[Senate Hearing 111-32]
[From the U.S. Government Publishing Office]

                                                         S. Hrg. 111-32

                     NOMINATIONS OF: MARY SCHAPIRO,



                               before the

                              COMMITTEE ON
                          UNITED STATES SENATE


                             FIRST SESSION


                            nominations of:

            Mary Schapiro, of New York, Chairman-Designate,
                   Securities and Exchange Commission


         Christina D. Romer, of California, Chairman-Designate,
                      Council of Economic Advisors


           Austan D. Goolsbee, of Illinois, Member-Designate,
                      Council of Economic Advisors


           Cecilia E. Rouse, of New Jersey, Member-Designate,
                      Council of Economic Advisors


           Daniel K. Tarullo, of Maryland, Member-Designate,
            Board of Governors of the Federal Reserve System


                            JANUARY 15, 2009


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

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50-221                    WASHINGTON : 2009
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               CHRISTOPHER J. DODD, Connecticut, Chairman

TIM JOHNSON, South Dakota            RICHARD C. SHELBY, Alabama
JACK REED, Rhode Island              ROBERT F. BENNETT, Utah
CHARLES E. SCHUMER, New York         JIM BUNNING, Kentucky
EVAN BAYH, Indiana                   MIKE CRAPO, Idaho
ROBERT MENENDEZ, New Jersey          MEL MARTINEZ, Florida
DANIEL K. AKAKA, Hawaii              BOB CORKER, Tennessee
SHERROD BROWN, Ohio                  JIM DeMINT, South Carolina
JON TESTER, Montana                  DAVID VITTER, Louisiana
HERB KOHL, Wisconsin                 MIKE JOHANNS, Nebraska
MARK R. WARNER, Virginia             KAY BAILEY HUTCHISON, Texas

                 Colin McGinnis, Acting Staff Director
              William D. Duhnke, Republican Staff Director
                   Aaron Klein, Legislative Assistant
                Dean V. Shahinian, Legislative Assistant
                    Joe Hepp, Legislative Assistant
                  Drew Colbert, Legislative Assistant
                   Lisa Frumin, Legislative Assistant
                  Kate Szostak, Legislative Assistant
                  Didem Nisanci, Legislative Assistant
                Dan Schneiderman, Legislative Assistant
                 David Stoopler, Legislative Assistant
                   Emma Palmer, Legislative Assistant
                 Matthew Pippin, Legislative Assistant
                 Jason Rosenberg, Legislative Assistant
                Jonathan Davidson, Legislative Assistant
                      Rob Lee, Legislative Fellow
                  Mark F. Oesterle, Republican Counsel
            Peggy R. Kuhn, Republican Legislative Assistant
           Mark A. Calabria, Republican Legislative Assistant
                Jonathan Graffeo, Legislative Assistant
           Brandon Barford, Republican Legislative Assistant
             Mike Nielsen, Republican Legislative Assistant
          Courtney Geduldig, Republican Legislative Assistant
            John Hallmark, Republican Legislative Assistant
                       Dawn Ratliff, Chief Clerk
                      Devin Hartley, Hearing Clerk
                      Shelvin Simmons, IT Director
                          Jim Crowell, Editor


                            C O N T E N T S


                       THURSDAY, JANUARY 15, 2009


Opening statement of Chairman Dodd...............................     1

Opening statements, comments, or prepared statements of:
    Senator Shelby...............................................     5
    Senator Johnson
        Prepared statement.......................................    64
    Senator Reed.................................................     7
    Senator Schumer..............................................     7
    Senator Menendez.............................................     9
        Introduction of Nominee Cecilia E. Rouse.................    33
    Senator Tester...............................................    10
        Prepared statement.......................................    64
    Senator Enzi.................................................    10
        Prepared statement.......................................    64
    Senator Warner...............................................    11
    Senator Bennett..............................................    11
    Senator Akaka................................................    30


Richard Durbin, a U.S. Senator from the State of Illinois........    34
Barbara Boxer, a U.S. Senator from the State of California.......    36


Mary Schapiro, of New York, Chairman-Designate, Securities and 
  Exchange Commission............................................    12
    Prepared statement...........................................    66
    Response to written questions of:
        Senator Dodd.............................................    71
        Senator Shelby...........................................    76
        Senator Johnson..........................................    83
        Senator Bennett..........................................    84
        Senator Crapo............................................    84
        Senator Levin............................................    86
Christina D. Romer, of California, Chairman-Designate, Council of 
  Economic Advisors..............................................    39
    Prepared statement...........................................    67
    Response to written questions of:
        Senator Johnson..........................................    92
Austan D. Goolsbee, of Illinois, Member-Designate, Council of 
  Advisors.......................................................    40
    Prepared statement...........................................    68
    Response to written questions of:
        Senator Johnson..........................................    94
Cecilia E. Rouse, of New Jersey, Member-Designate, Council of 
  Economic Advisors..............................................    41
    Prepared statement...........................................    69
    Response to written questions of:
        Senator Johnson..........................................    95
Daniel K. Tarullo, of Maryland, Member-Designate, Board of 
  Governors of the Federal Reserve System........................    42
    Prepared statement...........................................    70
    Response to written questions of:
        Senator Dodd.............................................    96
        Senator Johnson..........................................   101

              Additional Material Supplied for the Record

Dianne Feinstein, a U.S. Senator from the State of California....   103

                            NOMINATIONS OF:

                      MARY SCHAPIRO, OF NEW YORK,





                     COUNCIL OF ECONOMIC ADVISORS;

                    AUSTAN D. GOOLSBEE, OF ILLINOIS,


                     COUNCIL OF ECONOMIC ADVISORS;

                    CECILIA E. ROUSE, OF NEW JERSEY,


                     COUNCIL OF ECONOMIC ADVISORS;

                    DANIEL K. TARULLO, OF MARYLAND,


                       BOARD OF GOVERNORS OF THE
                         FEDERAL RESERVE SYSTEM


                       THURSDAY, JANUARY 15, 2009

                                       U.S. Senate,
          Committee on Banking, Housing, and Urban Affairs,
                                                    Washington, DC.
    The Committee met at 10 a.m., in room SD-538, Dirksen 
Senate Office Building, Senator Christopher J. Dodd (Chairman 
of the Committee) presiding.


