect the private 
enterprise system.

                         ANTITRUST ENFORCEMENT

    I just have a couple of minutes, I want to quickly ask 
about the antitrust role you play. It seems to me, my own 
personal observation is, there are two ways you can kill the 
private enterprise system in this country. One, you can tax it 
and regulate it to death. The other is you can be like a 
football game and have no rules and no referees, where an 
interesting football game with a lot of fans turns into chaos 
and eventually no one will come to those games, without rules 
and effectively being regulated.
    We are going to have to deal with this whole issue of too 
big to fail. I used to stay, if they are too big to fail, they 
are too big not to be regulated. I am beginning to think, if 
they are too big to fail, maybe they are just too big.
    Address that last point. Tell me exactly what the process 
is, if you would, when a company wants to merge with another 
company, what role does the FTC have in approving or 
disapproving of that? What other Federal agencies play a role, 
if you could? I apologize. We have just a minute or two.
    Mr. Leibowitz. Sure. We share jurisdiction with the 
Department of Justice. There are some areas that have been 
historically ours; some that have been historically theirs; 
some where we work out who will get a particular matter. The 
standard we apply is section 7 of the Clayton Act. That asks 
whether the deal might substantially lessen competition, as 
Congressman Schiff knows from The Judiciary Committee, and we 
challenge the deals we believe do that.
    Now, sometimes we win in court, and we won our first 
preliminary injunction in 6 years 2 weeks ago in a merger of 
automotive crash estimation companies, and sometimes we don't. 
But we try to do our best. The Justice Department has been 
criticized over the last 8 years for not bringing enough cases 
or appropriate cases. We have not been criticized for doing 
that. We have called things as we have seen them.
    In terms of too big to fail--it is an interesting issue. It 
certainly may be an issue in the banking area. I have not seen 
in my 4\1/2\ years on the Commission, a case where we approved 
a deal that could have been described as too big to fail.
    But we are going to be very aggressive going forward. We 
are going to enforce the antitrust laws, because my colleagues 
and I think the antitrust laws have worked quite well in boom 
times and in depressions and in deep recessions. There might be 
an exception for a company that wants to buy a failing company. 
That is incorporated into the antitrust laws. But we are going 
to try to do our best to enforce the law.
    Mr. Edwards. Thank you, Mr. Chairman.
    Mr. Serrano. Thank you.
    Mr. Culberson.
    Mr. Culberson. Thank you, Mr. Chairman.

                   ABUSES RELATED TO MORTGAGE LENDING

    I appreciate your service, Mr. Chairman. Thank you very 
much for being here with us today.
    The 2009 omnibus spending bill contained an authorization 
in it to give the FTC expedited rulemaking authority to 
prohibit unfair and deceptive trade practices acts on mortgage 
loans. Of course, that is a huge concern, and a big part of the 
problem we face today has come from people being given loans 
that shouldn't have been in the first place.
    Because of the obvious number of unscrupulous individuals 
that have taken advantage of people making fraudulent or 
deceptive mortgage loans, could you describe for me, if you 
could, sir, what are you doing under that authorization 
language? Tell me about what rulemaking and what kind of rules 
you are considering? You have got, I know, under this language 
authority to obtain civil penalties. How do you determine 
whether a case goes to civil court? Are you able to make a 
referral to the Justice Department for criminal, and how do you 
distinguish?
    Mr. Leibowitz. Yes, answering your last question first, if 
a case is particularly egregious, we may try to refer it to the 
Justice Department, and if we can get them to bring it, we 
will.
    In the omnibus, you gave us two things. One is fining 
authority, which is very, very important because we can go 
after malefactors and we have a real deterrent. Otherwise we 
probably wouldn't have fining authority in this area.
    Mr. Culberson. Does the fine go to the Treasury or to the 
people that have been defrauded?
    Mr. Leibowitz. Two things. If we get a fine, it goes to the 
Treasury. If we get redress for consumers, which we always try 
to get, that will go back to the consumers. And in fact, one of 
the cases we are most proud of in recent months is a case 
against Bear Stearns or a subsidiary that did mortgage 
servicing. We got 86,000 redress checks back to American 
consumers, about $350 each, which is, you know, for a middle 
class family a lot of money, $28 million in all.
    How do we determine what we are going to do in the 
rulemaking? Well, we have 90 days from the time that the 
omnibus passed to begin the rulemaking. I believe we are going 
to beat that deadline, and we are going to be in the field, not 
with proposed rules but with questions to all stakeholders 
about what kind of rules we should have, I think, within 75 
days.
    Two areas where we are going to concentrate will be 
foreclosure rescue scams, which we believe are growing, and 
mortgage servicing, which was the problem we found in our EMC 
case. We might look at other things like advertising. But the 
Fed has actually passed some rules that will strengthen our 
hands on that, and it may very well be that enforcing those Fed 
rules on mortgage advertising will be sufficient, with fining 
authority.
    Mr. Culberson. When the Federal Trade Commission steps in 
and you take a case to civil court, does your jurisdiction in 
addition to causes of action that a person may have 
individually under State law, do you preempt, does the Federal 
Trade Commission's authority over these mortgage companies and 
mortgage scams, is that in addition to State law?
    Mr. Leibowitz. We don't generally, certainly by bringing 
cases, we don't preempt. In fact, the Supreme Court decided a 
tobacco case early this term that found, and we agreed, that 
our agreements with tobacco companies didn't preempt State 
lawsuits. We do have, I think, preemption authority for some of 
our rulemaking, but it sort of depends. And I think our general 
approach has been that we like to set a floor rather than a 
standard.
    Mr. Culberson. I just want to make sure that your remedies 
are not exclusive; that a person who has been defrauded can 
also go to court under State law and hammer these guys.
    Mr. Leibowitz. In that sense, Congressman Culberson, they 
are absolutely not exclusive. And we wouldn't want them to be. 
And by the way, one of the other things that came in the 
omnibus is more ability to work with State AGs, which is very, 
very important when you are a small agency like ours to sort of 
leverage your resources.
    Mr. Culberson. What do you do to go after something I know 
happened routinely when banks were knowingly making loans to 
people that couldn't pay them back with the certain knowledge 
they could unload those loans to the taxpayers, sell them to 
Freddie and Fannie, who were aggressively marketing, pushing 
banks to make loans to people that otherwise a bank wouldn't 
touch. I know what happened. We all know what happened. We all 
know examples of bankers who in their long history would never 
have made loans like that, but they kind of turned a blind eye 
to it. They knew it was going on. They were making big fees, 
and they knew they could unload the loan immediately on to the 
taxpayers. And, of course, it has led to the problem we have 
today.
    What remedy, if any, does the taxpayer have to go after 
bankers like that or people who were pushing and marketing 
loans like that and unloading them on taxpayers, on our 
children and grandchildren?
    Mr. Leibowitz. Well, I would say this, and I want to go 
back and get you the right answer. We don't generally have 
jurisdiction in those instances, although sometimes, of course, 
we will bring cases on behalf of consumers, as we did in EMC.
    Mr. Culberson. EMC?
    Mr. Leibowitz. EMC, the Bear Stearns case where we got 
86,000 redress checks. I think consumers themselves may have 
recourse to lawsuits. Sometimes, not most of the time, but 
sometimes, of course, they have been complicit, because they 
knew they were getting a loan that was too big for them, and 
that complicates our ability to go after some malefactors.
    I think the banking agencies probably have jurisdiction, 
and where there is criminal activity, I think the Justice 
Department probably does, too. I would be happy to circle back 
with you and get you a follow-up answer in writing.
    Mr. Culberson. It is really difficult to know who to go 
after.
    Mr. Leibowitz. I think this also goes back to the question 
that Congresswoman Emerson asked which is about the 
balkanization of jurisdiction here, right? If one of your 
constituents was defrauded in a loan, it really doesn't make a 
difference to that constituent whether the oversight is the FTC 
or one of three different banking agencies. They ought to have 
one person to call and have all of the right remedies.
    Mr. Culberson. Thank you, Mr. Chairman.
    Mr. Serrano. Thank you. Mr. Schiff.

               FEDERAL AND STATE ENFORCEMENT AUTHORITIES

    Mr. Schiff. Thank you, Mr. Chairman.
    Mr. Chairman, how wonderful it is to see you in this 
committee and in this role. I appreciate the great work you do. 
It is good to have somebody with your talents as the Chairman.
    I want to follow up on some of my colleagues' questions. I 
have much the same interest, and that is, in particular, with 
some of the mortgage relief fraud going on, which seems to be 
very widespread now. I was reading your testimony that you 
brought a number of enforcement cases over the last 5 years, a 
variety of different kinds. But still, when you total them up, 
it is about a dozen cases a year across many jurisdictions, 
this being one of them. I have to imagine there are probably 
hundreds if not thousands of these frauds going on in a single 
year now.
    My experience, having been a prosecutor in the Federal 
system, is we generally don't want to bother unless it is a 
really big case, and these mortgage frauds are all going to be 
little cases.
    Mr. Leibowitz. That is exactly right.
    Mr. Schiff. I wonder, I guess, a couple things. One, what 
is sort of the maximum penalty that you are able to assess in a 
case where someone is defrauded out of maybe $1,000 or $2,000? 
Two, the Feds aren't likely to take it unless it is like a 
major mill doing these things, and even then, it may be tough.
    Are the State and local district attorneys able to take 
these as garden variety fraud cases, or do they have to be 
Federal cases, and do we need to give you more enforcement 
capability?
    Mr. Leibowitz. That is a series of great questions, 
Congressman.
    You are absolutely right. We as an agency cover the 
waterfront. We are 1,100 FTEs. About half of them do antitrust, 
and about half of them do consumer protection. We have lots of 
different consumer protection matters we have to do, from 
privacy, spam, spyware, Do Not Call, old-fashioned fraud to 
financial services deception and fraud.
    Mr. Schiff. Do you do copyright as well?
    Mr. Leibowitz. We have occasionally brought copyright-
related cases in the context of deception, involving peer-to-
peer matters.
    Mr. Schiff. With our history, I have to throw in copyright.
    Mr. Leibowitz. That doesn't surprise me. We do have that 
history.
    Having said that, in the example that you mentioned 
hypothetically, if a consumer is ripped off for $1,000, we are 
going to get at most $1,000 back for that consumer in redress, 
maybe disgorgement of profits from the company. But one of the 
great things you did for us in the omnibus was giving us both 
rulemaking authority and fining authority. So with fining 
authority, you can go after a malefactor and make them pay a 
price. It has to be approved by a court, but at least there is 
a real deterrent there.
    With rulemaking authority in this area for predatory 
mortgages and deceptive financial services not issued by banks 
but issued by non-bank mortgage companies, because there are so 
many companies out there, we can set a standard. By setting a 
standard, some of those companies that are sort of dragged down 
because their competitors are doing it will go up above the 
watermark, and they will start writing mortgages in a better 
way.
    If we say, the rule is, you can't advertise teaser loans 
without explaining what they are, most companies will want to 
be above the standard. They won't want to get in trouble with 
us, particularly if we have fining authority. So that was very, 
very helpful.
    In our reauthorization, which I think is an area where the 
Senate and House Commerce Committees are going to legislate or 
start legislation this year, we are hoping to have some more 
general relief from our Magnuson-Moss Act which is very 
cumbersome rulemaking and more fining authority so that we can 
really have an effective deterrent against malefactors.
    Mr. Schiff. Do we have an asset forfeiture capability?
    Mr. Leibowitz. Do we have an asset forfeiture capability? 
We do not.
    Mr. Schiff. In terms of the prosecution side, I am 
assuming, but I don't know for sure, our local DAs, as opposed 
to U.S. Attorneys' Offices, do they have jurisdiction to 
prosecute someone holding themselves out, for example, if you 
will pay me $1,000, I will renegotiate your mortgage and then 
they take the money and don't do anything?
    Mr. Leibowitz. Sure. State AGs certainly do under 
comparable State laws. Sometimes they can enforce aspects of 
the FTC Act. Local prosecutors probably can under parallel 
laws. I think most States have baby FTC acts. So we can work 
with them, and we do, and we are going to do more of it going 
forward.
    But, again, as you point out, I like to think that the 
analogy isn't putting our finger in the dike. I like to think 
we have made real differences for the people who we have 
benefited and we have had some deterrent effect. But an 
increase in resources, would be useful to us so we can decide 
to bring two cases instead of bringing one and settling 
another. And then in our authorizing committees--
    Mr. Schiff. Before the gavel comes down, on the mortgage 
relief fraud, do local DAs have the power to enforce FTC laws? 
Should they have it if they don't?
    Mr. Leibowitz. The DAs do not. State AGs do under what you 
have given us in the omnibus.
    Mr. Schiff. Thank you, Mr. Chairman.
    Mr. Serrano. Thank you.
    Mr. Kirk.

    ANTI-COMPETITIVE BEHAVIOR INVOLVING NONBANK FINANCIAL COMPANIES

    Mr. Kirk. Thank you, Mr. Chairman.
    You have extensive anti-competitive jurisdiction, and the 
administration has proposed a seizure of nonbank financial 
companies, which is directly in your jurisdiction. So is that 
decision by Secretary Geithner accurate that FTC has failed in 
its mission?
    Mr. Leibowitz. I don't think we have failed in our mission, 
Congressman. I think we have made a pretty valiant effort, 
given the size of our agency. So, for example, in the last 10 
years, we have gotten $465 million in redress to consumers in 
just the financial services area. In the last 5 years, we have 
brought 70 cases in this area. Just last week we brought more.
    Mr. Kirk. But I missed the big ones.
    Mr. Leibowitz. Well, I will say this. We don't have 
rulemaking authority, or we didn't until you gave us that 
authority in the Omnibus Act. So it is very hard to go after 
everybody when you can't set ground rules.
    I will say this: In the Bear Stearns EMC case, which was a 
deceptive financial services case involving mortgage servicing, 
we got 86,000 redress checks to American consumers. Could we 
have done more? Yes, we could have done more in retrospect.
    Mr. Kirk. I am concerned that the Commission, for example, 
has had very exotic prosecutions, for example, in hospital 
cases, the same year that they missed AIG.
    Mr. Leibowitz. I don't know that we had jurisdiction over 
AIG. I will get back to you on that.
    Mr. Kirk. I read your testimony. It says, ``anti-
competitive activities for nonbank financial companies.''
    Mr. Leibowitz. We don't have jurisdiction over insurers. We 
are carved out under the FTC Act.
    Mr. Kirk. I thought the CDSs were ruled as non-insurance 
products.
    Mr. Leibowitz. I will get back to you on that. I just don't 
believe that is within our jurisdiction.
    Mr. Kirk. Would an analysis that an institution is too big 
to fail trigger your scrutiny for noncompetitive activity?
    Mr. Leibowitz. I think our scrutiny on the antitrust side 
would be to enforce the antitrust laws, and so, in that 
context, we will look to see whether a merger might 
substantially lessen competition. There has been some 
discussion of whether entities are too big to fail. I think we 
look at market power and whether folks can raise prices. We 
don't really look at too big to fail as an antitrust doctrine.
    Mr. Kirk. Would you say that Goldman Sachs and J.P. Morgan 
now are too big to fail?
    Mr. Leibowitz. I would say that is an interesting 
discussion to have, but it is probably outside of our 
jurisdiction.
    Mr. Kirk. So for those institutions now, they have a 
considerable market power, you would agree?
    Mr. Leibowitz. They have considerable market power; I would 
want to see how many other folks are in that area. They 
certainly have a lot of power, authority, and debt.
    Mr. Kirk. Is there a single government-sponsored merger 
that you have raised an objection to?
    Mr. Leibowitz. A government-sponsored merger?
    Mr. Kirk. Correct. We have had quite a number of them where 
we have arranged----
    Mr. Leibowitz. No, we don't have jurisdiction in that area. 
It is the banking agencies that do. And so we have certainly 
raised objections to mergers, and we have won a PI. We won a 
case on appeal earlier this year, or late last year. We blocked 
what we believed to be an anti-competitive hospital merger 
involving Inova and Prince William Hospital, Inova being the 
dominant hospital chain in Virginia.
    Mr. Kirk. Which may be important, but misses the huge 
earthquake that just hit this economy that is directly in your 
jurisdiction, which in your testimony is anticompetitive 
behavior involving nonbank financial companies.
    Mr. Leibowitz. Yes, but not involving insurers, not 
involving those entities within someone else's jurisdiction. I 
will get back to you on that. I want to make sure I give you an 
accurate answer.
    Mr. Kirk. Because my question then is, going forward for 
this committee, do you have the resources necessary to go after 
too-big-to-fail, nonbank financial companies?
    Mr. Leibowitz. I would say we have the resources to do good 
merger reviews. You may not have been here when we had this 
discussion at the beginning. We are a much smaller agency than 
we were in 1980, even though the population has grown. And 
certainly we have been very pleased that you have given us 
additional plus-ups in the appropriations over the last few 
years, because it has been really helpful so we can do our job, 
which is promote competition and protect consumers.
    Mr. Kirk. Within what is in your jurisdiction, have you 
done a cursory review of who is too big to fail?
    Mr. Leibowitz. Within our jurisdiction, we have blocked 
mergers that we believe to be anticompetitive, or we have gone 
to court to try to do that. Have we done----
    Mr. Kirk. No, no. In your testimony, you say that there is 
a decrease in filings that may create a decrease in the types 
of mergers that do not raise competitive concerns, but we 
continue to see significant filings that do raise concerns as 
well as----
    Mr. Leibowitz. There is concern under the antitrust laws. 
That is exactly right.
    Mr. Kirk. As well as activities outside merger, which you 
say the Commission----
    Mr. Leibowitz. Sure. So our most important antitrust--
    Mr. Kirk. Here is my question again. Have you even done a 
cursory review of institutions within your jurisdiction which 
are too big to fail?
    Mr. Leibowitz. I would say this. Let me just get back to 
you. Financial services mergers go to the Department of Justice 
under our clearance agreement. They have the financial services 
expertise. It is the Department of Justice. Whenever we do a 
merger review, we have----
    Mr. Kirk. No, outside of merger, have you done a cursory 
review of market activity outside or within your jurisdiction 
of institutions too big to fail? This is the third time I am 
asking the question.
    Mr. Leibowitz. We have not done a major report on too-big-
to-fail doctrine. We incorporate it into all of our--if anyone 
raises it with us, as some have in the context----
    Mr. Kirk. I take it you haven't done a cursory review?
    Mr. Leibowitz. We have not done a review.
    Mr. Kirk. Even with what we have been reading in the 
papers?
    Mr. Leibowitz. But we have been enforcing the antitrust 
laws very vigorously, and we have been doing that over the past 
8 years.
    Mr. Kirk. Mr. Chairman, might I suggest that you do a 
cursory review within your jurisdiction of institutions in this 
United States which are too big to fail?
    Mr. Leibowitz. I would be happy to do that and get back to 
you.
    Mr. Kirk. Thank you, Mr. Chairman.
    Mr. Serrano. Thank you.
    Mr. Fattah.

                      FORECLOSURE-RELATED PROBLEMS

    Mr. Fattah. Thank you for your testimony, and let me thank 
you for your work.
    Mr. Leibowitz. Thank you.
    Mr. Fattah. These schemes to go after people who are 
seeking mortgage relief, you are taking some action. I just 
wanted to delve into this. And I think the new Web site is very 
helpful in giving people general guidance.
    But the Bear Stearns case is a good case in point. There 
were others in which essentially consumers were offered that 
someone could help them modify their mortgage note for an up-
front payment. That is the essential thing, and then did little 
or nothing?
    Mr. Leibowitz. In the Bear Stearns case, I think it was 
more the notion of embedded fees in consumers' bills that they 
did not see in the context of mortgage servicing. EMC was a 
mortgage servicing company, so they would do the mortgage 
servicing for another holder of the mortgage.
    Mr. Fattah. The mortgage relief cases, then, I guess are 
the ones where that happens.
    Mr. Leibowitz. The foreclosure rescue scam cases, and in 
those we have seen a variety of different patterns, yes.
    Mr. Fattah. Now, there are places around the country in 
which there has been--I guess Florida, California, and Arizona 
have seen the highest rates of mortgage foreclosures in certain 
counties, and notwithstanding what my colleague was suggesting, 
they really are not in the poorest communities. These mortgage 
foreclosures and activities have been in some of the upper-
middle-class communities in these particular States.
    And so this rumor, this myth, that somehow poor people are 
the ones who have drug down the market on mortgages are 
somehow--is really misplaced. But are we targeting this relief 
to communities in which these mini-mansions and all other such 
housing models have really been at the heart of this problem?
    Mr. Leibowitz. You know, our approach is fairly 
utilitarian. We try to do the greatest good for the greatest 
number of people. So you are absolutely right. It is not just a 
subprime problem. It is not just a problem with low-income 
folks.
    I would say, I want to go back and get you a dispositive 
answer, but my sense is we have brought our cases across the 
boards. But sometimes they are preying on low-income folks and 
immigrants whose English language skills are not as good as 
others'. But it is across the board.
    Mr. Fattah. I just wanted to get on the record that, you 
know, when you look at the survey of foreclosure activity and 
people behind in their mortgages, it has really been some of 
the highest-income counties in the States that have been at the 
very forefront of this, Florida, California and Arizona, and 
this myth that has been circulating and the kind of discussion 
here that somehow mischaracterized where the heart of this 
challenge is, so I just wanted to get that on the record.
    I do want to thank you for the Web site. I think it can be 
useful to many of our constituents. Thank you for your 
testimony.
    Mr. Leibowitz. Thank you, sir.
    Mr. Serrano. Thank you, I would just like to comment on the 
gentleman's statement. I have also, like so many people, have 
been troubled by the fact that so much emphasis has been placed 
on the government's desire to try to get the American dream 
available to all, and somehow to believe that because maybe 
some bad loans were made in the process of making that dream 
available to all, that that is what threw the market apart, and 
the way to resolve this problem is to move to a future where we 
go back not allowing some folks to share in the American dream, 
which is homeownership.
    Ms. Lee.
    Ms. Lee. Thank you very much.

       PREDATORY LENDING AND MINORITY AND LOW-INCOME COMMUNITIES

    Congratulations, Mr. Chairman. Good to see you.
    Let me ask you briefly, with regard to the companies that, 
really, in many ways unscrupulously exhibited a pattern of 
advertising primarily to minority and low-income communities as 
it relates to their ads for predatory loans and subprime loans, 
there was really a distinct pattern of steering minority 
borrowers into the much more expensive subprime loans than 
whites with the same credit scores. Study after study has 
dramatically shown in very glaring ways that there were higher 
rates of subprime loans with punitive prepayment penalties and 
outright fraud in loans to minorities. So it is clear that many 
of these companies targeted the poor and communities of color.
    I have a community, for example, in East Oakland, targeted 
totally by these advertisings, unfair predatory loan 
strategies, which ultimately ended in what I say is 
discriminatory lending. So now they are doing the same thing 
with regard to the foreclosure rescue and credit repair scams, 
which you have talked about.
    But what I want to find out from you, Mr. Chairman, is, you 
know, we are in this era now where race is pushed under the rug 
oftentimes; race is not a factor in many. And we want to get 
beyond race, granted. But when you see practices like this that 
are targeted specifically to African American and Latino 
communities, aren't there some issues of civil rights that we 
have to bring up in terms of racial discrimination and how you 
address racial discrimination as we try to make sure these 
communities are not victims again to these type of loan sharks?
    Mr. Leibowitz. You are absolutely right, Congresswoman.
    In fact, while we have brought a number of financial scam 
cases, 70 over the last 5 years, we have also brought cases 
involving discrimination. So a case we brought last year, 
Gateway, involved a mortgage company that was charging more for 
African American and Latino borrowers, and they are a 
Pennsylvania company, than they were for white borrowers. And 
we are going to do more of that.
    But the scams are out there. And about a year-and-a-half or 
2 years ago, I will get you the exact date, we did a sweep of 
Internet advertising for mortgages and we found 200 companies, 
200 companies, that were displaying patently false, facially 
false mortgages, like a 15-year mortgage at 1 percent. We know 
we would all be getting those mortgages if they really existed. 
We know they are not valid.
    We sent those companies letters. Some of them stopped their 
inaccurate advertising. We brought cases against some of them. 
But we need to do more.
    One of the things that has been very, very helpful is that 
your committee gave us rulemaking authority and fining 
authority in this area.
    Ms. Lee. But is there any way to impose penalties on these 
companies to either compensate the families or the victims of 
these scams or the communities that were left in shambles as a 
result, again, based on civil rights law and based on these 
communities being primarily communities of color.
    Mr. Leibowitz. Well, we will try to get redress for all 
consumers. Now, in the Gateway case, we couldn't do that 
because the company I believe went bankrupt. We got some relief 
for consumers, but it was just a fraction, a sizable fraction 
but a fraction of the harm. And again you have given us fining 
authority in the omnibus that will be helpful, and I believe 
under the civil rights laws, which we don't enforce, there is 
also some ability for the Justice Department; for example, the 
Civil Rights Division and others, to fine malefactors.

                      FTC AFFIRMATIVE ACTION PLAN

    Ms. Lee. Finally, Mr. Chairman, let me just ask you with 
regard to your affirmative action plan and your workforce, in 
terms of ethnic gender breakdown, do you have an affirmative 
action plan? What is your racial composition, ethnic 
composition, gender composition of your shop?
    Mr. Leibowitz. Let me get back to you with that. We do have 
affirmative action plans internally in the Commission. We have 
persons of color who are deputies in divisions and supervisors, 
and we are going to do more in that area, and of course we have 
women who are bureau heads.
    Ms. Lee. So by pay grade and job title and----
    Mr. Leibowitz. Absolutely.
    [The information follows:]

 

    
    Ms. Lee. Standard reporting I would like to look at.
    Mr. Leibowitz. Absolutely. And I will say this: OPM did a 
study of 37 different agencies, and we came out in the top five 
in three out of the four categories, in terms of competence, 
and the ability to accomplish our mission. The one area where 
we did not come out quite so high was in job satisfaction. And 
if you look at those job satisfaction numbers, we came out I 
think in the top third but not as high as in others. If you 
look at the job satisfaction numbers, among our professionals, 
who are mostly though of course not exclusively white, the job 
satisfaction is exceedingly high. If you look at job 
satisfaction among our support staff, which is probably 
substantially, maybe not mostly, African American and persons 
of color, it is not so high and that is something we are going 
to be working on and are going to continue to work on.
    Ms. Lee. I look forward to working with you on it. Thank 
you, Mr. Chairman.

                         DECEPTIVE ADVERTISING

    Mr. Serrano. Thank you.
    These things are coming from everywhere. I was made aware 
of these packs that you get at home with all the coupons and 
the coupons are usually about cleaning your rug and now they 
are about, you know, we buy used houses, all cash settlement in 
as little as 3 days. Pay all closing costs, get cash now, and 
move out later. I should be wearing a straw hat. Listen to 
this: ``Do you have a family member or a personal friend 
selling a home? Easy. Collect $1,000 finder's fee if we 
purchase.''
    Mr. Leibowitz. If you would hand that over to us at the end 
of this hearing, we will follow up with that entity.
    Mr. Serrano. Thank you. And thanks to my staff for that.
    Mr. Leibowitz. By the way, this is how we find some of our 
cases. We had 700,000 complaints last year in our Consumer 
Sentinel database, but we also see stuff like that and we give 
it to staff or staff comes up with it. And, again, there is 
more and more of this, and less and less clean your rug.
    Mr. Serrano. I am old enough to remember Steve Allen, and 
when you see something like this, you really want to get into a 
Stevareno routine because he could sell you anything off this, 
or Groucho Marx could do wonders with this.
    Part of this whole issue of financial products has been the 
issue of lawyers talking to each other; right?
    Mr. Leibowitz. We did a lot of work together.

                   MAKING DISCLOSURE MORE MEANINGFUL

    Mr. Serrano. It is bad enough to have a witness with the 
title of chairman. Every time somebody says ``chairman'' I get 
up.
    The whole disclosure issue on financial products has been 
an issue where in many cases the disclosure often seems to be 
long, complicated, and hard to interpret and often comes after 
the customer is essentially committed to the particular choice. 
Also there is considerable evidence that some mortgage lenders 
have steered certain buyers, especially minorities, into 
expensive subprime loans even though they would have qualified 
for conventional mortgages or better terms. In those cases what 
is really needed is not just disclosure about the terms of the 
loan that the consumer actually got but also information about 
the better terms the consumer qualified for and should have 
gotten.
    Do you have thoughts on what can be done to make disclosure 
more meaningful and more useful?
    Mr. Leibowitz. Yes, we do. And we see disclosure problems 
across the board in our Spyware cases where the disclosures are 
on the third click on page 15 of the Uniform Licensing 
Agreement, the ULA. We see it in the context of credit card 
solicitations, although we don't have jurisdiction over many 
credit cards anymore because they are mostly issued by banks. 
And one of the areas I think--I don't want to prejudge our 
rulemaking, but one of the areas I think that we will look at 
when we do our rulemaking is better disclosures in this area 
because, it doesn't solve every problem but if you disclose to 
consumers what they are really getting and they have the 
information they need, they can decide whether to take a loan 
or get a mortgage or not. And so, yes, we are going to be 
looking at this area. And I would say particularly in the 
foreclosure rescue area and in the mortgage servicing area, you 
deal with either deceptive or unfair or buried disclosures, and 
they don't give notice to consumers. So it is not the only 
reason we are in this economic mess, but it is not surprising 
that it is clearly one of the factors. So we are going to look 
at improving disclosures. It is a great idea.
    Mr. Serrano. I bet you a lot of folks would give you 10, 15 
things they saw coming, some on the higher, more serious 
levels, and others--for instance, when I began to see, I think, 
in the early '90s, there was a great market for people who 
could speak very, very fast. These were the guys who would tell 
you buy this product and then they would give you half a minute 
of disclaimers on everything this product could cause you. And 
it was so fast it just didn't seem right. So this disclosure 
issue is very important.