    Chairman Dodd. The Committee will come to order, if we may. 
We have got a very busy morning this morning.
    Let me first of all welcome all of my colleagues who are 
here. I want to make a particular warm welcome to Mark Warner, 
our new colleague who is here this morning, our new Senator 
from the State of Virginia. Connecticut claims him a little 
bit, as well, having grown up a bit there, so I have known Mark 
many, many years and he is going to be a wonderful addition to 
the U.S. Senate and we are thrilled that you are a Member of 
this Committee. I gather that Senator Kohl is going to be 
joining us, and I think Senator Bennet, the new Senator from 
Colorado, will be joining us, as well, on this Committee.
    We appreciate the tremendous work of Bob Casey and Tom 
Carper, who are going to other committee assignments, but they 
were wonderful Members of this Committee and I want to publicly 
thank them for their service over the last 2 years that I have 
had the privilege of chairing the Committee.
    I want to thank Richard Shelby again. We have known each 
other a long time, have served together for many, many years. 
It has been a good relationship over these last years. We got a 
lot done on this Committee and I am looking forward to this 
Congress. We are obviously going to be a very busy Committee, 
to put it mildly, with all the issues in front of us. I enjoyed 
immensely the cooperation that I had from Senator Shelby and 
the members of the minority side, as well, Bob Corker here on 
numerous occasions. I drew him into situations he probably had 
some second thoughts about, but he was a great member and a 
real complement to the efforts we are making here.
    Today, we have a busy agenda----
    Senator Shelby. Mr. Chairman, you weren't going to tell 
them how many years together we have been here----
    Chairman Dodd. I wasn't going to tell them that.
    Senator Shelby. No, not together.
    Chairman Dodd. Many years.
    The way I am going to proceed is I am going to make an 
opening statement regarding our nominees, turn to Senator 
Shelby for any opening statements he would care to make, and 
then I am going to turn to my colleagues who are here to 
introduce our witnesses this morning, and, of course, several 
of our colleagues are also Members of this Committee. So we 
will try and move along as quickly as we can here with these 
    So this morning, we meet to consider five very 
distinguished individuals President-elect Obama has designated 
for nomination to the Securities and Exchange Commission, to 
the Federal Reserve, and to the President's Council of Economic 
Advisors, positions critical to restoring confidence in our 
financial system and stabilizing our underlying economy. I want 
to thank each of the nominees who are here today for appearing 
before this Committee and for their willingness to accept the 
job that you are going to undertake.
    Almost every day, we hear more troubling economic news, 
including the loss of more than a half-a-million jobs in our 
country in December, that some 9,000 to 10,000 homes are 
entering foreclosure each and every day in our Nation, or the 
prospect of another small business facing bankruptcy because of 
a combination of falling sales and lack of access to adequate 
credit. And so you arrive as nominees before this Committee at 
a very, very critical moment in our Nation's history.
    On the first panel, we will hear from the Chairman-
designate for the U.S. Securities and Exchange Commission. The 
securities markets consist of trillions of dollars worth of 
stocks, options, municipal bonds, corporation bonds, mortgage-
backed and asset-backed securities, and other securities. Half 
of American families--half of our families in this country are 
invested directly or indirectly in the securities markets. They 
invest for retirement, for college education and tuition. Many 
small businesses rely on securities markets to raise capital to 
expand their businesses and to make payroll. And the role these 
markets play in the world's capital markets obviously is 
critical, as we all understand.
    Given the correlation of the health of securities markets 
to our Nation's economic stability, the Securities and Exchange 
Commission is an extremely important institution, to put it 
mildly. It oversees sales of securities, markets, mutual funds, 
investment advisors, credit rating agencies, and accounting 
principles. It coordinates with securities regulators 
throughout the 50 States, as well.
    But perhaps most importantly, it is designed to protect 
investors. As former Chairman William Douglas said, ``The SEC 
is supposed to be the investor's advocate,'' to quote him, 
``responsible for ensuring that a family or a small business 
investing its hard-earned money can trust that the cops are on 
the beat and doing their job well.''
    But as we all know, the securities markets are in turmoil. 
Mortgage-backed securities markets have cratered and literally 
billions of dollars have been lost. Major investment banks who 
contributed mightily to our financial problems have now been 
forced to either become bank holding companies or fail 
altogether. The charities and investors who entrusted their 
money in Bernard Madoff Investment, LLC, lost billions of 
dollars in a massive Ponzi scheme that went undetected by the 
examiners of the SEC and FINRA, not for years, but for decades. 
How did that happen, and who was responsible for that?
    In the last 8 months, stocks have plummeted. Since last 
May, the Dow Jones and NASDAQ averages are down by about 40 
percent, damaging the retirement savings and pension funds of 
millions of Americans, pounding endowments for universities and 
nonprofits, and endangering critical financing for small 
businesses and entrepreneurs.
    Quite simply, these failures have undermined our economy, 
and understandably, there has been an erosion of confidence in 
the regulators. People have questioned the SEC's ability to 
spot problems or prevent them from occurring in the first 
place. After years of misleading sales pitches and credit 
ratings that proved to be wildly optimistic, many have 
completely lost faith in mortgage-backed securities.
    As Columbia University's John Coffee has said, and I quote 
him, ``It is time to find a tough cop for the Wall Street beat, 
someone who will restore confidence not only in the integrity 
of the market, but also in its regulators.''
    There are a host of specific issues the Commission must 
examine in the coming weeks and months, from accounting and 
securitization, to credit default swaps, credit rating 
agencies, short selling, to the Madoff fraud, on which this 
Committee, by the way, will be scheduling a hearing on January 
27. And it is absolutely critical that the Chairman and 
Commissioners make an extraordinary effort to pursue these 
issues fairly and independently, free from political 
considerations and from the industries which formerly employed 
them. That has always been true, but it is particularly true in 
these days.
    The Committee also considers, or will consider the 
nomination of one of the Federal Reserve Board Governors, which 
is among the most important positions that we consider in this 
Committee. In establishing the Federal Reserve, the Congress 
created a system in which the Fed Governor's seat has a fixed 
14-year term. Governors at the Fed enjoy the third-longest term 
given to any appointee in the Federal Government, behind only 
the lifetime appointments awarded to judges and a 15-year term 
given to the Comptroller General. As such, a nominee to the 
Federal Reserve Board Governors requires careful deliberation 
and thoughtful consideration.
    The seven Fed Governors are the only individuals appointed 
by the President of the United States and confirmed by the U.S. 
Senate who have a voice in our Nation's monetary policy, 
entrusted to fulfill the Fed's dual mandate of promoting 
maximum employment and achieving price stability. They play a 
very critical role, as we all know, in creating the conditions 
necessary for our economy to grow and for every American to 
have the opportunity to share in that prosperity.
    While the role of the Fed is critical to setting monetary 
policy, I would also add it serves as a regulator of the safety 
and soundness of our largest lending institutions, and very 
significantly as a regulator and enforcer of the laws passed by 
the U.S. Congress to protect consumers. These aspects are no 
less important than the Fed's monetary policy responsibilities.
    Chairman Bernanke has, in my opinion, been very forthright 
and active in identifying that the problems in the housing 
market are at the root of our economic crisis, and I thank him, 
quite candidly, for his continued calls for concrete action, 
such as he did last week in a national given speech.
    However, not all of the Federal Reserve Governors have been 
as helpful. Indeed, when I asked Governor Duke at a hearing in 
October what the Fed was doing to comply with the law to 
prevent foreclosures on mortgages that the Fed effectively owns 
through the Bear Stearns bailout, it took Governor Duke 3 
months to respond, and then only half-heartedly. That is 
    It is my hope that Dan Tarullo will both be more 
responsive, but also if confirmed, help steer the Fed on a 
better course so critical during these tough economic times.
    On the second panel, we will also have the nominees who 
will, if confirmed, comprise the President's Council of 
Economic Advisors. These men and women will be responsible for 
providing the President and the administration with the facts, 
economic projections, and recommendations that will guide the 
administration policy and thinking in the coming days. That job 
has never been more critical than it is today, given the severe 
recession that we are battling and the unprecedented crisis 
that has gripped our Nation's credit and financial markets.
    The good news is that help is truly, in my view, on the 
way. The President-elect has laid out a bold plan to revive our 
economy by cutting taxes for middle-class Americans and 
investing in our Nation's infrastructure, which is something 
that I, along with many of my colleagues on this Committee, 
have long advocated.
    The President-elect has also stated that he will make 
fundamental changes to the administration of the TARP program 
and take it in a sharply different direction. That is why I am 
supporting the release of the second tranche of TARP funds, 
although I have been extremely disappointed, as most of my 
colleagues have been, in the way that the present 
administration has implemented the TARP program. Given the 
fragile state of our financial system, halting this program 
would, in my view, be the height of irresponsibility.
    I am sure that we will have an opportunity to discuss these 
and other issues with the distinguished CEA nominees on our 
second panel. I and others will introduce them individually at 
that time, and again, I thank my colleagues who are here to do 
    But this is a critical moment, as we all know, in our 
Nation's history, and if we are to reestablish confidence in 
our financial system, then we must do so by looking out for the 
interests of the American people, their families, small 
businesses, and others who have been caught by this credit 
crunch. I know that each of the nominees share these 
priorities, and if confirmed, I know all of us look forward to 
working very closely with you to see to it that we achieve the 
results we all desire.
    And now, I would like to turn to my colleague from Alabama, 
the former Chairman of the Committee, Senator Shelby, for any 
comments he would care to make.