                         YIELD-SPREAD PREMIUMS

    Let me ask you another question. Last July the Federal 
Reserve Board finally issued rules using its authority under 
the Homeownership and Equity Protection Act rules, which the 
FTC enforces for lenders under its jurisdiction. For high-
priced mortgages these rules require better income verification 
and more consideration of the buyer's repayment ability and 
prohibit prepayment penalties in many cases. These rules do 
not, however, address other problematic practices such as 
yield-spread premiums that basically reward mortgage brokers 
for steering customers into higher priced homes.
    Should mortgage brokers be required to disclose to 
customers that they have received compensation tied to the 
interest rate on the customer's loan? Should yield-spread 
premiums be prohibited entirely, at least in the subprime 
market, as fundamentally unfair and anti-consumer?
    Mr. Leibowitz. You know, that is an interesting question, 
and one we have been discussing. I don't think they were banned 
under the Fed's rules. And my staff tells me it is a complex 
issue, and it is, and we are working with other agencies and we 
are----
    Mr. Serrano. You think I had an easy time----
    Mr. Leibowtiz. And I thank you for that.
    It is a complex area, and we worked on mortgage disclosure 
forms and we have a model mortgage disclosure form that would 
replace the RESPA and TILA forms and actually would be more 
beneficial to consumers. Sometimes consumers will look at the 
yield-spread premium and they will focus on it and they will 
take a loan with a higher yield-spread premium rather than 
taking a loan with a lower mortgage, and so it is a very 
complex issue. It is one we are happy to take a look at.
    Mr. Serrano. Even though it is complex.
    Mr. Leibowitz. We do take a look at complex issues. Those 
are the ones that are most challenging and those are the merger 
cases, the ones that are complex. The easy ones we either don't 
do or we let go. So yes, we will take a look at that. We have 
had discussions at the Commission level. We have had 
discussions within our bureaus, with our economists arguing for 
the benefits of yield-spread premiums and I think some of our 
consumer protection litigators arguing that they can be very 
misleading, and we are going to work through this issue maybe 
in the context of our rulemaking.
    Mr. Serrano. This whole exchange reminds me of the SNL 
skits on President Bush's saying this is a tough job. We pretty 
much understood that.

                          FTC STAFFING LEVELS

    Mr. Edwards brought up the issue of staffing levels, and we 
saw the changes and we are trying to make good on our promise 
to get you back somewhere but still far away. I think the last 
there was--1,094 was your level at this point and it went up as 
high as close to 1,800; so we have to find a way to do better.
    But during the last couple of years, I mean during this 
period when they went down, could you mention what new 
responsibilities you gained which then made the issue more 
difficult? And if you got the kind of dollars you would like to 
begin to see, what additional priorities would you take on?
    Mr. Leibowitz. That is a great question. We are a pretty 
well-respected agency, and as a result Congress gives us lots 
of assignments in the sense that you pass a law and you task us 
with enforcing the law. So I can think of three laws in the 
last 8 or 10 years that we are a lead law enforcement agency 
for: CAN-SPAM, FACTA, Gramm-Leach-Bliley. I will submit a list 
of others. One of our biggest areas is trying to stop pay-for-
delay settlements, where brand pharmaceutical companies pay off 
their generic competitors to stay out of the marketplace. If I 
own a gas station and you want to build a gas station across 
the street, I can't say here's $200,000, go away for 5 years. 
And yet we are seeing very similar conduct among pharmaceutical 
companies.
    So what we find is sometimes, and this is totally 
reasonable, we are willing to settle a case instead of going to 
court or staff will come to us and say, ``there are these three 
interesting investigations. We think there are violations in 
all of them. Which case would you like us to bring or which two 
cases would you like us to bring?'' And so we have to make 
decisions that are reasonable decisions on behalf of the 
consumers we serve and the decisions you want us to make, but 
they are made within the context of limited resources.

                          TIPS AND COMPLAINTS

    Mr. Serrano. Let me ask you before I turn it over to my 
colleagues. You get obviously a lot of tips and complaints 
every day--even from chairmen of subcommittees.
    Mr. Leibowitz. Yes. Those are good ones, by the way.
    Mr. Serrano. And I get the feeling this will be looked at 
right away, and that is a good thing. How do you follow up on 
these? Just a fraction of them? Most of them? How do you 
choose? I mean, obviously, all kidding aside, this one 
attracted your attention because here we are talking about the 
present issue that we are facing in people making all these 
promises, and I must tell you this came to a mailbox of a 
person who has been in a new house less than a month. So you 
can imagine what is happening in the whole neighborhood.
    Mr. Leibowitz. Well, look, you chaired the Consumer 
Protection Subcommittee in your State assembly; so you 
understand----
    Mr. Serrano. You know this.
    Mr. Leibowitz. I do know that, yes. We do our homework.
    Mr. Serrano. Who chaired it after I left to come to 
Congress?
    Mr. Leibowitz. That I don't know.
    Mr. Serrano. Jerry Nadler.
    Mr. Leibowitz. Jerry Nadler. So it is a rich tradition in 
that subcommittee. And so you know there are so many more 
malefactors out there than you can possibly go after and only 
so much State AGs and the Federal Trade Commission and others 
in this space can do. So you have to sort of prioritize.
    Putting aside Do Not Call, last year we got about 709,000 
complaints. They go into a database. We make that database 
available to criminal authorities and other law enforcement 
agencies so that they can use our database, and they do. We 
look at the number of complaints on a particular issue, and 
that helps us determine both what the biggest problems are, and 
then we sometimes bring cases out of that--we like to think we 
usually do--and what the emerging problems are. So we started 
to see, for example, 4 or 5 years ago more nuisance adware on 
people's computers and more complaints about that. So, for 
example, you will see a pop-up ad and you won't know where it 
came from, and it turns out there are four or five companies 
that were putting badware on your computers and hiding it. And 
we started to see more and more complaints about this. It was 
hard to remove. And we brought two major cases against Zango, 
and 180 Solutions, and they stopped doing the bad things they 
were doing. One of them actually ended up going bankrupt. One 
of them was a case we brought with then Attorney General 
Spitzer who started the investigation. Attorney General Cuomo 
brought the case. And as a result, there is less. The problem 
is not gone, but there is less of a problem with nuisance 
adware on consumers' computers. One of those companies 
acknowledged in court papers that they were responsible for 6.9 
billion pop-up ads in consumers' computers. And some of that 
was on the basis of complaints we started to see. Some of it 
was on the basis of our own observations and our own computers, 
like where is this stuff coming from? Because we have a lot of 
smart technology folks.
    So you try to do your best. You try to figure out which 
complaints are the ones you can go after, which ones you can 
refer somewhere, which ones we can give to other law 
enforcement agencies. And, again, if we had more resources, we 
could do a better job of bringing more cases.
    And we do other things, too, like write reports on 
industries. We did a report on the marketing of food to kids 
and childhood obesity. We do our entertainment industry 
marketing reports. We do those every 2\1/2\ or 3 years because 
we can't do them more often because we just don't have the 
resources. But I want to say we are a beleaguered agency. We 
actually think we do a better job of effectuating our mission, 
but any help you can give us I think would be deeply 
appreciated and has been.
    Mr. Serrano. I appreciate that. And you are right when you 
say you are a respected agency. That is a fact, and you gain 
respect from both sides of the aisle here. And thank you for 
remembering my consumer affairs chairmanship. Do you remember 
when I gave New York item pricing?
    Mr. Leibowitz. I know it was a great victory for the 
consumers of New York, but I can't remember precisely the date.
    Mr. Serrano. How about removing talcum powder from rice?
    Mr. Leibowitz. You see, now, that is a problem we don't 
have to deal with today at----
    Mr. Serrano. Quick story. This is the truth. This is an 
incredible story. I read a report that Puerto Ricans had less 
cancer than most other Americans. That was interesting. Why? 
When they did get cancer, it was stomach cancer. Some 
researchers had related it to the fact that rice, which is our 
staple, had talcum added to it before the Panama Canal was 
built because it needed to make the trip around the Horn and 
you needed to keep it dry at sea. Talcum kept it dry. Later on 
if you removed the talcum, it didn't look good and consumers 
thought that there was something wrong with the rice; so they 
kept putting talcum in the rice. So I removed talcum from the 
rice.
    I also passed the most unenforced law in New York State. 
You don't need a credit card to rent a car. The first thing 
they ask you for is----
    Mr. Leibowtiz. Is a credit card.
    Mr. Serrano. It is against the Serrano law. Anyway----
    Mr. Leibowitz. Did you give the FTC the jurisdiction to 
enforce that law?
    Mr. Serrano. Yes. And we may have to talk to Paul.
    Mr. Culberson.
    Mr. Culberson. Thank you.

                          EDUCATIONAL EFFORTS

    Mr. Chairman, if I could ask one question very quickly in 
an area that I really wanted to go into, if you could answer 
it, I would be very grateful.
    If you could briefly tell the committee, what does the FTC 
do to promote your educational material to reach as many at-
risk consumers as possible? Do you use different strategies to 
reach rural versus urban or wealthy versus poor? Could you just 
describe briefly your educational efforts.
    Mr. Leibowitz. That is a great question. We spend a lot of 
time on education. We have a great consumer and business 
education department. So we use a sort of three-pronged 
strategy. One prong is our Web site. We have an 800 number 
people can call so they will get the materials if they want 
them sent to them. Two is we co-brand with other entities. So 
our Money Matters Web site is going to be co-branded with AARP, 
with local community groups, and with a whole bunch of other 
folks. And then the third thing we do is we try to make sure 
that when we do launch something like this that we get 
publicity on it so consumers will know.

                   ABUSES RELATED TO MORTGAGE LENDING

    Mr. Culberson. Really the FTC's charge--the area I really 
wanted to get into is to protect consumers, to protect people 
from deceptive trade practices, to keep them from occurring in 
the future and to get restitution, reimbursement, for people 
who have been defrauded, essentially. And certainly taxpayers 
are included in that group. And I really mean this line of 
questioning sincerely because something that we have all been 
struggling with is how do we compensate taxpayers for this 
massive fraud that has taken place that is a result of, as we 
all know, loans being made to people that couldn't repay the 
loan, the mortgage broker knew that it was a bad risk, the bank 
knew that it was a bad risk? And I noticed that in a recent 
report that--this is just from March 24--that the Federal Trade 
Commission convinced--this is on Dow Jones newswire--FTC 
convinced the U.S. District Court to order New Hope and Hope 
Now to stop advertising they are part of a government-endorsed 
mortgage assistance network. And I recall that Freddie and 
Fannie were selling themselves as federally guaranteed 
institutions, that mortgage brokers and banker, we all know, as 
a part of the subprime marketing scam, were selling these loans 
to banks. They were pushing these loans on the false assurance 
that Freddie and Fannie were government endorsed just like 
these two operations, Hope Now and New Hope.
    Certainly you have got authority, you have got broad 
authority, now particularly under the omnibus, to bring actions 
to protect consumers in cases where they have been defrauded. 
In loans you can actually issue rules now governing issuing 
mortgages, mortgage lenders, as long as they are not a bank. 
You don't have the jurisdiction over the banks. You have got 
that kind of broad jurisdiction, Mr. Chairman. I would really 
like to ask you to seriously consider what can you do to sue or 
go after mortgage lenders, mortgage brokers, who carry errors 
and omissions insurance? And, Mr. Chairman, I am a lawyer as 
well, and as a lawyer professional people carry insurance. We 
have got errors and omissions coverage. I guarantee you a lot 
of these mortgage brokers have got some sort of professional 
liability coverage that could be triggered, and I am very 
serious. Why couldn't FTC go after a lot of these mortgage 
brokers and people who were marketing subprime loans to people 
who that under the circumstances that they would have never 
have made--I guarantee you if those banks had to personally 
assume liability for those loans, they would never have made 
them. They unloaded it on you and me and our kids.
    Mr. Leibowitz. That is exactly right.

                    COMPENSATION FOR FINANCIAL FRAUD

    Mr. Culberson. The more I think about it, both Mr. 
Chairmen, I think FTC may be perfectly positioned to bring 
civil action on behalf of the United States taxpayers who have, 
all of us, been defrauded massively by these miserable mortgage 
brokers and lenders who were knowingly making loans to people 
who couldn't repay and with the assurance, false assurance, 
just like this New Hope bunch that the Federal Government's 
guaranteeing Freddie and Fannie, and they knew that wasn't 
true. And then they sell it to Freddie and Fannie and now all 
our kids are stuck with it.
    It is sort of a broad general question, but it really 
occurred to me in just listening at the testimony today, Mr. 
Chairman, and looking at the charge of the FTC that--and I have 
got three subcommittees. You all have many subcommittees. I 
really think of all the entities that we have jurisdiction 
over, the FTC, they may be perfectly positioned to sue some of 
these guys, trigger their errors and omissions coverage, and 
recover funds for the taxpayers to help reimburse all of us as 
a nation for this massive fraud.
    So if you will permit me, Mr. Chairman, I kind of throw a 
lob of a general question out there and I want to plant a seed 
in obviously the mind of a creative and talented lawyer. 
Couldn't you put together a massive class action on behalf of 
the taxpayers of the United States and go trigger some errors 
and omissions coverage to get us reimbursed in whole or in 
part?
    Mr. Leibowitz. I think, Congressman, it is a great idea and 
it is something we will take a look at--with a couple of 
caveats. One is there might be some requirement that is not 
triggered by the passing up of the clearly deceptive mortgages 
and bundling them and sending them on to a bank. But I don't 
know that there isn't. So let us take a look at that.
    The other thing I would say is I am not sure we would 
recover all the money that consumers have been defrauded about 
in the sense that----
    Mr. Culberson. It is so massive.
    Mr. Leibowitz. It is so massive. Some of it has been 
depleted. I mean our taxpayer dollars, as you know better than 
anyone, are now being used to subsidize some of the folks who 
were involved if not in the deception, in buying the package 
loans that were virtually worthless or clearly worth much less 
than what everyone believed they were. But I think that is a 
great idea. We will go back and do a little research and we 
will get back to the committee.
    Mr. Culberson. With your permission, Mr. Chairman, I would 
like to pursue this with him. I am a pretty creative lawyer 
myself and I would like to see if we couldn't find a way to 
help make this happen. You sent the Bear Stearns, people 
defrauded by Bear Stearns $230 apiece?
    Mr. Leibowitz. About 350.
    Mr. Culberson. They were not entirely compensated. It would 
be nice, Mr. Chairman, even if we could get 10, 15 percent on 
the dollar of what the taxpayers were defrauded.
    Mr. Serrano. I have no problems with it as long as you 
don't blame it on immigrants.
    Mr. Culberson. Thank you, Mr. Chairman. He is watching me, 
keeping an eye on me.
    Mr. Serrano. It doesn't take him long to blame immigrants.
    Mr. Edwards.
    Mr. Culberson. He is joking of course.
    Mr. Edwards.
    Mr. Serrano. Of course, I am joking.
    Mr. Leibowitz. Not unlike our Commission, it looks like it 
is a very bipartisan committee.
    Mr. Culberson. A lot of kibitzing.

                  ``PAY FOR DELAY'' IN PHARMACEUTICALS

    Mr. Edwards. Mr. Chairman, you talked about the pay-for-
delay settlements in the cases pending vis-a-vis the 
pharmaceutical industry, where brand name drug companies pay 
generic drug companies to delay entry into the market. How 
pervasive is this process of companies trying to delay?
    Mr. Leibowitz. Unfortunately, it is becoming a new way of 
doing business. In the late 1990s and around 2000, 2001 we 
started to see this in the pharmaceutical industry, and under 
Bob Pitofsky, who was the Chairman under Bill Clinton and Tim 
Muris, the first Chairman under President Bush, we stopped 
these deals cold. And for about 5 years you did not see any 
more pay-for-delay settlements. When a brand and a generic were 
involved in litigation, they would settle but they would settle 
on a date based on the strength of their litigation. And one 
case in 2003, which is in the Sixth Circuit, said that these 
deals were, per se, illegal. But then in another case, the 
Schering case, our Commission found liability. You get to 
choose your appellate court, and Schering chose the 11th 
Circuit, which is a very conservative circuit and had some bad 
case law in this area from our perspective, and the court ruled 
against us. And we tried to get the case to the Supreme Court. 
We have jurisdiction to do that, but in a very rare departure 
from sister agency comity, the Justice Department came out 
against us and said ``don't take this case'', and they didn't. 
And since then two other cases have come down, and they have 
been very, very permissive in the rules that they have had. So 
as a result we have seen more and more of these deals. Not 
every brand and generic agreement where the brand pays some 
compensation and the generic agrees to stay out of the market 
for a period of time involves an illegal pay-for-delay 
settlement, but a lot of them do, and what that means is that 
generic drugs are not getting to consumers as soon as they 
should.
    So we have two cases, one in district court in the Third 
Circuit and one in district court in the Ninth Circuit. We are 
hoping to get one of those to the Supreme Court. At the same 
time we have a two-pronged strategy for stopping these deals. 
We also support legislation that would create a sort of 
brightline test to stop the deals. You could still have 
settlement; you just couldn't pay compensation. It is a 
bipartisan bill in the Senate with Senator Kohl, Senator 
Grassley, and Senator Durbin. In the House it is Mr. Waxman, 
Mr. Dingell, and Mr. Rush. And it has the support of President 
Obama. So I think we are going to be able to move it this year. 
We certainly hope so.

                           REVIEW OF MERGERS

    Mr. Edwards. Good. I appreciate that information.
    Finally, let me ask, what general criteria, and I know you 
could spend weeks in legal jargon, but just generally what 
legal criteria do you use in deciding whether to approve or 
disapprove of a merger?
    Mr. Leibowitz. We do a pretty thorough investigation. Under 
Hart-Scott-Rodino, we get a lot of documents. For maybe 5 or 10 
percent of the cases, we ask for follow-up documents called the 
second request if they are close calls. The standard is, does 
the deal or may the deal substantially lessen competition? And 
that is the standard we apply. And if we think that it does, we 
will go to court and then a court will decide. So we have won 
some cases and we have lost some cases.
    Mr. Edwards. Were you involved in any way in the Sirius XM?
    Mr. Leibowitz. That was the Justice Department.
    Mr. Edwards. Explain to me as a layman how having one major 
provider in this country is not anti-competitive.
    Mr. Leibowitz. When you have a marketplace you like to see 
four or five competitors as a general matter to have real 
competition. Now the Justice Department, I believe, and I don't 
want to speak for them, had a broader definition of the 
marketplace than just satellite radio; so they believed it 
competed with iPods, and other new technologies. I don't want 
to say we would have brought that case if it came to us. And I 
don't want to criticize the folks who were running the Justice 
Department then because----
    Mr. Edwards. Go ahead.
    Mr. Leibowitz. Because they are very decent people. But you 
raised a very good question, Congressman.
    Mr. Edwards. I mean to extend that logic out, I could say 
it is okay if American Airlines has a monopoly in southwestern 
United States because people can drive in a car or a bus.
    Mr. Leibowitz. You wouldn't want to have one car company. 
You wouldn't want to have one computer company. You just want 
to see more competition. I agree with that.
    Mr. Edwards. That just seemed to me the case to say when 
have we gone too far? If having just one company in that arena 
is not anti-competitive, then what is anti-competitive? But, 
Mr. Chairman, I know that is a broad issue. I think it is one 
of the big issues the Congress is going to have to deal with. 
How do we look at this ``too big to fail'' issue? How do we 
look at effective regulation of major industries? We have got 
an airline industry that is more concentrated now than it has 
ever been, television ownership, satellite company ownership, 
banking obviously. Some of that is within your jurisdiction; 
some of it is not. But I thank the gentleman for his comments.
    Mr. Serrano. Thank you. That is an interesting question 
about the satellite radio. For full disclosure I own three 
satellite radio subscriptions and as was presented then, the 
bigger issue supposedly was the fear that on their own each 
would fail and there would be no satellite radio. That could 
have been the usual business comment but----
    Mr. Leibowitz. Well, the other side of the ``too big to 
fail'' doctrine is the failing business doctrine, that if one 
company is going out of business, if it is not going to survive 
then another company could buy it even if it might otherwise 
violate the antitrust laws. But in that context if investors 
have leveraged too much so that they are going to go bankrupt 
but the product is still viable, I don't know that that comes 
within the failing company doctrine because someone else would 
buy it and you would still have two competitors. So I am not 
necessarily speaking about XM Sirius because I am not familiar 
with the details of the case but it is consistent with what you 
just said.
    Mr. Serrano. I tell you I wasn't happy about losing one of 
the Spanish channels in the merger. Of course we get the 
Sinatra channel all the time, and that made up for it.
    Mr. Culberson. Priorities.
    Mr. Serrano. Yes. Both of our colleagues and the chairman 
will be submitting questions for the record.

                    FTC ROLE IN RESTRUCTURED SYSTEM

    We have one last question that will give you an opportunity 
to end this hearing in a perfect way and it just works out that 
way. And that is there is so much discussion under way about a 
major overhaul of our system for regulating the financial 
services industry, and the problem it seems at times is that it 
is so fragmented, there are so many different agencies with so 
many different responsibilities. FTC, however, is unique among 
these regulators because it focuses on the protection of the 
consumer. So what role do you think the FTC should play in a 
restructured financial services regulatory system? If that is 
not a great ending question.
    Mr. Leibowitz. That is the kind of question we like 
throughout the day.
    But, look, I would say this. We think it is a discussion 
that Congress needs to have about whether to eliminate this 
balkanization of jurisdiction, and we want to work with your 
committee and we want to work with our authorizing committee. I 
would just say this and I think this is a consensus on the 
Commission. We haven't voted on a piece of testimony as we did 
today but we discussed it a lot. If Congress is to create an 
entity to do consumer protection across all financial services, 
we think you should think seriously about putting it in the 
Federal Trade Commission. We do have some experience. We think 
we have done good work, not perfect, but we think we have 
something to build upon. That would require some more 
resources. If we get close to seeing that day, we will come 
back and talk to you about that in terms of the resource issue, 
but we really want to work with you. You are the policy makers, 
we implement what you want and we will try to do our best.
    Mr. Serrano. Mr. Chairman, we thank you for your testimony 
today. We thank you for your work. We will be handing to you 
officially one of your next investigations and we look forward 
to continuing to work with you.
    Mr. Leibowitz. Our next investigation, immediately.
    Mr. Serrano. And we look forward to continuing to work with 
you and this committee is committed to trying to get you the 
resources necessary to do the work you have to do.
    Mr. Leibowitz. Thank you, Mr. Chairman. We are deeply 
appreciative of all your efforts.
    Mr. Serrano. The committee is adjourned.

 

                                         Wednesday, April 29, 2009.

                   FEDERAL COMMUNICATIONS COMMISSION

                                WITNESS

MICHAEL J. COPPS, ACTING CHAIRMAN
    Mr. Serrano. The meeting will come to order. We welcome 
Michael Copps to this oversight hearing on the Federal 
Communications Commission.
    The Administration is expected to submit its budget next 
month. When it does, we expect to be fully briefed on the FCC 
budget. A lot of the hearings we are holding now, we are 
holding without a budget, so we are going to talk about 
everything except numbers, I guess.
    The FCC has policy responsibilities that affect the 
everyday lives of all Americans. We increasingly rely on the 
electronic media for our news, information, entertainment, and 
personal communications. We use cell phones for Internet 
searches and tweets. Internet connections are increasingly used 
to distribute programming traditionally on cable.
    The communications that we take for granted today result 
from decisions the FCC made long ago. Decisions that you will 
make in the near future will affect both the kind of 
information and how we receive it, for many years to come.
    This is a time of transition for the FCC. The White House 
has nominated Julius Genachowski, did I get that right, to 
become the next Chairman of the FCC. Mr. Genachowski served as 
Chief Counsel to the FCC Chairman during the Clinton 
Administration.
    In the interim, our witness today, Michael Copps, is 
serving as the Acting FCC Chairman. Mr. Copps is well prepared 
for the task. He has served on the five member Board of the 
Commission for almost eight years, and he has been part of many 
3-2 decisions, I am not going to say on which side, but you 
know on which side.
    On June 12, the Nation is scheduled to complete the delayed 
transition to digital TV. To assist with that transition, the 
FCC obtained $66 million from NTIA as part of the recent 
Economic Recovery Act. With analog signals due to end in just 
six weeks, we want to hear the FCC perspective on what it is 
doing and what to expect.
    Another important topic before the FCC is broadband. The 
Recovery Act provided more than $7 billion to assist with 
broadband deployment in unserved and underserved communities. 
The Act also directed the FCC to develop a long-range national 
strategy on broadband policy by next February.
    The U.S. trails many other countries in the percentage of 
households with basic broadband connections. A number of other 
countries have lower costs and faster speeds than we have. Our 
lower income areas, particularly in central city and rural 
locations, have especially low broadband rates.
    Last September, this subcommittee held a hearing on 
problems public, educational, and governmental, PEG channels, 
have been having with cable systems. Those problems have not 
gone away, and new problems have arisen. A number of members 
have raised concerns also about the auditing procedures by the 
FCC's IG on recipients of Universal Service Fund money. They 
claim that the orders are onerous, reduce money from universal 
service, and have uncovered no fraud.
    The last Administration rarely saw a merger that it did not 
approve, in communications and financial, or any other 
industry. We have paid a heavy price for the mismanagement of 
our massive financial institutions in the last year. I am not 
sure that our communications giants have served us much better.
    Our witness today, Mr. Copps, has fought to limit media 
concentration. Our communications system plays a vital role in 
our democratic society. We live in an increasingly diverse 
society that is finding many new and creative ways to 
communicate. As technology and society change, our 
communications policy should keep pace.
    Mr. Serrano. Before we turn to our witness, I would like to 
invite Ms. Emerson, our ranking member and our colleague, to 
make her statement, please.
    Ms. Emerson. Thank you, Mr. Chairman. Welcome, Chairman 
Copps. Thank you so much for appearing before us this morning.
    Chairman Serrano has said you all at the FCC do play a very 
important regulatory role in our country's telecommunications, 
television, radio, Internet, and the cable industries, and 
these services do touch every, just almost every single 
American citizen and business, each and every day.
    So, ultimately, I will have to bring some balance between 
providing enough regulation and oversight to ensure that the 
American people have available communications services, while 
not slowing the technology progress, or impinging on individual 
rights. And I know this has got to be a very challenging job, 
with many business, technology, and consumer groups watching 
your every move.
    Also, as the Chairman has said, I realize that not all of 
the budget numbers are here, so we will look forward to getting 
that, but I will also be interested to hear why the Commission 
is going to request increases to address your technology 
infrastructure purchase, new public safety vehicles, and to 
hire additional staff. And you may touch on that in your 
testimony.
    So, thanks again for being here. I look forward to learning 
more about your budget increases, but also look forward to 
working with you.
    Thank you, Mr. Chairman.
    Mr. Serrano. Thank you. You know, before I begin, one of 
the things that has changed, I guess, throughout the last 
generation, is that in many cases, we had members of the 
Administration before us, where the members sitting here on the 
panel had very little knowledge or involvement with the work 
you do. But this is a new generation.
    Personally, I have two Blackberries, with cell phone, 
email, everything. I own two Nanos and one iPod, video iPod, 
HDTV. I subscribe to Major League Extra Innings. I subscribe to 
MLB.com for the laptop. You too?
    Ms. Emerson. You can see it on my Blackberry. My own icon. 
Cardinals icon, I might add.
    Mr. Serrano. See what I am talking about? So, we do have 
vested interests, and not in a conflict of interest. No 
different, we are really representative. And this morning, I 
ran with the Nike Plus, which is a sensor to your sneaker, to 
your shoe, that tells you how fast you are going and how you 
are doing, and the lady kept coming on and saying faster, 
faster. And it was no fun at all. I was very aggravated.
    The point is that this particular agency is one that we, 
whether we know it or not, deal with on a daily basis, and we 
are interested in the results. We are very much interested in 
your testimony. And your statement will go fully in the record, 
and we hope you stay within five minutes. We can grill you 
through and through.
    Mr. Copps. Thank you very much, Chairman Serrano, and 
Ranking Member Emerson. With me this morning are our Chief 
Financial Officer, Mark Stephens, and a few other people from 
the FCC.
    Because I have not appeared here previously, let me first 
of all thank you both, and the subcommittee generally, for your 
ongoing support during the past year. I believe, and I hope you 
agree, that you are seeing a return to the American people on 
the investment that you have made in the FCC.
    FCC has played a critical role in shaping the 
communications landscape of our country for nearly 75 years. 
This is our diamond jubilee year, also that of the 
Telecommunications Act. And as we mark that diamond jubilee, we 
face new challenges and opportunities that really put us at the 
epicenter of some of the most critical challenges facing the 
Nation, and so much of the future, as you indicated in your 
statement, hinges on our success in bringing the opportunity 
generating tools of modern communications to all of our 
citizens.
    Our 2010 budget submission steps up to these challenges, 
and outlines some strategies to meet them. We are going to be 
requesting, for fiscal year 2010, $335,794,000. Of that, 
approximately $318 million is to maintain current service 
levels. That is an increase of some $6 million, to accommodate 
inflationary increases for salaries and benefits and leasing 
costs and utilities and other contractual services.
    During 2010, the Commission also proposes to take some 
long-delayed, and I think urgently required steps to modernize 
the agency, particularly, as you mentioned, our technology 
infrastructure, for which we are seeking $15 million. First, we 
will upgrade and integrate our IT systems, to make our 
processes more transparent and easier for the public to access. 
Second, we will modernize our antiquated phone systems to 
address present shortfalls. Third, we will improve internal 
coordination and information sharing by our staff.
    As Commissioner for the past almost eight years, I had a 
pretty good idea that our agency was a long way from entering 
the Digital Age, and as Chairman the past three months, now I 
know it for sure. While we might be able to muddle through with 
our outdated and inefficient infrastructure, and force the rest 
of the world to adjust to us, that is not my vision for an 
agency that has communications as its middle name.
    You know, we have been helping many of our licensees 
transition into the Digital Age. I think it is time for the FCC 
to transition into the Digital Age, too. And I believe we need 
to not only keep pace with the needs of the public and those 
with whom we do business, but we ought to be really leading the 
way, and showing the way.
    In the few minutes I have, let me just briefly mention two 
pressing communications issues that I know are on your minds as 
well as ours. The most immediate is the DTV transition. Since 
February, when Congress postponed the deadline to June 12, our 
dedicated staff at the FCC has been hard at work to develop a 
strategic nationwide program to educate and assist consumers, 
and to put in place a really coordinated organizational, 
interagency, public sector-private sector partnership to do 
that.
    We have got better coordination with NTIA, and other 
government agencies and stakeholders. The White House ramped up 
our partnerships with the private sector, and we have retooled 
our consumer outreach, by moving from a general awareness 
campaign to actually trying to provide help on the ground, or 
boots on the ground, in-home assistance, to people who really 
need it, and the most vulnerable would include senior citizens 
and people for whom English is not their primary language, 
people with disabilities, those living in rural areas and on 
tribal lands also. And we have also improved our consumer 
outreach, and the problems that I think were neglected for far 
too long, such as digital signal coverage, reception 
challenges, and antenna issues.
    I want to assure this Subcommittee that we will continue to 
do everything we can to minimize consumer disruption on June 
12, but make no mistake, there will be disruption. We cannot 
fix all of the problems of the past few years in a few short 
months, but because of the additional time that we have, and 
the resources we have been given, I think we can make a sizable 
difference.
    Another matter that I want to discuss involves perhaps the 
most exciting issue the FCC will address this year, or maybe in 
many, many years, and that is broadband. Broadband can be the 
great enabler that plays a central role in restoring America's 
economic well-being, and opening doors of opportunity for all 
Americans, no matter where they live, the particular 
circumstances of their individual lives, who they are. It is 
technology that intersects with all of the cross-cutting 
challenges that face this country of ours right now, whether we 
are talking jobs or education or energy, or environment and 
climate change, or international competitiveness, or 
healthcare, overcoming disabilities, opening the doors of equal 
opportunity. The list just goes on and on. Broadband can and 
will have a tremendous effect in all of those areas.
    And it is with that in mind that Congress and the President 
set out a two-step broadband strategy in the Recovery Act. 
First, NTIA and the Rural Utilities Service were asked to 
provide $7.2 billion in stimulus money for projects that will 
create jobs, spur the economy, and foster the availability of 
broadband in the near term, and our role in that at the 
Commission is largely a consultative role. Second, the 
Commission was tasked, and this is the exciting part for me, 
with developing a longer term national plan for broadband, and 
to present it to Congress by February 17 of next year. And that 
strategy will look to the future, and design a plan to ensure 
that every American has access to high speed, high value 
broadband.
    I have been calling for that for eight years, since I came 
to the Commission. I thought we were the only country on the 
face of God's green Earth, the only industrial country that did 
not have a broadband strategy. So, I am particularly pleased 
that now, we are going to have a plan, and that the FCC is put 
right at the center of developing it.
    So, to get the ball rolling, on April 8, we issued a 
comprehensive notice of inquiry, to begin a national dialogue 
on broadband, that is going to reach out to everybody, not just 
the usual suspects who travel the halls of the FCC. I want to 
hear from nontraditional stakeholders, as well as traditional. 
It is going to be far-reaching. We want a lot of data. We just 
want this to be the best effort that the Commission has ever 
done. And if we do our job right, this will be the most 
formative and the most transformative proceeding, I think, in 
all of the Commission's history. And my team and I are 
committed to getting this done and done right.
    There are a lot of things, as you both indicated in your 
statement, for us to talk about. My time is limited, so I will 
just end by respectfully asking the Subcommittee to consider 
smiling upon our financial year 2010 request, and again, thanks 
for the support you have given us, and I would be pleased to 
hear any comments that you might wish to make, or suggestions 
that you might have, or try to answer any questions that you 
may have.
    [The information follows:]