    Senator Shelby. Thank you, Chairman Dodd.
    Ms. Schapiro, as a veteran of the SEC, CFTC, and a self-
regulatory organization, you would bring solid experience to 
the table during a time of economic and regulatory uncertainty, 
perhaps turmoil. Unfortunately, as the SEC celebrates its 75th 
year, it finds itself, as Senator Dodd alluded to, under fire 
for a number of regulatory failures. These failures are not 
isolated. They cut across the agency's many functions and have 
had serious consequences, ranging from judicial invalidation of 
SEC rules to the complete collapse of an entire class of 
regulated entities.
    The Consolidated Supervised Entity Program, which you are 
familiar with, a program that I had called into question in 
this Committee, was unceremoniously terminated, as all of the 
participating firms failed, were merged out of existence, or 
switched to bank holding company status outside of the SEC's 
regulatory purview.
    Likewise, the SEC's handling of credit rating agencies 
contributed to the subprime frenzy that is at the root of the 
current economic crisis. Careless rating practices, which were 
a byproduct of the SEC's ill-considered approach, have wrought 
havoc on our financial system. I attempted to address this 
situation in 2006 here in this Committee with the Credit Rating 
Agency Reform Act, but the SEC's resulting rule changes came 
too late.
    Most recently, as Senator Dodd mentioned, the Madoff fraud 
has once again highlighted weaknesses in the SEC's inspections 
and enforcement functions. Improvements in both programs will 
be necessary, if not imperative, to ensure that the SEC 
fulfills its investor protection mandate.
    While it is not realistic to think that every fraud will be 
detected, investors have a right to ask, and I think this 
Committee has a responsibility to determine, whether the SEC 
has had its inspection and enforcement priorities wrong. This 
is an effort that you, as chairperson of the Commission, will 
have to undertake, as well, should you be confirmed.
    The next chairman of the SEC faces a difficult task, as you 
know, of undertaking considerable reform of the agency at a 
time of great instability, but this challenge must be met head-
on and undertaken immediately. If the SEC does not increase its 
effectiveness in protecting investors, maintaining fair, 
orderly, and efficient markets, and facilitating capital 
formation, the whole economy will continue to suffer.
    At the same time, Congress will have to tackle the critical 
and far more significant issue of how to reform the entire 
financial regulatory structure. The SEC's place in that 
reformation is not yet clear. Will the SEC remain in its 
current form with its current responsibilities? Will it be 
merged with the CFTC? Alternatively, will the SEC be eliminated 
and its functions parceled out to other existing or new 
agencies, as others have suggested? I believe the severity of 
this current financial crisis demands the consideration of all 
    I hope you agree that the integrity of our financial system 
is paramount and trumps the interest of any individual, agency, 
or group. If that is the case, I believe we will have the basis 
for a productive working relationship as we begin what could be 
the most significant financial reform effort since 1932.
    Our second panel, as Senator Dodd has already mentioned, 
includes four individuals, one nominee to serve on the Board of 
Governors of the Federal Reserve System and three nominees 
slated to serve on the President's Council of Economic 
    Professor Tarullo and his work on banking regulation are 
well known to this Committee. He has testified here many times, 
and he has testified before the Committee on the Basel II 
process that you will all recall. Chairman Dodd and I have long 
expressed great skepticism regarding Basel II, as did his 
predecessor, Senator Sarbanes. The events of the past year have 
confirmed the need for greater scrutiny over bank capital 
requirements. It is clear that existing capital requirements do 
not adequately guard against a systemic crisis. It is also 
clear that Basel II-like standards, which depend on internal 
models using incomplete assumptions, also fail us. I will be 
very interested in hearing, Professor Tarullo, your views 
regarding the future of capital requirements and other 
regulatory reforms.
    I will also welcome the other three nominees who will 
appear on the second panel. They have been nominated, as I 
mentioned, to serve on the President's Council of Economic 
Advisors, Dr. Rouse, Dr. Goolsbee, and Dr. Romer, who if 
confirmed will serve as chairman. The Council provides, as you 
well know, the President with economic analysis and advice on 
the entire range of domestic and international policy issues. 
Because each nominee here brings specific expertise in the 
insights to the Council, I will be very interested in the 
second panel to hear what they recommend and how their views 
comport with their economic philosophies and writings. Dr. 
Romer, as a scholar of the Great Depression, your views will be 
of particular interest at this time.
    I thank all the nominees for their willingness to serve and 
to appear before this Committee this morning and I look forward 
to a broad range of discussion.
    Thank you, Mr. Chairman.
    Chairman Dodd. Thank you very much, Senator.
    Let me welcome our two Members of this Committee, Senator 
Reed and Senator Schumer, for purposes of introduction of our 
nominee. Jack.