 

    Mr. Serrano. Thank you. Thank you for your testimony.
    Before I get to my questions, I did notice something in 
your statements, which I am sure it is an oversight, but it is 
something that is sort of a mantra with me. You mentioned the 
different groups you are reaching out to, and one group, if you 
will, one area that always gets left out are the territories, 
Puerto Rico and Guam and Samoa and the Virgin Islands, and so 
on. And I operate under a very simple theory. If you are under 
the American flag, you should be treated equally.
    There are some things about tradition or Constitution you 
cannot do, and so, it would take some changes, we believe, to 
allow people to vote for President and to have voting Members 
of Congress and so on, but when it comes out to handing 
educational funds or housing funds, or for the FCC to make sure 
the digital transition is swift, there is nothing in the 
Constitution or in practice anywhere that does not stop you 
from making sure, and I know for a while, we were getting a lot 
of outreach from Puerto Rico and the Virgin Islands on the fact 
that they were very short on the converter boxes, and the new 
information.
    So, you know, I am not going to stay on that subject, but I 
am trying to encourage every federal agency, since I became 
chairman of this subcommittee, to think of the territories. But 
not only on the other side. I mean, I have done it with the 
Speaker of the House and the Majority Leader, where the minute 
they begin to say the 50 States, they look at me, and they say 
and the territories, because they know what is coming next.
    Mr. Copps. Can I comment for just a second on that?
    Mr. Serrano. Of course.
    Mr. Copps. I know the passion that you bring to that cause, 
and I think we are really trying to address what you are 
talking about. Take Puerto Rico, and the DTV transition for 
example. We have got people on the ground right now in Puerto 
Rico, trying to help. We know the fact that there is such a 
high percentage, maybe over half the people there, who are 
dependent upon over-the-air television.
    We are monitoring consumer supplies of the set-top boxes, 
so that we have an adequate supply, and pushing the consumer 
electronics folks to make sure that that happens. And we spent 
a lot of time meeting with folks and considering such things as 
universal service and satellite coverage and all the rest.
    So, I appreciate your calling that to our attention, and I 
can assure that by not mentioning it in my brief formal 
statement, in no way means that we are giving them anything but 
full fledged treatment.
    Mr. Serrano. I appreciate that. Appreciate that.
    And we will, in about six weeks, be switching over to DTV, 
and the FCC recently received $66 million, as you mentioned in 
your statement, from NTIA to assist with the transition. What 
is the FCC doing with these funds? How much of a difference do 
you think you can make? How many folks do you think will still 
not be prepared to meet the challenge, if you will, the change 
on June 12, and what else do you think should be doing to make 
sure we----
    Mr. Copps. Well, it is a tremendous challenge, like you 
say, and, as I indicated in my statement, I do not think in a 
few months we are going to be able to solve all of the problems 
that have been boiling for the past three years. We suffered 
from the lack of really making this a national priority. We 
suffered from the fact that we did not have a coordinated 
interagency effort, like we had on the Y2K proceeding several 
years before that.
    We really did not build, industry has done a lot, and 
industry continues to do a lot, but there should have been some 
convening forum and coordinating forum, with all the players. 
So many of these problems, we learned about a year or two years 
later than we should have learned about them.
    Anyhow, that was then, this is now. We are getting $65.7 
million in DT funds. $30 million of that is going to go towards 
call centers, really, and I think a contract was just recently 
let for that, so that will be a contractor call center, plus 
the FCC call center, and we are ramping that up, and giving 
better training to our folks there, too, so we can handle as 
many of these calls----
    Mr. Serrano. To be one call center or call centers?
    Mr. Copps. Well, there will be one general number to call 
into, and then, they will be divvied up and parceled out from 
there. About $14.5 million of this will go for in-home 
assistance, and we have got some neat initiatives going on 
there. Some of it will be contractual. We already have an 
agreement with the AmeriCorps folks, whereby some of their 
volunteers will, are being trained, have been trained, and will 
be going, when requested, into houses to help the elderly and 
people with disabilities, and other folks, to get that 
converter box hooked up, to make sure the antenna is working, 
and to answer whatever other questions, and provide whatever 
other help they can.
    About $11.6 million will be going toward walk-in help 
centers. I think these are a good idea. It was something that 
developed right before the February 17 transition, but even 
with that little notice, they got good traffic, so where people 
can go, maybe on a Saturday morning, and get advice on how to 
get hooked up, or apply for the coupons. We will be doing some 
additional media service, I think to the tune of about $5 
million, and then there is some money for travel, publications, 
and translators. So, that is basically how the money is going 
to be used.
    And I want to salute the partnerships that we have now. I 
think industry has really stepped up to the plate, running the 
call centers last time, and just trying to work in partnership. 
And it is good when we get everybody together to see the 
enthusiasm for getting this job done.
    I have been a little disappointed with the fact that the 
national media have not done a little better job in talking 
about what is happening with the transition. You know, there 
was that one story, when Congress delayed the final transition 
date from February to June, and I watched the network news that 
night, and the story was, the transition is delayed. That was 
basically the story. It did not say anything about a lot of 
stations would still be transitioning in February, which a 
number did. Some would be going in April. But it just kind of 
gave the impression everybody, do not worry, put the boxes back 
in the closet, or do not go out and get the coupons right now. 
It was really unfortunate, because there still is a lot of 
urgency attached to this.
    Only about 2.5 percent of the American people live in the 
areas that are fully transitioned right now. So, we have got 
all those other people still to be covered by the stations that 
are going to be transitioning.
    Mr. Serrano. Yeah, I have noticed a lack of coverage by the 
so-called national media. In fact, I was going to comment that 
the Spanish-language networks, Telemundo and Univision, have 
done quite a job. I mean, every two minutes, there is something 
on telling you this is happening, and you must get this box. 
And you know, obviously they want to get their stations 
through, but it is working.
    A question, do they do that on their own? Are they prodded 
by the FCC? It is obviously in their best interests to have 
people switch.
    Mr. Copps. Well, I think a little bit----
    Mr. Serrano. Are those commercials paid for by themselves?
    Mr. Copps. No, no. I salute them, and most of the 
commercials are paid for by themselves, and I salute Univision 
and Telemundo for the work they have done. But there is a bully 
pulpit at the FCC and in the government to try to encourage 
this, and there are also requirements of stations in the rules 
for the transition. But the ones that they have been airing 
over the last couple of months, are from our requirements for 
certain amounts of education on the transition, and not just 
raising general awareness about the transition, but now, how to 
prepare. And now, we are moving along to make sure that some 
folks, who are, no matter what happens, no matter all the steps 
they go through, they are still going to be deprived of some 
signal coverage at the end of the day, that they know that. 
They are not going to be happy, but my impression is that if 
you tell people the truth, they will forgive a lot more than 
they will if you do not tell them the truth. So, it is a hard 
message for broadcasters to put out, to ask them to put out, 
you know, go tell your viewers that some of them are going to 
lose signal coverage. But I think it is a minimum that we have 
to expect.
    Mr. Serrano. Let me move on briefly to the broadband issue. 
The obvious question for many of us is, why do we lag so far 
behind other countries? I mean, we have always discussed in 
healthcare and other issues, but everybody thought that it 
would be Japan and the U.S., for some reason, that would be 
number one, and we are not.
    Two, as you move ahead, how do you assure that the usual 
group that gets left out, the elderly, the minorities and so 
on, get full use. And what does the FCC today consider 
broadband? Because I mean, there are some people who think that 
anything more than 56 is broadband, but it is not. What do you 
consider broadband?
    Mr. Copps. In answer to the first question, why are we in 
the dire straits that we are in, either 15th or 20th or 25th as 
a nation, I think it is because we never made a national 
commitment to broadband, and we never had the kind of national 
strategy that I talked about before, that I have been urging. 
Most every other country was ahead of ours in understanding the 
importance of this.
    We are finally getting beyond that, but for all the years I 
have been at the FCC, we are under charge by Congress to do 
Section 706 reports every couple of years, to render a verdict 
on whether the deployment of advanced telecommunications, 
broadband, is proceeding in a reasonable and timely fashion. 
And every year, these reports come across my desk, and they say 
yes, because they describe broadband as 200 kilobits upstream 
and downstream, but you know, that is an early 1990s kind of 
definition. We are just starting to move away from that right 
now.
    And then, the logic was that, if one subscriber in a zip 
code signed up for that 200 kilobit broadband, that means the 
deployment of broadband is proceeding in a reasonable and 
timely fashion. You know, that is like kind of if you fly into 
a strange city, and you come out of the airport doors, and the 
first car you see is a Cadillac, are you supposed to conclude 
that everybody in that area drives a Cadillac, because one 
person does? It was that kind of logic. So we had a commitment, 
you know, the President talked about having a commitment to get 
it out by 2007, but a commitment does not mean anything if you 
do not have a strategy to implement it. And that is what we are 
finally getting to now: in 2009, the FCC is going to be doing 
it, and it should have been probably a dozen years ago.
    And part of that strategy will be emphasizing what I said. 
You have got to get this stuff out to all of our people, and I 
always underline that word, all. If you are elderly, if you are 
in the inner city, or you are out in the rural countryside, if 
you have a disability, if you are rich or you are poor, I do 
not think it makes any difference.
    This is the opportunity--creating technology that all of 
our citizens need to have to be productive as people, 
contributing to the country, and capable of fulfilling 
themselves in their own capacities, and other people have it. 
It is not just some kind of feel-good social do-good, or Copps 
is going down some wild liberal track, or something like that. 
I think it is business for the United States. I think it is 
competitiveness for our country. That person out in rural 
Missouri or somewhere, or in the inner city in New York, trying 
to start a small business, and do not have access to this kind 
of technology, how are they going to compete with somebody who 
does, either in this country, or worse, overseas?
    And then, in response to the final question, the 
appropriate definition of broadband, we finally announced, a 
year or so ago, that we were going to move away from this 200 
kilobit definition, and now, we have kind of a range, and I do 
not have all of the numbers in here, but there are six or seven 
different plateaus of broadband. But this will be something 
that we need to come to terms with in developing the broadband 
plan by next February. And it is going to be something that 
NTIA and RUS are going to have to come to terms with from their 
perspective, in trying to administer these grants over the 
period of the next year or so.
    Mr. Serrano. Well, I can tell you, that MLB.com is coming 
through loud and clear on HD on the laptop. And at $2,500 a 
Yankee Stadium seat, $149 a year for 2,000 games is a pretty 
good deal. I should not say that. They will probably raise the 
prices now.
    Ms. Emerson.
    Ms. Emerson. Yes. I will tell you, Mr. Chairman, that the 
reason that I also got the baseball channel on my TV was 
because at Cardinals Stadium, not even for the good seats, it 
is $89 a seat now, instead of the $27 that my old season 
tickets had, so----
    Mr. Serrano. Well, the Yankees just reduced their top tier 
tickets, and they think they did people a favor, from $2,600 to 
$1,250 a ticket, not a season, a seat.
    Mr. Copps. Oh, my goodness.
    Ms. Emerson. Well, they will never get that stadium paid 
for, then, Joe.
    Anyway, let me, I want to continue the discussion of 
broadband, Chairman Copps, while we are at it. And I have 
several questions. Obviously, with the $4.7 billion to the 
Department of Commerce and $2.5 billion to Ag, to expand 
broadband access through the stimulus bill, I think that is a 
good thing, on the one hand. But simultaneously, they have a 
year to spend the money. You have a year in which to develop a 
national broadband plan to provide access to broadband 
capabilities to all Americans. And I guess Commerce gets two 
years now, to develop a nationwide inventory map of existing 
broadband services.
    So, that is all kind of juxtaposed against each other, and 
I mean, obviously, I would think you do the plan first, have 
the inventory first, do the plan, and then, spend the money to 
see where it is going to go, as opposed to backwards. But do 
you think it is, I mean, just from that philosophy, is it 
premature to expand access before you all have even developed a 
plan, and before we even have an inventory?
    Mr. Copps. No, I think it is really just responding to the 
dire plight that we are in, as much as anything else. And it is 
kind of a two-pronged approach. There is a stimulus effort out 
there, obviously reflected in the bill, to get some money into 
the system. We know that there are huge needs for this kind of 
technology, so why not start it now, where we know we can put 
it, where we know it is needed, and try to create some 
immediate feedback.
    But to me, personally, I see that as more of a down payment 
on a much large commitment, and from my standpoint, I think 
getting this longer term strategy right is crucial. When we 
really get into those areas that, initially, they look like 
they are close in needs, but they have some little different 
needs, how do we have the path for navigating through that, and 
how do we really define unserved and underserved, and decide 
what technologies go where.
    All of these questions are going to be horribly 
complicated. You cannot answer them all, I do not think, in 
time to completely inform the NTIA and the RUS grants. I wish 
we could. We are trying to coordinate with both of these 
agencies, because the legislation directs us to, and we should 
be doing that regarding these definitions, but I do not see the 
consultation that we give to those agencies as being the final 
biblical word on these things. They will have to make some of 
those decisions.
    Ms. Emerson. So, how does the coordinating process work? Or 
how have you all set it up to work, with Ag and with Commerce? 
And do you think it makes sense to have three agencies 
coordinating this?
    Mr. Copps. Yes--I think more than three agencies are 
involved. A lot of the folks that are sitting behind me here 
from the FCC are in daily consultation with NTIA and with RUS, 
and they are having meetings yesterday and today and tomorrow. 
We conducted a proceeding, asking questions on some of these 
things, about unserved and underserved populations, and 
compiled a large record on that. We put together about 150 
pages of comment summaries, which we are delivering to NTIA 
this week.
    I think we have got the lines of communication with NTIA 
and to RUS pretty clear now. But if you are going to have an 
effective strategy going forward from there, it involves much 
more, and I think that is where the role of the White House 
really becomes important, because, as the Chairman of an 
independent agency, I cannot necessarily say, I think it would 
be nice if all these agencies would come down here today and 
talk to me about broadband. Some will come, some will not come. 
However, if that word comes from the White House, they are a 
little bit more likely to come. I saw that when I worked in the 
Commerce Department in the Clinton Administration. There was a 
lot of interagency coordination then, so I welcome that kind of 
role, but they all have to be there. I mean, certainly, Housing 
and Urban Affairs should be there, if we are talking about 
rural housing or inner city housing, and when new construction 
goes up, it should be wired for this kind of stuff.
    Ms. Emerson. Do you feel confident that the White House 
will convene these meetings?
    Mr. Copps. I do. They are doing so.
    Ms. Emerson. Okay. And I know that Commerce is supposed to 
give you all some money for expenses related to the program. 
How much do you anticipate----
    Mr. Copps. I do not think we have a figure on that. We just 
got through with $65 million funding for our DTV efforts, and 
now, we are turning to this, and we are having active 
discussions. Again, there is good two-way communication on what 
our roles will be in mapping, with the primary responsibilities 
on them.
    But you know, we are the expert agency, so we are trying to 
figure out who is going to be doing what there. So I think we 
will probably have something to say on this matter. We probably 
have something a little more definitive to say about what kind 
of funds might be transferred to the FCC in a couple of weeks.
    Ms. Emerson. Do you have any fears that public investment 
and public moneys would crowd out private sector investment in 
deployment of broadband, and if so, is it possible that that 
expansion could be compromised by increased government 
regulations?
    Mr. Copps. I think the key is how you craft those 
incentives, to make sure that they work for both the private 
sector and for the public sector both. That is critically 
important. I think there are some areas where private 
investment is not going to occur by itself. Again, in inner 
city or rural America, where we have got the experience, we 
have seen for the last ten years, while lots of Americans have 
access to broadband, in these difficult to reach spots, there 
is no market solution there. And that is our problem. I think 
we always thought the market could handle all of this.
    And you know, that is such a departure from American 
history, generally. If you go back to the earliest times of our 
country, when we moved from the Eastern seaboard, and finally 
spilled over to the mountains, and we had an infrastructure 
challenge. And how do you get the produce from over the 
mountains to the markets? So, we figured out ways, as a 
country, to do that, by building turnpikes and roads and canals 
and bridges, and making harbor improvements. Later on, in the 
early and mid 19th Century, we built regional railroads to bind 
the country together.
    When we became an industrial power, the big 
transcontinental need was, how do you bind that country 
together? We constructed the transcontinental railroads. We 
found ways for the public sector and the private sector to work 
together in getting electricity out to rural America, and 
getting plain old telephone service out to rural America, and 
developing the interstate highway systems. Yet, we got to this 
big infrastructure challenge of the 21st Century, which is 
broadband, and many maintained that we do not need such an 
effort. Just forget about the history of the country. It will 
take care of itself. Let the good times roll. Now, we finally 
have recognized that did not work, and we are really not going 
off on some great new departure.
    We are returning to the formula of public/private 
partnership that worked for America and that built this country 
over the years. It makes me happy to see us returning to that.
    Ms. Emerson. What about the regulatory side? Do you think 
that we are going to have all sorts of new regulations with 
regard to deployment activities, that could hamper the private 
sector?
    Mr. Copps. I do not think so. I certainly hope not. That 
does not mean that there will be no regulation, because I 
believe, in some cases, regulation is justified. But I think 
that if we really can develop this public/private partnership 
that I am talking about, really understand the needs of the 
private sector, and the private sector understands the needs of 
the American people and the government, we can work our way 
through this in a cooperative fashion.
    Now, it is not going to be without controversy. I am not 
trying to paint that kind of picture. In all these earlier 
infrastructure challenges that I talked about over the course 
of our history, we did not have an automatic consensus. There 
were hellacious debates pro and con, are we going to do this, 
or are not we going to do it. My point is, we usually found 
ways to do it, and I think we can find those ways here, too, if 
we are inclusive, and if we are really data centered. So many 
of the wrong-headed decisions that have been made by the 
Commission and others have occurred because we lacked proper 
data. I think our Commission has become too dependent on 
outside data and on industry supplied data, or special interest 
supplied data.
    We are the expert agency. We ought to have that 
information. We ought to have the databases, and I hope that is 
one of the things that will come out of this broadband 
exercise.
    Ms. Emerson. Thank you.
    Mr. Serrano. Thank you. Now, we will recognize members 
under the five minute rule, starting with our colleague, Ms. 
Wasserman Schultz.
    Mr. Copps. Good morning.
    Ms. Wasserman Schultz. Good morning, Mr. Copps.
    Mr. Copps. Good to see you.
    Ms. Wasserman Schultz. Good to see you, too. Why is the 
chairman glaring at me on the five minute rule?
    Mr. Serrano. That was not a glare. That was a sign of 
admiration.
    Ms. Wasserman Schultz. Okay. Thank you. It is good to see 
you, and there is a couple things I wanted to ask you. First, 
Mr. Chairman, though, I have two questions that I did want to 
ask unanimous consent to submit for the record, if I might.
    Mr. Chairman, I have two questions.
    Mr. Serrano. I am sorry, go ahead.
    Ms. Wasserman Schultz. If I can submit two questions that I 
will not ask publicly for the record, and ask unanimous consent 
to do that.
    Mr. Serrano. Sure, absolutely.
    Ms. Wasserman Schultz. Thank you. Last year, Vice President 
Biden and I, when he was in the Senate, passed the Protect Our 
Children Act, which deals with pursuing Internet predators who 
engage in child pornography. And I spoke to then Chairman 
Martin about the need to make sure that we were focused on 
crafting rules for managing the computer networks that have 
become indispensible to our lives, but making sure that we, 
while we limit those management practices, and make them 
practical and implementable, that at the same time, effective 
in blocking unlawful content, like pirated music, movies, and 
particularly, child pornography. And that is a very difficult 
balance to find.
    Mr. Copps. It is.
    Ms. Wasserman Schultz. What I would like to know is do you, 
as the acting Chairman, maintain the position of former 
Chairman Martin, when he stated last year that it is imperative 
for ISPs and network managers to have the important ability to 
block the distribution of illegal content, including pirated 
movies and music and child pornography?
    Mr. Copps. I do, and I think that is imperative that we 
assist in these efforts. Early on, I was probably as 
responsible as anybody for getting the Four Principles of an 
Open Internet accepted by the Commission, the right to access 
content of your choice, and attach devices, and run 
applications and all that. And all of that is premised on the 
fact that we are talking about accessing lawful content and 
doing lawful things, and there is no escape valve, or loophole 
for people to drive through. The question becomes how do you 
have sufficient oversight, without overly interfering with the 
Internet, to make sure that that happens? But it is hugely 
important. I have been concerned----
    Ms. Wasserman Schultz. How do we do that?
    Mr. Copps [continuing]. About the welfare of children in 
media generally, including the Internet, and it is something we 
really have to face up to, as a country.
    Ms. Wasserman Schultz. Do you have any ideas, or does the 
Administration have any ideas, in terms of how to continue 
Internet innovation, but at the same time, that the really 
explosion of Internet content that is illegal and, I mean, but 
what we are talking about when, particularly with child 
pornography, is the transmission of crime scene photos. I mean, 
child pornography is not pornography, per se.
    Mr. Copps. Right.
    Ms. Wasserman Schultz. It is acts, unspeakable acts 
committed against children, and there is 500,000, in the United 
States alone, known individuals who are trafficking in child 
pornography on the Internet. And we know how to go get them, 
and hopefully, the Protect Our Children Act will be provided 
with the resources this year to begin to do that. But we need 
the policy and the technology to be able to do that.
    Mr. Copps. First of all, I would emphasize that I am 
running an independent agency and do not speak for the 
Administration. We will be looking at its policies, and doing 
what we can. Obviously, the Justice Department and a lot of 
people are involved in pursuing things like this, but I think 
we can play a positive role.
    We do not have answers for all of these questions right 
now. As you know, one of the significant dialogues we really 
need to be having in this country is, as we move all of our 
communications, away from broadcasting--it is all going on the 
Internet. How do you protect the public interest in this new 
medium that everybody says is so dynamic and liberating and 
open, yet you do not want to unduly interfere with it. There is 
a legitimate interest in making sure, if broadcast is going to 
be there, we can regulate broadcast a little differently than 
we regulate the Internet.
    Fast forward five or ten or how many years it is going to 
take, and assume that most of this material is on the Internet. 
How do you ensure the public interest is alive and well? How do 
you make sure that there is news, real, honest to God news, on 
that Internet, and that there is investigative journalism, that 
there are the resources to do it? How do you make sure that the 
American people have the breadth and depth of information in 
their civic dialogue to make intelligent decisions for the 
future of their country?
    We have not really stepped up to that. How do you protect 
journalism in this new world of the Internet, and make sure 
that it is vibrant? How do you protect children in this new 
medium? I am saying everybody has to have access to this, put 
it in the schools, put it everywhere the child goes. But yet, 
it has that ability to be abused.
    Now, I will tell you another part of this, and this maybe 
gets beyond your question, so shut me up if you want to.
    Ms. Wasserman Schultz. That is okay. I have another 
question----
    Mr. Copps. Part of this, long-term, is that we have to step 
up and have a media literacy program in the United States of 
America. And I think it needs to be from kindergarten right 
through high school. There is something interesting that you 
can teach kids at every step of the way, and it is not just how 
to use this technology, but it is how does this technology use 
or misuse you. And that is a big order. We have a very 
decentralized system of education. You cannot just mandate that 
from Washington, but I think, again, we can think creatively, 
and do some progressive things there.
    Ms. Wasserman Schultz. Thank you. Is my time expired?
    Mr. Serrano. Yes.
    Ms. Wasserman Schultz. Apparently so. Thank you.
    Mr. Serrano. Thank you. Mr. Crenshaw.
    Mr. Crenshaw. Thank you, Mr. Chairman.
    Just, you know, the questions that were just asked. You 
raised a lot of questions yourself. I mean, and those are good 
questions, like, so I would really like you to answer your own 
questions.
    Mr. Copps. I thought I was doing a public service just 
asking the questions.
    Mr. Crenshaw. You know, I saw Tuesday, where the Supreme 
Court said that I guess the fleeting expletive policy was not 
unconstitutional, kind of what we are talking about. And just 
to hear your thoughts on how we begin with all this advancing 
technology, not just, you know, radio and television, but the 
Internet that you are talking about. What are your thoughts on 
what the role of the Federal Government ought to be, the FCC, 
to protect, I think I read where you said that the Supreme 
Court case was kind of a victory for families and protection of 
children.
    And some of the questions you just asked rhetorically, 
what, how are we going to do that, as we look ahead?
    Mr. Copps. Well, what I do not necessarily want to see is 
that the Federal Communications Commission, kind of hunkers 
down and goes through all kinds of programs, to see if they 
cross the line, and spend too much time on that. This is 
important; we all take an oath to enforce the statutes, 
including decency, and this is something I think I was one of 
the first Commissioners to raise, when I became a commissioner 
in 2000.
    So, yes, I think program material has been coarsened, and I 
think there are some things to do about it, but it is not just 
over getting your badges out and going after people. Part of it 
is a bully pulpit. How do you encourage the broadcasters to 
return to some kind of voluntary codes of conduct, like they 
used to have years and years ago, and try to move away from 
this kind of excessive violence or language, or sexual 
innuendo, or more than innuendo, on their broadcasting 
material.
    Part of it, I think, really has come from a loss of 
localism in our broadcasting. I am not a fan of the media 
consolidation that has occurred in this country over the last 
30 or 40 years, and I think one of the results of that has been 
kind of a homogenization or nationalization of program matter. 
Community values get lost in that, because the programs are 
coming in from far away from a station's particular community. 
So, I think that may be one of the problems. I do not see that 
more consolidation is really in the interest of the American 
people.
    Mr. Crenshaw. Well, just quickly on broadband, we talked a 
little bit about that. It seems like a lot of times, the 
Federal Government kind of picks winners and losers, you know, 
and even as you figure out how to implement all this broadband, 
I mean, you got, like I represent a district in Florida. You 
got some urban areas, you got some rural areas, and so, people 
always wonder, you know, when am I going to get served? Are you 
going to spend money upgrading some of the urban areas that 
maybe are slow. Are you going to say that is not money well 
spent, we are going to go out to the rural areas that do not 
have broadband at all? I mean, how do you kind of make those 
decisions, and what are your plans in that regard?
    Mr. Copps. Well, I want to make sure that the winners are 
the American people. One way we do this, is that in crafting 
this broadband strategy, we have some workable definitions of 
what is an unserved area and what is an underserved area, 
although I think, in all truthfulness, you can probably make 
the case that the United States as a whole is an underserved 
area when it comes to broadband. But that being said, there are 
areas that are way ahead of others, but all need attention. I 
mean, somebody has 500 kilobits or 786 kilobits, is that what 
we are talking about for 21st Century broadband? Is that what 
this national broadband strategy is supposed to be directed at? 
I do not think so, but we have to work out some kind of 
consensus, and again, talking with the industries, talking with 
all the stakeholders on what is achievable.
    We are not going to be building, in the next two years, the 
broadband that we will have in 2075 or 2090. So, we cannot just 
say we want all of this right now, but rather something that 
will ensure that we are competitive with the rest of the world, 
and leading the rest of the world, and that gets us out of 
being ranked 15th or 20th, and puts us back in the forefront of 
nations. I think that needs to be our goal.
    There will be some difficult choices to make, but like you, 
I think picking winners and losers is not a good role for the 
government. I guess sometimes it does happen, with the choices 
that are made. If we try to be as technologically neutral as we 
can, if we try to be open to innovation and encourage 
entrepreneurship, we can avoid some of those pitfalls.
    Mr. Crenshaw. Well, on that, just real quickly, I have read 
that in some of the big companies that are saying the stimulus 
money has a lot of restrictions, you know, the typical, I 
guess, complaint that too many regulations, too many 
restrictions, and they are concerned, are they going to use 
some of that stimulus money. Do you hear those concerns, and 
are they real, and if they are----
    Mr. Copps. Well, I think we have heard them. I think we 
will have to make judgments. I would like to see everybody 
looking proactively and innovatively at this program, and see 
if they can make a contribution, whether they are large or 
small companies. Obviously, competitive considerations will 
inform those decisions, but they do not necessarily have to be 
the only considerations that are made.
    Mr. Crenshaw. Thank you. Thank you, Mr. Chairman.
    Mr. Serrano. Thank you. It is some rule of the House. It is 
the rule that will go very good back in my district.
    Mr. Kirk. I guess Topic A for today is the 6 point drop in 
the U.S. economy that was reported this morning, and it is 
interesting to me that our subcommittee is relatively new, kind 
of sleepy, but the biggest spending.
    Mr. Copps. Biggest what?
    Mr. Kirk. Biggest spending of this Congress is coming out 
of the jurisdiction of this subcommittee, through the TARP and 
Treasury programs. And the biggest asset of the United States 
is under the jurisdiction of this subcommittee, which is the 
spectrum. Just an old estimate, total value of the gold in Fort 
Knox is $45.5 billion. Total value, old estimate, of the unused 
spectrum is $771 billion.
    So, you have got this 2010 plan, but I get the sense that 
we are kind of on autopilot now, not connecting the vast 
borrowing of the United States that is required to support the 
stimulus, without any examination of this asset, which could 
and, in my view, should be sold to sponsor and foster economic 
growth of the United States. It is almost to the point where if 
we just gave it away, the economic performance of the United 
States would pick up enormously. If we sold a huge amount of 
it, we would be able to lower the borrowing requirement of the 
United States by a significant amount.
    My sense is there is no big thinking like that happening in 
this 2010 report.
    Mr. Copps. Well, as I have said publicly, I think that the 
first thing we need to do with that spectrum is to understand 
it. These are decisions that Congress has to make about selling 
spectrum, but I think we have to understand how much of that 
spectrum is being used today, April the 29th, at 11:00 in the 
morning. For what purposes, and how we can do a better job of 
allocating and putting it to good economic use.
    Mr. Kirk. The NTIA chart is pretty complicated. The New 
America Foundation chart actually lays it out the way even a 
Congressman could understand, and it shows how much has been 
unsold, and the value of the bits that are off. And I am 
worried, because DOD will tell you over and over again that we 
need all the spectrum, but my experience in Afghanistan was 
that when we rolled into combat, many times, our radios were 
not working. And so, the first thing we did before we rolled 
out is get everybody's Roshan cell phone number in all the 
other platoons. And if the comms did not work on DOD's side, we 
would just call the other guy on civilian. Showing that 
already, the civilian sector, in Afghanistan, was more flexible 
and dynamic than the military system.
    And this amount of spectrum in Uncle Sam's hands is really 
enormous weight. This morning, is it this morning we are doing 
the next big auction? Or is it tomorrow morning? So, this 
morning, I think we are going to borrow about $90 billion in 
the Bureau of the Public Debt. And it is, I think it should be 
increasingly bizarre that we are sitting on this dead asset, 
while we are attempting to borrow from China, already been told 
that the Central Bank of China is not going, is going to get 95 
percent out of purchasing U.S. debt.
    And so, I would just urge you, is there a way, and I know 
you are acting and everything, is there a way to begin to think 
much bigger?
    Mr. Copps. Yes, I think we are, and I have talked about it.
    Mr. Kirk. This requires a jihad against Secretary Gates, 
because my read on the earring of the Pentagon is they are all 
dead thinking over there, and somewhat out of touch with how 
actual soldiers----
    Mr. Copps. Well, I think it is realistic to have a spectrum 
inventory, and I think that inventory should encompass both the 
civilian private sector spectrum and the government spectrum, 
so we can actually see what is being used at this moment in 
time, and what is available for productive economic purposes 
now.
    I do not know exactly where our broadband plan at the FCC 
will come out on this, but I do know that we have teed up 
specific spectrum questions in that NOI that went out a couple 
of weeks ago. So, we are very, very much open to that. I think 
an enlightened spectrum allocation plan, based on a good 
inventory, has to be an important part of a viable, forward-
looking broadband plan for the 21st Century.
    Mr. Kirk. This is a conversation that, if I had the chance 
with the President, I think most people look at the assets of 
the United States, and have no idea that the spectrum is the 
most valuable asset of the U.S. government, in terms of 
marketability, have no idea.
    And the idea that we would borrow money, China is out of 
the game, so now, we are borrowing money from largely other 
foreign investors, like today, to provide rural broadband, and 
not sell this instead to support the program, seems fairly 
bizarre. I think the rural broadband program is $478 per person 
benefited, you know, when you take Chairman DeLauro's 
appropriation in the stimulus, and divide it by the number of 
Americans she claims to serve in the report to the stimulus 
bill, it is about $470 a person, and not to release this 
spectrum, which would A, significantly reduce the economic 
decline of the United States, and B, generate enormous, but I 
get the sense that here is very little appreciation, and I ask 
you, is there any appreciation that you have seen in the White 
House at all on this?
    Mr. Copps. Again, I am representing an independent agency, 
so you know, I am not going to----
    Mr. Kirk. And hopefully, you talk to them.
    Mr. Copps. I am not going to try to speak for the 
Administration. I think they are very much onboard with the 
kind of approach that we have taken on the broadband inquiry, 
and trying to launch that proceeding, and I think they are 
looking at the bigger picture and are very much aware of the 
fact that the spectrum is a huge resource, and that this 
industry is absolutely essential to the future wellbeing of the 
country.
    Shortly after I got to the FCC, the telecom market 
basically collapsed. I hope there was not a direct relationship 
with my going there, but I said, even then, that this industry 
is going to be back. It is the central infrastructure driver of 
the 21st Century, and it did come back. And it will be back 
again. It is still growing, even in terms of the economy where 
we are right now, so I think you are absolutely right to talk 
about the stunning economic potential there.
    Mr. Kirk. Mr. Chairman. Spending some time on the Pakistan 
border with China. It is the most remote part of China, and 
pull out your China Telecom, and solid bars across. Which is 
not present in the United States, and my hope is that this 
subcommittee could help the Administration think a lot bigger, 
with regard to the principal asset that it owns and is not 
using.
    Mr. Copps. I am encouraged by the fact that the 
Administration is thinking bigger for the first time, stepping 
up to the plate and making a commitment to broadband, with a 
determination to develop a viable and comprehensive broadband 
plan that is the product of reaching out and talking to the 
private sector, the nontraditional stakeholders. We have been 
charged to conduct international comparisons, to go around the 
world, and see what is working, and try to learn from what 
other people are doing, and learn from failures overseas. This 
is going to be data-driven. It is going to focus on spectrum 
and all these things, so I am hopeful that we are going to take 
advantage of this opportunity. As I say, I have been pushing 
this for eight years, asking why we cannot have this kind of 
opportunity to formulate a strategy. So, I am determined now to 
do it right. I think we have got it launched in a satisfactory 
fashion. Now, I am trying to make sure that we go out and get 
the kind of input that we really need to get it done.
    Mr. Kirk. Mr. Chairman.
    Mr. Serrano. Thank you. Let me just take a second to 
slightly differ, in a friendly manner, with my friend, Mr. 
Kirk, who called the committee sleepy.
    I think one of the things that is happening, as you well 
know, is that the unprecedented amount of money that we gave 
out has made both parties, if we are willing to admit it, sort 
of search around now, and say okay, what is the next step. And 
any committee that has jurisdiction over the Treasury has to 
find out what it is, and how it is that we are going to 
supervise, rather than just supervise for the sake of 
supervising. It is all new to us, and I do not know how many 
chairmen of committees or subcommittees you will get to 
publicly admit that, what I just admitted, that we are looking 
to see what our role should be under this unprecedented time.
    However, any committee that is trying to make the IRS more 
friendly towards taxpayers, and does so in its dollar 
allocation and language, is not sleepy. Any committee that is 
trying to make the District of Columbia be treated as an equal 
partner and not as a colony, as this committee has done, is not 
sleepy. And any committee that was a year ahead of our great 
new, young President, Mr. Obama, on the issue of Cuba, as Ms. 
Wasserman Schultz, who did not totally agree, can attest to, is 
rather sleepy. Let us just say they were mellow and not 
abrasive.
    And speaking of issues, Mr. Kirk, that we have been very 
strong on, is the whole issue of my next question, which is, 
quiet.
    Mr. Kirk. I just would urge you that we never seen this 
much money under the jurisdiction of this, at an unprecedented 
rate. And so, what I am urging for, in a mellow way, is I would 
expect that the number, significantly higher than what we have. 
Because so much is happening. We have not had that many 
hearings at all.
    Mr. Serrano. Right, and the reason we have not had that 
many hearings, is because we do not have a budget. We do not 
have budget figures. We just expected the first summer hearing 
of the new Administration. It will not be like this in the 
future.
    Mr. Kirk. And you and I both have significant concerns 
about the content.
    Mr. Serrano. Right. Yes. We do. We share that. We share 
that.
    And an issue that this subcommittee is leading on. Last 
fall, this subcommittee held a hearing on the problems that 
some public, educational, and government, known as PEG, 
channels are facing with some cable systems. There was 
bipartisan appreciation for the value of PEG channels, and 
support for continued fair treatment of those channels.
    Since then, there have been more stories about restrictions 
on PEG channels on some cable systems. Has the FCC been looking 
at this issue? What might the FCC consider doing to address it?
    Now, I have to be honest. When I first saw cable TV come 
into New York City, and as you know, New York City may be the 
leader in many things, but when it came to cable TV, it was one 
of the last places to get, even though some people claim it was 
invented to get New York City stations elsewhere in the Nation, 
but we got it last, because in New York, it meant tearing up 
sidewalks and everything, and they do not want to do that, and 
there were other issues. But we were under the understanding 
that you could not get a franchise unless you set aside, 
specifically, channels, programming, assistance for programming 
to put these shows on the air, and that is how local folks were 
able to get their shows on the air, educational, entertainment, 
and otherwise.
    Now, we find out that this was, in many cases, or 
nationwide, something they were encouraged to do, but did not 
have to do, and little by little, they are not doing it, by 
either saying no, or on a program that has 300 channels, 
putting the PEG channels at 298, 299, and 300. What can we do? 
Because this is the only ability the public really has to be a 
player.
    Mr. Copps. Well, I am concerned. I am, like you, a strong 
advocate of public, educational, and governmental programming. 
I think it needs to be encouraged in this age of media 
consolidation that I referenced before. I think these channels 
are often, along with low power stations, the last bastion of 
localism, and reflecting the diversity of the community. And I 
think they are under pressure, and some cable operations have 
allegedly moved PEG channels to digital early, and that 
requires people to go out and get a box, to be able to see the 
programs. You mentioned maybe PEG channels being put on a 
different channel somewhere, and then, you have to go through 
some kind of a drop down menu, and it becomes a navigational 
challenge of the first order just to find a PEG channel, and 
each one you want to get, you have to go through that again.