    Senator Reed. Well, thank you very much, Mr. Chairman and 
Senator Shelby. You both have laid out daunting challenges that 
face the Securities and Exchange Commission and I feel 
extraordinarily confident that Mary Schapiro will meet those 
challenges based on her experience, based on her intelligence, 
based on her integrity.
    As you both indicated, she has an extraordinary range of 
experience, having served on the Securities and Exchange 
Commission and the Commodities Futures Trading Commission, and 
recently as the head of FINRA. She brings this experience to 
the SEC at a time of great challenge, a time in which morale is 
low, budgets are inadequate, and there has been, I think, a 
handcuffing of their enforcement activities over the last 
several years.
    I know that Mary Schapiro is committed to restoring 
investor protection as the hallmark of the SEC. I know she is 
going to vigorously enforce the laws to protect consumers and 
investors. And she will bring to this great task, as I said 
before, insight, integrity, and intelligence. I am just 
delighted to be able to be here today to commend her to you and 
ask for her swift confirmation so that she can get on with the 
task not only of restoring the ability of the SEC, but also 
this great task of transformation of the regulatory structure, 
not just domestically, but internationally.
    Once again, I can't think of anyone more prepared to do 
this than Mary Schapiro and I commend her to you with 
    Chairman Dodd. Thank you very much, Senator.
    Senator Schumer.


    Senator Schumer. Thank you, Mr. Chairman, Ranking Member 
Shelby, all the Members of the Committee.
    I, too, congratulate Ms. Schapiro on her nomination to 
serve this country as Chairman of the SEC. When we met last 
week, I was very impressed by not only your broad and deep 
knowledge of the securities industry, which I expected, but 
your clear recognition of the problems that the financial 
markets in the entire country are presently facing.
    We need a much stronger regulator than we have had in the 
recent past, and I believe by temperament, inclination, and 
experience, you can become that much-needed stronger regulator. 
You come here with a long background in securities regulation, 
with experience leading many of the major institutions that 
make up our capital market's regulatory system. The trick is 
for you to turn that experience into a regulatory tool box that 
you can use to rein in the perilous excesses of the industry 
while still preserving the entrepreneurial vigor that is the 
hallmark of a free market.
    In other words, you know the world of securities regulation 
as well as anyone out there, and unfortunately, you will need 
every drop of this knowledge to succeed in your new position, 
because we now face a financial crisis as enormous as we have 
ever seen in our lifetimes, and the sad truth is that this 
crisis was caused in good part by the failures of your 
predecessors at the SEC.
    Under the radical laissez-faire ideology of recent 
regulators, we saw explosive growth in precisely those areas 
which were unregulated or under-regulated by the SEC. 
Investment banks were allowed to accumulate enormous amounts of 
risk. Credit derivatives mushroomed to over $60 trillion in 
value. The hedge fund industry saw tremendous growth without 
any transparency. And the credit rating agencies grew, as well, 
as firms issued thousands of undeserved AAA ratings that made 
everyone all too comfortable that these unregulated investments 
were safe and sound.
    Despite all these problems, I believe the SEC has retained 
a strong fundamental ability to be a sound regulator with the 
right leadership. Does it need major reforms? Absolutely, and I 
think in your testimony you show that your priorities are in 
the right place.
    First, the SEC needs a stronger emphasis on finding and 
preventing fraud by bolstering its inspection and examination 
process. The only way the SEC is going to find crooks is if it 
is actively looking for them. The SEC should also follow 
through on former Chairman Donaldson's initiative to have an 
Office of Risk Assessment. We need to update the SEC's tools to 
catch fraud as it is happening by ensuring that it has the 
resources and expertise it needs. This office would help the 
SEC triage its cases and focus on those it determines pose the 
greatest risk.
    Second, I would say, in all due parochialism, these 
preventative efforts should be based out of New York City, as 
we have talked about. It makes no sense to have inspectors, 
examiners, and risk assessors headquartered in
    Washington, DC, when all the activity they need to be 
monitoring occurs on Wall Street. At the same time, moving 
these functions to New York will improve the SEC's ability to 
hire top professionals with the skills and experience to 
unearth fraud.
    Third, we must have regulatory reform to ensure that there 
are no more unregulated pockets that might pose systemic risk 
to our system. In times of crisis, our financial regulators 
should not be playing whack-a-mole, facing unexpected threats 
from unregulated areas that pop up every time they have dealt 
with one crisis. Instead, they must function more like doctors. 
They must be strong, always watchful, always independent 
regulators that can snuff out problems before they grow 
dangerous to the system as a whole.
    We must start by bringing unregulated derivatives into the 
fold. The Fed, SEC, and CFTC have to collaborate further on 
regulatory oversight of clearinghouses. That is something I 
applaud, but we have to be vigilant in ensuring strong 
regulation of these entities and make sure clearinghouses have 
a presence in the United States, where they will be subject to 
the full oversight of our agencies. As we speak, the European 
Commission is debating a policy that would mandate exclusive 
European clearing of certain derivatives. This kind of 
protectionist policy has no place in the modern world and I am 
strongly urging you at all levels to vigorously resist this 
power grab by the EC.
    Finally, we need to improve our regulatory scheme for 
rating agencies. The main problem with these actors was that 
they were inherently conflicted. You can't expect to provide 
unbiased ratings if people paying the salaries are the ones you 
are rating. We would never consider allowing students to pay 
for their grades. Why have we let our banks do essentially the 
same thing? We need to find a way to promote or even require 
alternative funding schemes, such as an investor-funded model, 
which I have been trying to figure out the best way to do that 
and I hope you will work with the Committee on that issue.
    In short, Ms. Schapiro, you face a daunting task ahead of 
you. Major changes in so many areas are necessary, and you will 
be the one leading the charge. I believe you have the right 
experience, the right approach to successfully reform the SEC 
and restore the reputation of our capital markets as the best 
and safest in the world.
    Thank you, Mr. Chairman.
    Chairman Dodd. Thank you, Senator Schumer, very much for a 
very good, comprehensive introduction, and we thank you for 
    I am going to now ask my colleagues if they have any 
opening comments they would like to make. I will ask you, if 
you have prepared statements, maybe to include them in the 
record and keep it relatively brief, given the amount of work 
we have this morning.
    Senator Menendez.


    Senator Menendez. Thank you, Mr. Chairman. I think this 
nomination hearing is one of the most important this Committee 
will hold. We cannot solve the Nation's economic challenges if 
we do not have the ability to have investor confidence, 
transparency, and integrity in the marketplace, and that is why 
this nomination is so critical.
    The Securities and Exchange Commission has broken down and 
it is unclear if it simply needs gas or a whole new engine. 
Either way, something is seriously wrong. The engine light is 
flashing and we can't afford to put it off one more day.
    So I am looking forward to Ms. Schapiro's testimony. The 
SEC is in dire need of a strong leader who is not afraid to 
make drastic changes and tough decisions. Simply moving the 
paperwork from the in-box to the out-box like we have seen for 
the last few years is not going to cut it. We need a strong 
regulator who is willing to go in there and do what is 
necessary to get this agency back on track.
    The SEC should be, and it used to be, about providing 
protections for our investors and our markets. The mission 
statement couldn't be more clear, to protect investors, 
maintain fair, orderly, efficient markets, and facilitate 
capital formation. But the plaque bearing this motto must have 
been put in storage because none of these objectives are 
currently being met.
    Madoff may have gotten the most attention recently, but 
this really is just the tip of the iceberg. Our current 
economic crisis is in no small part due to the failure of the 
SEC. A fundamental lack of scrutiny, oversight, and 
enforcement, fueled by blind ideology, contributed greatly to 
the conditions under which homeowners, consumers, and investors 
have been hit hard.
    Mr. Chairman, the SEC is supposed to be the cop on the 
beat, but it seems to have been off duty for the past few 
years. Without a tough hand, without real oversight and 
accountability, this agency, like the TARP funding, cannot meet 
its objectives.
    So, Ms. Schapiro, I want to hear from you that you are 
willing to take no prisoners and question everything about the 
way the industry does business and the way the government 
regulates it. I think that is going to be critical to get us 
out of the economic challenges we face and I look forward, Mr. 
Chairman, to hearing Ms. Schapiro's remarks and I ask that the 
rest of my statement be included in the record.
    Chairman Dodd. Thank you, Senator. It will be. All members' 
statements will be included.
    Senator Corker.
    Senator Corker. Yes, sir. I am looking forward to the 
testimony and thank you for having the hearing.
    Chairman Dodd. Thank you very much.
    Senator Tester.


    Senator Tester. Thank you, Mr. Chairman. Thank you, Senator 
Shelby, for having this.
    Mary Schapiro, as has been said already here today, you 
come into a time where conditions are bleak and a situation 
where we have had limited regulation at best, a time where it 
seems like every week there was another titan that was going 
down and we had a lot of questions and very, very, very few 
answers to what has transpired.
    All I can tell you is what you already know, and that is 
that we need to reinsert confidence back into the system, into 
the marketplace. You are going to play a critical role in doing 
that. I think you have the skills to get that done, but it is 
going to take a lot of work and it is going to take a lot of 
good people working with you. I wish you the best and I hope 
for a quick confirmation.
    I would ask that the rest of my statement be put in the 
    Chairman Dodd. It will be included.
    Senator Enzi.


    Senator Enzi. Mr. Chairman, I would ask that my complete 
statement be put in the record.
    I am extremely interested in what happened in the Bernie 
Madoff case. I know that some mention has already been made of 
how that is an SEC problem, so I will be interested in how 
similar situations like that can be prevented in the future, 
but I would also like to hear how with Ms. Schapiro's 
experience as a regulator with both NASD and the Financial 
Industry Regulatory Authority, how they missed that scam when 
so many on Wall Street seemed to know about it. I am also 
interested in hearing your opinions about the credit rating 
agency registration system, because we have been working on a 
bill to take care of that. I will have some questions with the 
second panel, as well, but I will reserve it for questions.
    Chairman Dodd. Thank you. It will be in the record.
    Senator Warner, welcome.


    Senator Warner. Thank you, Mr. Chairman. I just want to 
very briefly say I am really looking forward to working with 
you and Ranking Member Shelby and all the Members of the 
Committee. This is my first hearing, so I will keep it brief, 
other than the fact that in a prior life, I did spend many 
years from the financial side interacting with the SEC, so I 
have got a lot of questions and ideas that I will reserve for 
question time.
    But thank you and I am looking forward to working with you.
    Chairman Dodd. Thank you very much.
    Senator Bennett.


    Senator Bennett. Thank you very much, Mr. Chairman.
    I don't have any pearls of wisdom other than to reflect on 
some of the comments that have been made that sounds like the 
entire solution to all of our economic problems are now lying 
on the doorstep of Mary Schapiro. I don't think that is true. I 
don't think the SEC is solely responsible for our difficulties, 
nor do I expect her to individually solve them all.
    But I enjoyed my visit with her when she came by. I think 
she is very well qualified for this position and appreciate the 
prompt calling of a confirmation hearing. I intend to support 
her nomination.
    Chairman Dodd. Well, thank you very much, Senator.
    Let me just say that if other colleagues arrive to 
introduce some of the nominees we have forthcoming, I will 
probably interrupt the hearing in order to accommodate them, 
but that is not being the case right now, so Ms. Schapiro, what 
I would like to do is have you stand and I would like you to 
swear or affirm your presence here this morning. Raise your 
right hand.
    Do you swear or affirm that the testimony that you are 
about to give is the truth, the whole truth, and nothing but 
the truth, so help you, God?
    Ms. Schapiro. I do.
    Chairman Dodd. And do you agree to appear and testify 
before any duly constituted Committee of the U.S. Senate?
    Ms. Schapiro. I do.
    Chairman Dodd. Welcome. It is nice to have you with us. 
Before we hear your statement, I think I noticed some people 
behind you who might be members of your family, or some 
geniuses in the securities area here, maybe both. Do you want 
to introduce them?
    Ms. Schapiro. I would be happy to. Thank you, Senator. My 
daughter, Molly Cadwell, my daughter, Anna Cadwell, and my 
husband, Chas Cadwell.
    Chairman Dodd. Welcome. We are delighted to have you with 
us here today. Are you missing school today, are you, for this?
    Senator Shelby. Oh, yes. They are smiling.
    Chairman Dodd. So the longer the hearing goes, the less 
time you have to go to school? Is that how it works?
    Ms. Schapiro. There is a certain math test that is being 
avoided today.
    Chairman Dodd. All right.
    Senator Shelby. Postponed, maybe.
    Ms. Schapiro. Postponed.
    Chairman Dodd. Well, we are delighted to have you here, and 
as we have all said here, I don't think any of us expect you to 
answer all of the issues that face our country, but it is a 
critical position. I think you know that and our conversations 
reflect that, so I am anxious to hear your statement and then 
engage in some conversation about where we are.