    So, we are aware of the complaints. We have three petitions 
before us for a declaratory ruling to do something about it. 
The case has also gone to the court. We are in the process of 
answering questions on PEG channels, from the city of Dearborn 
that were requested by the court and I am trying to expedite 
those and get them back to them. But I think this is something 
that we need to step up and address; we just cannot afford to 
see these PEG channels go by the board. They are too valuable. 
They are too wedded to the public interest, and I want to make 
sure that the Commission is as proactive as it can be in 
maintaining, sustaining and encouraging them.
    Mr. Serrano. And I hope you do so. And let me just tell you 
that I am concerned, and I think this is a concern that is 
shared by the full committee, that if we do not move fast on 
this, it is just going to go by the wayside, and there are 
other issues that will come up, and the PEG issue will not be 
as important. You did say proactive, and this brings me to a 
side issue, and this is just an observation on my part. You can 
correct me, if I am totally wrong, but there seems to be a 
feeling that the FCC now is waiting for the new Chairman to 
come into place before it deals with some issues.
    Well, as you know, that has become a political hot potato, 
and that they are tying, the minority party wants to tie in 
their selection, which is fine. They have a right to have a 
selection, selections, and now, it might be a while before we 
get a Chairman. Now, my understanding is that you are 
constituted fully now, not fully in membership, but you are 
totally legally able to move ahead and do a lot of things. Am I 
correct?
    Mr. Copps. I feel empowered. I am the Acting Chairman of 
the Commission. I think, I am trying to approach my role in a 
realistic fashion. I think there are some issues, like the 
future of universal service, for example, in which Congress has 
a great interest. I think the Administration does, too, and 
while we can do some things around the edge, that is not 
something I would call to a vote tomorrow morning.
    I do not consider the PEG channel issue that way. I think 
that is something we need to act on. We have tried to act on a 
number of issues at the Commission. We are clearing out 
thousands of backlogged items that could actually make a 
difference in helping the economy right now, really tens of 
thousands, to be truthful. I think we are an active Commission. 
I think we are getting things done. The longer the interval 
goes on, until a new Chairman is confirmed, the questions 
cannot wait. So, yes, I am not reluctant to, I am not going to 
shy back from doing that, but again, just so you know, I think 
you have to kind of----
    Mr. Serrano. Well, I understand what----
    Mr. Copps [continuing]. Realistic fashion.
    Mr. Serrano. I understand that some issues are new, and the 
magnitude so large that you might want to wait until you have 
the full Board.
    Mr. Copps. It is really----
    Mr. Serrano. For example, this PEG one, which has been 
around a while.
    Mr. Copps. I will give you another example. We were talking 
about public safety before, and we spent a lot of time, under 
the previous Chairman, and we tried to work together with him, 
on what do you do with this D block. And how do you get an 
interoperable broadband public safety network built in the 
United States of America? It is almost eight years after 9/11, 
four or five years after Hurricane Katrina, storms and 
emergencies occur across the Nation all the time, and first 
responders still cannot communicate with one another.
    So, we spent a couple years trying to put together some 
kind of a private/public partnership, but for many reasons, 
which I would be happy to go into if you want me to, we were 
not able to bring that off.
    I do not think we can afford to wait, but I am not about to 
rush ahead with a decision on this. But what I have told our 
bureaus and offices to do, is we have got a new Chairman coming 
in. I want you to go back to square one on this, and look at 
all of the options for building this public sector--private 
sector, interoperable broadband safety network. Take nothing 
off the table. You have got proposals to let the government pay 
for it. I do not think that is going to happen, to just give 
the spectrum away, or auction it off, and a lot of area in 
between.
    So, I want to have ready for the new Chairman, I do not 
think it slows down business. I think it expedites it. I want 
to have ready for him an options paper, so we can move ahead 
right away, and I will be pushing to move ahead, to get that 
done. But that is one of those things on which we can make a 
lot of progress before he arrives, even though we perhaps do 
not make a final decision.
    Mr. Serrano. Well, I just would encourage you to continue 
to be bold.
    Mr. Copps. Okay.
    Mr. Serrano. Because it might be five, six, seven months. 
We do not know how this is going to be resolved, this thing of 
the new Chairman and the new membership. And we need to move 
ahead.
    Mr. Copps. You know, we really have tried to be. To be 
frank, we received letters from Capitol Hill towards the end of 
last year saying your job is basically the DTV transition, and 
try to avoid controversy. That kind of got cranked into the 
equation for a while, too. Just another factor.
    Mr. Serrano. Just ignore those letters. This is a perfect 
question to ask, surrounded by two female Members of the House. 
Earlier this month, Mr. Copps, you announced a new initiative 
to increase the diversity of broadcasters. You will improve 
data collection and ownership by minorities and women, and you 
will create a Diversity Advisory Committee. To what extent do 
minorities and women own broadcast facilities today? Does their 
programming differ from other broadcasters? And I do not mean 
better. That might be forgiven, right? How might the FCC do to 
increase these percentages?
    Mr. Copps. This is an area in which we are moving ahead, 
but it is not without controversy. I have launched this, and I 
am determined to do something. I think this is a huge problem. 
To what extent do women and people of color own broadcast 
properties? It is a shockingly and appallingly paltry 
percentage. You know, we are a country that is over a third 
minority right now; we will probably be half by the middle of 
the century. Yet, people of color own 3.6 percent of all full 
power commercial television stations in the United States of 
America, 3.6 percent.
    Should we be surprised at the lack of programming dealing 
with issues of importance to women and people of color, noting 
the contributions that various minority and diversity groups 
are making to the country, or relating good stories about 
minority communities instead of all the bad stories? We should 
not be surprised if women and minorities are not managing those 
stations, do not hold the good executive jobs, and most 
importantly of all, do not have an opportunity to own those 
stations. We need to remedy the problem.
    So, I am for being really aggressive on this. I know you 
can get pushed back by courts pretty easily on some of this, 
but we have got to be a lot bolder on everything from ownership 
to equal employment opportunities at the Commission, and I am 
pushing those matters. I have reconstituted the Diversity 
Advisory Committee, which is going to have its first meeting 
next week. I plan on going and really charging them to be 
aggressive. I am going to say we are on the cusp of doing 
meaningful things on women and minority ownership, but we want 
to make sure we have the so-called Adarand studies up to date, 
so we can justify what we do to the courts. We want to make 
sure that we have the data. I want to look at ideas like full 
file review as something more aggressive to make people 
eligible to participate in the few incentive programs that do 
exist.
    So, you know, this is one area where I am not holding back 
at all. I think it is a huge priority. It has been ignored for 
too long. It is a national embarrassment, and we need to do 
something about it. We need to do it now.
    Thank you.
    Mr. Serrano. Ms. Emerson.
    Ms. Emerson. It is hard to believe, given there are more 
women in this country than men, too. So, I do not know, maybe 
it needs to start, lower levels of education to try to entice 
young people to get involved.
    Let me ask you, if I could, Mr. Chairman, about media 
ownership. Given, you know, every week we are reading another 
story about this newspaper is folding, this newspaper is going 
bankrupt. There is only one newspaper now in Seattle, one 
newspaper in Denver. And so, I would like you to, number one, 
comment on the state of the newspaper industry, at least from 
your perspective, and I also would like to know how people are 
impacted when their local newspaper does go out of business, or 
the news coverage that they have traditionally been provided is 
reduced. And then, my last question is, given the state of 
affairs for print media right now, do you think that the rules, 
the 2007 rules of cross-ownership should be revisited?
    Mr. Copps. There is no question that newspapers are facing 
problems right now. I do not think we have a completely 
accurate handle on how many companies are making money and how 
many are not. I have read two long, long pieces in the New York 
Times in the last few weeks. Tucked away in the print was a 
little sentence in each one that said, of course, most 
newspapers in the United States are still making money. We do 
not hear that very often. More often, we hear that most of them 
are going under. And I am not trying to downgrade the pressures 
that they are under, because I understand that.
    I think, to some extent, some of the consolidation that we 
underwent created some of these problems. I was not a fan of 
the Tribune takeover, and I warned at the time that amassing 
that kind of a debt could be inimical to the future well-being 
of that concern, and that has come to pass.
    Certainly, the rise of the Internet has challenged them, 
and maybe some of their problems were self-created by just 
putting content up, free, on the Internet. The health of 
newspapers is beyond my purview, as Chairman of the Federal 
Communications Commission, but where it does come into play is 
when we look at some of the newspaper broadcast connections, 
and increasingly, newspaper and broadcast come under the same 
management. Maybe there are some efficiencies in that. I 
generally look at that with some level of skepticism, because, 
when you close a newsroom, you have lost another independent 
voice and independent news and independent judgment in a 
community.
    So, I am afraid, as I read in an article yesterday, there 
is not much in the way of acquisitions going on right now. I am 
not so sure that, when the economy begins to turn around, that 
situation will persist. And I think you will probably see more 
people wanting to consolidate.
    I think you have to look at each case on an individual 
basis. What really galled me and did not appeal to me, was when 
Michael Powell tried to change the rules on ownership, kind of 
flashing an always on green light, you know, you can always 
come to the FCC, and we will approve a merger. I have never 
said that I oppose all mergers, and I am always willing to look 
at the facts in each individual market. If a duopoly or some 
kind of a different cross-media takeover means the difference 
between a station going dark or staying on the air, I am 
willing to look at that, and I think we should do so. But let's 
do it, again, with some attention to the details. Look at the 
needs of a particular market, rather than just flashing that 
always on green light.
    The fact is that most people still get their news and 
information from television and from the newspaper. The latest 
figures I saw say probably two thirds, in spite of the fact 
that the Internet is becoming more and more popular. But I am 
seriously worried about the decline of broadcast journalism and 
newspaper journalism. I am not convinced that shrinking these 
newspapers into little mini-papers is necessarily the way to 
success, and I am even less sure that that will serve the 
public interest.
    So, this is a dialogue we need to have. When I was up in 
New York City a couple of weeks ago, I learned of a group 
convening up there, through one of the universities, to really 
take a close look at this. I applaud Congress taking a close 
look at it. You are raising the appropriate questions. I think 
there is going to be a hearing on the Senate side, on the 
future of journalism, too, and that is a dialogue that we 
really need to be having, because that is what the public 
interest is all about. If we do not have a viable system of 
journalism, newspapers, and take advantage of all the 
technologies we have to increase the civic dialogue, then we 
are losing a wonderful opportunity to help our country 
progress.
    Ms. Emerson. I appreciate that, Chairman. Just because I 
think we are going to have votes, I will stop now.
    Mr. Serrano. We have votes. I wonder if history will 
indicate that during a difficult time for the newspaper 
industry, that Members of Congress, who usually get treated 
very badly by them, actually care that they are still alive. 
Ms. Wasserman Schultz.
    Ms. Wasserman Schultz. Thank you, Mr. Chairman. The other 
issue I wanted to focus on was with the digital television 
transition, and some of the unique issues that we face in South 
Florida, and other areas where natural disasters are prevalent. 
And last year, I got a rather unsatisfactory answer from 
Chairman Martin, when I asked him about the issue of analog, 
portable analog, battery operated televisions, and whether or 
not a converter was going to be available commercially for 
people who rely on those, like in my district and in my region, 
when we get hit by a hurricane. Many people have, the only 
access that they have to information about emergencies is 
through that type of television.
    Chairman Martin said there were no plans to actually 
solicit or create a converter for those types of televisions, 
and I was hoping that you would be able to say that that has 
changed, and now, we have moved in that direction.
    Mr. Copps. I do not have a completely satisfactory answer. 
The fact is that a lot of those analog portable sets are not 
going to be working after the transition. If they have the 
right connections, it is possible to attach a converter box to 
them, but then, in point of fact, they cease being portable. At 
least one company now is starting to produce a digital portable 
set. It is expensive, about $150, maybe more than that.
    I have tried to talk about this wherever I go, and tried to 
jawbone, and encourage the production of these. I suppose, in 
the final analysis, the private sector is going to make some 
judgment upon whether there is a market there around the 
country to, for $150 to $200 sets, or if they produce enough of 
them, the price will come down. But I can tell you, when I go 
to Florida, lot of the stations are going to transitors in 
June, when it is hurricane season. So, it could be an ugly 
problem. Again, this is one of those things that we did not 
realize until too late, or folks could have been on top of it 
much sooner.
    Ms. Wasserman Schultz. Can the Commission encourage more 
aggressive development of that type of technology, or----
    Mr. Copps. Well, I think we can encourage by jawboning and 
asking questions.
    Ms. Wasserman Schultz. Jawboning.
    Mr. Copps. I do not think we can dictate that----
    Ms. Wasserman Schultz. $150, is that, $150, $200 television 
sets, you know, for an emergency situation, is really, you 
know, not accessible, and there will literally be thousands of 
people who will be without access to the information, you know, 
but for a portable radio.
    Mr. Copps. Yes.
    Ms. Wasserman Schultz. You know, it is not quite the same. 
The other issue is last year, we dealt with the issue of 
consolidation, particularly in South Florida, when the 
Washington Post, Newsweek company----
    Mr. Copps. Right. Right.
    Ms. Wasserman Schultz [continuing]. Proposed to purchase 
WTVJ, and the issue there was the Prometheus Radio Projects 
versus FCC, and the fact that you have the six station, that 
six station rule, and what allowed WTVJ, post-Newsweek, to 
argue that the two Spanish language stations in South Florida, 
in addition to the four English language stations, were 
equivalent, and that WTVJ was sixth, including those two 
stations, while at the same time, they argued actually that, 
WTVJ argued, in order to be able to have a duopoly with the 
Spanish language station, they argued the opposite. So, you 
cannot have your cake and eat it too.
    But I know you cannot specifically talk about that case, 
and that sale was terminated.
    Mr. Copps. Right.
    Ms. Wasserman Schultz. Fortunately, for my constituents in 
South Florida. But does the FCC have plans to reexamine the 
loophole that would allow higher rated Spanish language TV 
stations to diminish the standing of English language stations, 
for the purposes of facilitating a common ownership duopoly? 
Because you are really comparing apples to oranges when you are 
comparing those stations. They have different audiences.
    Mr. Copps. I think we should be doing that. I think we 
should be attuned to the concerns of what some of these 
consolidation deals raise. I suppose you learn as you go along. 
People always figure out new ways to get around the rules. So 
yes, I think we could be looking at some of these issues. I 
think you can approach some of the problems by looking at the 
broadcast ownership limits.
    It is very difficult to do, in an economy like we are in 
right now, but I think we need to keep addressing those 
problems. This goes a little bit beyond your question, but I 
also think there is a lot we can do to remove, what I would 
call behavioral rules, and just making sure stations are 
serving the public interest, and have a little more rigorous 
kind of licensing system with some public interest guidelines 
attached to them, like we had once upon a time. Now, you just 
send in a postcard every eight years, and you get your 
broadcast license renewed. I do not think that is sufficiently 
protective of the public interest.
    Ms. Wasserman Schultz. Mr. Chairman, before my time expires 
and we adjourn for votes, I am going to just throw out a 
provocative question, which is an extension of Congressman 
Kirk's question. Why do not we charge for broadcast stations, 
for the spectrum that they use?
    Mr. Copps. Well, I think the original deal was there is a 
quid pro quo involved here, and licensees got the spectrum in 
return for serving the public interest, and that is what allows 
the----
    Ms. Wasserman Schultz. Serving the public interest in the 
way that it was intended to be.
    Mr. Copps. I think a lot of stations are. I think there are 
still a lot of broadcasters in the United States who work hard, 
and in whose breasts the flame of the public interest still 
brightly burns, but as we go down this road to more 
consolidation, and we went through all the deregulation for 20 
years, I think there are----
    Ms. Wasserman Schultz. I wonder if they would start, if 
someone filed legislation to require them to pay. Just saying.
    Mr. Serrano. Well, you may get me to join you on that for a 
very strange reason. I pay great attention to the Spanish 
networks. Their policy, their behavior, their entertainment, 
their politics is Miami-based.
    So, if you are in New York, L.A., Texas, and you disagree 
with that policy, and we know what we are talking about, that 
may come to an end soon. It so happens we have all been 
involved in that issue. It is, if you are a New Yorker, what 
you get from radio, on Univision Radio, and I say it publicly, 
and from TV, is something that is politically attuned to Miami. 
And if you are a New Yorker and disagree with it, so be it, you 
get 24 hours of that. And that is, the whole Spanish language 
thing is another issue. Nobody, I think, monitors that.
    Mr. Copps. And look at the lack of ownership of stations in 
New York.
    Mr. Serrano. Now, we are going to adjourn, rather than 
recess, because you have been wonderful, but I want to get in 
one last question that I know is of interest, even though I did 
not check with them, to all three of us.
    It is a baseball question, and it has to do with two local 
teams for our second home, which is the Washington area. And it 
is this whole issue of the Mid-Atlantic Sports Network, engaged 
in a dispute over whether Time-Warner Cable will resume 
carrying the Orioles and the Nationals in the North Carolina 
region, which they see it as a local issue, that it is a local 
team.
    As you know, baseball is always broadcast regionally, so if 
you were in New York, you were lucky. But if you were somewhere 
else, you chose a team that was close to you, and that is what 
happens. And so, it is not out of the question to say that our 
two local teams in our second home here belong somewhere in 
that area.
    Ms. Wasserman Schultz. Baltimore is a local team in 
Florida.
    Mr. Serrano. And what is interesting about it is that the 
FCC Media Bureau ruled in October in favor of Madison, and two 
arbitrators have ruled in favor of Madison. So, my question to 
you would be do you have any sense of how long it will take for 
the Commission to make a final decision, whatever that decision 
is?
    Mr. Copps. I think that is something we can push. Let me 
just start by saying it is a restricted matter, so I am 
precluded from saying too much about the substance of it. I can 
talk to you a bit about the----
    Mr. Serrano. And I want to make sure that I am saying 
whatever that decision is.
    Mr. Copps. Right, right. This went to arbitration 
initially, and the arbitrator found in favor of MASN, and then, 
Time-Warner would appeal that, and the Bureau denied the 
appeal, and then, Time-Warner filed an application for review 
before the full Commission, and that is now pending at the full 
Commission. I am trying to talk to the Bureau folks, and make 
sure they are of the same opinion still, and look at the record 
of it. I think it is something that deserves an answer, and we 
will try and move forward on that.
    Mr. Serrano. Okay. Because the folks are missing another 
season, and I can tell you from a personal viewpoint, I know 
most people think of New York as this big, not necessarily 
great, for some people, a big place that takes care of 
everything that it has. We went a season without the Yankees on 
TV, because the ES Network had not been cleared for the local 
cable package. And I was the most miserable guy in the Nation, 
even more than the folks in Carolina, who----
    Ms. Wasserman Schultz. That is funny. You should have used 
your Slingbox.
    Mr. Serrano. Please. Chairman Copps, we want to thank you 
for your testimony. We want to thank you for your service to 
our country. We want to encourage you to continue to move ahead 
of that holdup past longer than 24 hours. It might be a long 
time, but we take great interest in the work that the FCC does. 
We know how important it is to our society and to our 
government, and we thank you for your testimony today.
    Ms. Emerson. Before you gavel, may I just ask, I have some, 
I would like unanimous consent to submit some questions for the 
witness.
    Mr. Serrano. And so do I, and that is without objection, 
and so do you.
    Ms. Wasserman Schultz. Yes. Thank you.
    Mr. Serrano. Thank you so much.
    Mr. Copps. Thank you, sir. I appreciate it.
    Ms. Emerson. Thank you.

 


                           W I T N E S S E S

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                                                                   Page
Copps, M. J......................................................   125
Leibowitz, Jon...................................................    63
Schapiro, M. L...................................................     1


                               I N D E X

                              ----------                              7

                        Federal Trade Commission
                        Tuesday, March 31, 2009

Chairman Serrano's Opening Statement.............................    63
Mrs. Emerson's Opening Statement.................................    64
Testimony of Chairman Leibowitz..................................    65
Materials in Other Languages.....................................    82
APA Rulemaking...................................................    82
Civil Money Penalties............................................    83
Proposals for Single Consumer Protection Agency..................    83
Civil Enforcement vs. Criminal Prosecution.......................    84
``Do Not Call'' List.............................................    85
FTC Staffing Levels..............................................    85
Antitrust Enforcement............................................    86
Abuses Related to Mortgage Lending...............................    87
Federal and State Enforcement Authorities........................    89
Anticompetitive Behavior Involving Nonbank Financial Companies...    91
Foreclosure-Related Problems.....................................    93
Predatory Lending and Minority and Low-Income Communities........    95
FTC Affirmative Action Plan......................................    96
Deceptive Advertising............................................    98
Making Disclosure More Meaningful................................    98
Yield-Spread Premiums............................................    99
FTC Staffing Levels..............................................   100
Educational Efforts..............................................   102
Abuses Related to Mortgage Lending...............................   103
Compensation for Financial Fraud.................................   104
``Pay for Delay'' in Pharmaceuticals.............................   105
Review of Mergers................................................   106
FTC Role in Restructured System..................................   107