    Ms. Schapiro. Thank you very much, Mr. Chairman. Senator 
Shelby, Chairman Dodd, and Members of the Committee, it is an 
honor to appear before you today as President-elect Obama's 
nominee to serve as Chairman of the Securities and Exchange 
Commission. I also want to thank Senators Schumer and Reed for 
their very kind introductions, and all the Members of the 
Committee and your staff, who have been so generous with their 
time and advice during this confirmation process.
    As Senator Schumer mentioned, I grew up in New York, a 
short train ride from Manhattan but miles away from Wall 
Street. My father was a printer, my mother a librarian. Like 
millions of families, my parents worked hard to save enough to 
buy a home, send their children to college, and have a secure 
retirement. They taught my siblings and me right from wrong and 
that we could get ahead by working hard and playing by the 
rules. And perhaps that why I have spent my career at the SEC, 
the CFTC, and most recently FINRA committed to building a 
financial regulatory system that protects investors and 
supports and strengthens free and fair markets.
    We cannot underestimate the situation we are now in. The 
credit markets have collapsed. Trillions of dollars of wealth 
have been lost. Our economy is in recession and investor 
confidence has been badly shaken. Middle-class families who 
were relying on that nest egg to send a son or a daughter to 
college or for a secure retirement don't know where to turn. 
There are many reasons for this crisis and one of them is that 
our regulatory system has not kept pace with the markets and 
the needs of investors.
    It is precisely during times like these that we need an SEC 
that is the investors' advocate, that has the staff, the will, 
and the resources necessary to move with great urgency to bring 
transparency and accountability to all corners of the 
marketplace, to vigorously prosecute those who have broken the 
law and cheated investors, and to modernize our country's 
regulatory system to match the realities of today's global, 
interdependent markets.
    These urgent responsibilities would fill any agenda, Mr. 
Chairman, but allow me to highlight a few of my top priorities. 
First and foremost, if confirmed as Chairman, I will move 
aggressively to reinvigorate enforcement at the SEC. With 
investor confidence so shaken, it is imperative that the SEC be 
given the resources and the support it needs to investigate and 
go after those who cut corners, cheat investors, and break the 
    As the first SEC Chairman, Joseph Kennedy, told the Nation 
75 years ago in explaining this new agency's role, quote, ``The 
Commission will make war without quarter on any who sell 
securities by fraud or misrepresentation.'' I look forward to 
working closely with you and Members of the Committee to ensure 
the SEC has the capability to fulfill this critical mission as 
well as to perform all of its other important duties.
    Second, I want to reengage the SEC with the people we 
serve, namely investors. The investor community, from the 
largest pension fund to the family who has scrimped and saved 
in their 401(k) or 529 plan, needs to feel they have someone on 
their side, that they can go to the SEC for advice, to seek 
redress, or to have their opinions heard.
    Third, as I work to deepen the SEC's commitment to investor 
protection, transparency, accountability, and disclosure, I 
also want to ensure these commitments are preserved in any 
regulatory overhaul that may be undertaken. Indeed, as a member 
of the President's Working Group on the Financial Markets, I 
hope I can offer its members, the administration, and Congress 
both the benefits of my years as a regulator as well as the 
decades of experience the professionals at the SEC have in 
these areas.
    The American people want and expect us to update the 
regulatory system that has failed them and to prevent the kinds 
of abuses that have contributed to the economic crisis we now 
face. I assure you that I will always keep their concerns front 
and center.
    Seventy-five years after the SEC was founded, the 
Commission finds itself in a situation where, once again, it 
must play a critical role in reviving our markets, bolstering 
investor confidence, and rejuvenating our economy. I am under 
no illusion that this will be an easy job. There is a lot of 
work to be done quickly and diligently in the months ahead.
    But I look forward to this challenge, to helping the 
millions of investors who rely on strong markets and a strong 
economy, and to working with the professionals at the SEC and 
the members of this Congress. To be entrusted with leading the 
SEC at this moment would be a great honor and I am grateful for 
your consideration.
    Thank you, Mr. Chairman, Senator Shelby, Members of the 
Committee, and I am very happy to answer your questions.
    Chairman Dodd. Well, thank you very much, Ms. Schapiro. We 
appreciate again your willingness to serve.
    Let me begin. What I will try and do is I will make it, 
say, around 10 minutes a round, and I won't be rigid about that 
since there is not a full complement of the Committee here, but 
we will try and move along and get as many people involved as 
    Let me begin with--you and I talked about this in the 
office the other day, with the Madoff situation, which has been 
the subject of some discussion. Let me just, as background, and 
you can correct me if I misstate this, but this is as I 
understand it. The Madoff firm was a registered broker dealer 
in 2006. It also registered as an investment advisor. During 
this period, NASD and later FINRA performed periodic exams, but 
never found, or apparently according to FINRA's staff, looked 
at the potential individual investments that people made with 
Madoff. They looked at brokerage operations and not the 
advisory activities--and again, that is the role of FINRA, I 
understand that--as if they were two separate entities.
    However, SIPC has said there was only one firm, the 
brokerage firm, not a separate investment advisor, and 
defrauded investors made checks payable to Madoff Firm. All of 
the advisory staff were brokerage employees, and the SIPC is 
playing claims based on their finding that the defrauded 
investors were clients of the SIPC-insured broker.
    And I went back and looked, and again, reading the role, 
FINRA has broad examination authority--and obviously you know 
all of this but let me just repeat it here--has broad 
examination authority over its broker dealer members. Under the 
Securities Exchange Act of 1934 and FINRA's own rules, Section 
8210, which gives FINRA the right ``for the purpose of 
investigation or examination to require a member, a person 
associated with a member, to provide information orally, in 
writing, or electronically, or to testify and to inspect and 
copy the books, records, and accounts of such member or person 
with respect to any matter involved in the investigation, 
complaint, examination,'' end of quote.
    Madoff Investments was the member and Bernie Madoff was an 
associated person. How do we respond to that?
    Ms. Schapiro. I think, Mr. Chairman, one of the real 
lessons of this tragedy, is that we have this stovepiped 
approach to regulation that allows misconduct to take place out 
of the sight of at least some of the regulators. As you point 
out, FINRA had jurisdiction over Madoff's broker dealer 
activities, but not over its investment advisory activities. 
The investment advisory activity did not run through the books 
of the broker dealer, which is what FINRA was examining. And in 
fact, the SEC required Madoff's investment advisory activities 
to be separately registered in an investment advisor in 2006. I 
would also add that FINRA didn't have access to any tips, 
directly--and no tips were shared by the SEC with FINRA.
    I think the bigger issue here and one that I have 
repeatedly expressed concern about, including, frankly, as 
recently as August with the Chairman of the SEC, is that there 
is an increasing migration of financial activity out of 
regulated broker dealers, where there is an SEC, FINRA, other 
SROs, and State involvement in the regulation, to investment 
advisors, where there are far fewer resources available for 
inspection and oversight. The SEC has not shared our view that 
this is something to be concerned about, this migration of 
activity out of the more closely overseen broker dealer side of 
the industry.
    Chairman Dodd. Well, let me ask you this. If confirmed, and 
in light of the Madoff experience, are there actions you would 
pursue, and let me identify several and ask you to comment on 
them. One, to increase the effectiveness of broker dealer 
examinations by FINRA and the SEC? I think you suggested the 
answer to that in your response to my question.
    Number two, to improve the use of tips by the SEC staff.
    Three, to increase the quality of audit opinions rendered 
for non-public broker dealers?
    And fourth, to ensure for the impartial administration of 
the Federal securities laws that prominent individuals are 
subject to the same standards as all other market participants.
    Ms. Schapiro. I can answer unequivocally that I would 
explore and hope to move very aggressively with respect to all 
of those. I think the effectiveness of the examination programs 
for broker dealers and investment advisors, and rating 
agencies, frankly, needs to be carefully examined and 
significantly bolstered going forward.
    With respect to tips and whistleblower complaints, if I am 
confirmed, within the first couple of weeks, I would like to 
create an entirely new process within the Commission so that 
these matters are centralized, they don't reside out in 
multiple offices but rather come to a central, fairly senior 
point of contact within the agency where they then can be 
staffed, examined, pursued, tracked, and reported to the 
Commission so that we have an understanding of exactly what 
kind of intelligence is coming into the agency and how it is 
being followed up on by the staff of the agency.
    The quality of audit opinions with respect to non-publicly 
held broker dealers, particularly those who have custody of 
customer assets, whether securities or cash, I think needs to 
be addressed very quickly. We may need a legislative fix to the 
PCAOB's authority in order to do that. I would absolutely 
support that.
    And finally, with respect to impartiality, my belief is 
there can be no sacred cows. We have to go with full force and 
fervor against anyone who violates investors' trust, large or 
small, regardless of their standing in the investment 
    Chairman Dodd. Well, thank you for that. And let me just 
say, by the way, and we have talked about this, as well, and 
Senator Shelby and I have discussed this, as I see it, the role 
of this Committee, we have a lot of work to do. Obviously, we 
are going to be watching very carefully the TARP program, 
assuming that we go forward with that, but obviously we want to 
know how that is working. That will be a major function of the 
Committee, an ongoing one.
    But also the very important track for us is the 
modernization of the regulatory structures in this country, and 
this is a huge set of issues with a lot of work to do, but it 
is a major obligation, I think, of this Committee and this 
Congress and this administration to do so in light of the 
events that have occurred. So we are going to be looking to 
working with you very closely on these issues, because the role 
of the SEC is critically important in all of that. So I will be 
very anxious to follow up and would ask you to keep our 
Committee and staff well informed as to the progress on these 
matters, if confirmed, that you just mentioned.
    The last point I will touch on and then turn to Senator 
Shelby, because we have a lot of issues to talk about, the 
credit rating agencies which Senator Enzi has raised and others 
have, as well, has been a constant issue of concern for us as 
we look back as to what happened. Senator Schumer's analogy of 
having students pay for their grades was a pretty good one in 
trying to describe what was going on. And I have thought a lot 
about this, as others have, as well, and I am still stymied a 
bit as to what is the best answer.
    I know many say, well, let the purchasers of the 
information pay for it, but I can identify conflicts where that 
can occur, as well, just as there would be with those who are 
selling the information have an obvious conflict.
    Just as a throw-out, let me ask you, what is your reaction 
to something like a FASB approach, or is there a need, even, 
for credit rating agencies? Have we reached a point where maybe 
there is a different system we ought to be thinking about to 
actually rate these securities?
    Ms. Schapiro. I think there probably will always be a 
desire to have some sort of truly independent third-party 
evaluation about the credit quality or other aspects of 
particular financial assets, so I guess I wouldn't go so far as 
to say we don't need credit rating agencies at all. We don't 
need broken ones. We don't need ones that give us bad 
information. That is very clear.
    I think there are a lot of interesting ideas out there 
about how to deal with the really serious conflicts of interest 
that manifest themselves so clearly in the compensation models 
that currently exist. One I have heard about is the idea of 
having exchanges as part of their listing fees, collect a small 
transaction fee for every trade that could then form a pot of 
money that could be used to pay for the ratings so that they 
are paid for by an exchange. A similar concept, I think, would 
be to have a FASB or a PCAOB sort of oversight body that then 
assessed a fee, compensated the rating agency so that the 
issuer wasn't directly compensating them, the idea that you 
    I think there are a lot of very creative ideas out there. I 
think they are all worth exploring, because fundamentally, 
until we deal with the compensation model, we are not going to 
deal with the conflict of interest and people are not going to 
have confidence that the ratings are worth relying on, worth 
the paper they are printed on.
    I also think we have to deal with the SEC's oversight of 
rating agencies. And again, a PCAOB model may be very helpful 
there. You could almost have resident examiners inside rating 
agencies really understanding what is happening, following up 
when ratings fail, pushing out disclosure about the reasons for 
the failures.
    So I think there is fertile ground there for us to explore 
and I would be very anxious to do that with the Committee.
    Chairman Dodd. We need to do it soon, in my view.
    Ms. Schapiro. I understand.
    Chairman Dodd. Senator Shelby.
    Senator Shelby. Thank you, Chairman Dodd.
    I am going to pick up on the rating agencies because I 
think, Ms. Schapiro, that they are central to any regaining of 
trust in our securities industry. The problem as I see it 
today, among other things, but the central problem is lack of 
trust, not just consumers' lack of trust in the banking system 
and securities, banks to banks. They don't trust. They don't 
know what is in those other banks' portfolios. They don't want 
to borrow any money from each other as they traditionally have 
    We see this morning's headlines where one of our largest 
banks has got to have a big injection if they are going to go 
through with a deal they made. So there is something deeply, 
deeply wrong, as you know, in our securities and banking 
system. Trust is central to it.
    The rating agencies used to mean something. They used to. 
Gosh, I have small banks that used to buy securities. Well, 
they are not buying right now. They are scared. They are 
solvent, but small.
    As long, I believe, as long as we have got the conflicts of 
interest and rating agencies--and they have told me and they 
have testified before this Committee that basically their 
opinion, they are just giving their opinion. I said, really? 
You are just giving your opinion, but you are paying for it and 
it has meaning of whether those securities are rated investment 
grade or whatever they are rated, and they have meaning in the 
marketplace. Well, we are just giving our opinion. I said, 
well, what if I gave my opinion? It wouldn't mean anything. And 
today, their ratings are meaning less and less.
    So I think you are going to have a great opportunity and we 
are going to have a great opportunity to do some right things. 
I hope that we do the right things. I hope that we are not 
going to be timid, because if we don't do it, where are we 
going to be? We have lost our opportunity.
    I want to pick up on the regulatory forum. You know, I know 
that we have got to face reality here. I never thought that I 
would say this, but I think we have got to visit insurance. 
Look at AIG. Who regulated AIG? Primarily, the New York 
Insurance Commission. My gosh, does anybody in this room 
believe that the New York Insurance Commission knew anything to 
speak of of the risk they were taking, they had on their books? 
Why, the answer is obviously no, and so forth.
    But you will be playing in those recommendations. We will 
be in the arena here trying to implement a new, different, and 
effective regulatory structure. We have to do it right. What, 
in your opinion, should be the role of the SEC? I mentioned 
earlier some people say we ought to merge the SEC into what, 
into this and that. I personally don't have a lot of confidence 
in the Federal Reserve. I don't have a lot of confidence in a 
lot of our regulatory agencies today, and I think for good 
reason. And if you poll the American people, gosh, I don't know 
where it would be, but it would be low, low, low.
    So what is the role you think the SEC should play in the 
future? And you come out of the CFTC, too. Most of the things, 
not all, as you know, that are traded on CFTC have to do with 
financial instruments, securities and so forth, which 
traditionally have come under the SEC or come under the 
jurisdiction of this Committee and so forth. Do we have too 
many regulatory bodies? Are they too stovepiped, as you alluded 
to earlier? What is the role you think the SEC should play, and 
where should we go?
    Ms. Schapiro. That is a great question. I think I have a 
couple of principles that guide me in thinking about regulatory 
reform and there will be lots and lots of suggestions, lots of, 
I expect, fascinating debate about exactly where do we move the 
different boxes that currently exist and how do we align them.
    But in terms of the principles that I think should guide 
our discussion, the first is that all systemically important 
products--credit default swaps, as an example--and all 
systemically important financial institutions, need to come 
under the regulatory umbrella so that we eliminate the gaps 
that exist with large players and products not being part of 
the regulatory regime. That has clearly been one of the issues 
that we have seen over the last year in particular.
    But I also think we have to think about the roles of the 
existing agencies, whether or not they continue to exist, and 
how we preserve those important roles. We have to have and 
continue to have the kind of focus on systemic risk that the 
Fed has brought to the debate over the last year, and an 
institution like the Fed being responsible for protection of 
the system from a systemic perspective.
    From my perspective, though, we don't need to just monitor 
risk and understand the safety and soundness of our financial 
system. We must continue to protect investors. So the functions 
of the SEC must continue to be fulfilled. The protection of 
investors, the inspection of investment companies, mutual 
funds, investment advisors, the full and fair disclosure by 
corporate issuers of relevant information, the exchange 
regulation and oversight, all of those functions need to 
continue to exist in, whether it is the SEC as we know it today 
or the SEC as a larger agency, potentially combined with other 
agencies, or an entirely new structure that we haven't devised 
yet. Those functions all matter enormously to the integrity of 
our capital markets and to the confidence that investors can 
have when they are allocating their capital. So we have to 
preserve the functions. We have got to get them better aligned 
and we have to fill the gaps.
    Senator Shelby. What do you believe should be the role of 
the SEC in the future in regulating credit default swaps?
    Ms. Schapiro. Well, I absolutely believe that credit 
default swaps need to come under the umbrella of Federal 
regulation, and we need a centralized clearinghouse for these 
transactions so that we can have transparency, we can eliminate 
or minimize counterparty risk, we can assure there is 
sufficient collateral, margining positions. I think the SEC 
needs to work very closely with the CFTC and with the Fed and 
the Treasury to ensure that we don't create another regulatory 
gap or we have a lack of understanding about which agencies 
will play which roles with respect to overseeing these 
    Senator Shelby. What do you think the role should be in the 
future on insurance companies that play in the field, such as 
AIG and others, but AIG is the big one, that put our whole 
system at risk?
    Ms. Schapiro. Well, I believe, and this is a little bit 
outside my purview, that we should have Federal oversight of 
insurance companies and particularly those that create systemic 
implications, like an AIG, should be under the Federal 
regulatory umbrella. This is not to suggest there might not 
also be a role for State insurance regulators----
    Senator Shelby. Sure.
    Ms. Schapiro. ----but that we have to, at the systemic 
level, have a better understanding of what is going on in those 
    Senator Shelby. Do you believe that any of the Federal 
regulatory people had any real inkling of what was going on in 
the insurance field that helped bring about where we are today?
    Ms. Schapiro. I really can't speak to that, having not been 
in the Federal Government for a long time. I just don't know 
the answer to that.
    Senator Shelby. You hadn't seen any evidence of that, have 
    Ms. Schapiro. No, I can't say that I have.
    Senator, if I could actually go back to your credit rating 
agency question----
    Senator Shelby. Yes. That is what I was going to do.
    Ms. Schapiro. ----I think you made a very important point. 
For the credit rating agencies to suggest that it is just their 
opinion is a little bit unnerving, to say the least. The 
requirement for credit ratings is written into a number of 
Federal rules and requirements, so I think it is more than just 
one man's opinion, so to speak, when they issue a rating.
    I think one of the things we have to explore is ways in 
which to make the capital regime for financial institutions not 
so dependent upon changes in credit ratings because they are 
very vulnerable and it has enormous implications when there is 
a credit rating change for the capital of the institution. So I 
think that is something that, working with the other 
regulators, we really need to explore.
    Senator Shelby. Picking up on something Senator Dodd raised 
earlier and Senator Schumer, the conflicts of interest and the 
basic ethics of the credit rating agencies, how are we going to 
eliminate, or what would you recommend or think about 
recommending or consider dealing with the conflicts? We have 
got to deal with the conflicts. If I hire S&P or Moody's to be 
my consultant and show me how I can do this and that to get an 
investment-grade rating or even a higher rating, they obviously 
have a conflict of interest.
    Ms. Schapiro. That is right. I think the compensation 
model, the traditional model that they utilize where the issuer 
pays for the rating is really at the heart of the conflict 
problem, and that is why I would be very interested to explore 
whether there are some quite dramatic things that could be done 
differently, a FASB or PCAOB type of model for compensation.
    Senator Shelby. It looks like things are for sale in the 
    Ms. Schapiro. Exactly right.
    Senator Shelby. And that undermines the whole integrity of 
the marketplace, as I understand it.
    Ms. Schapiro. That is right, and if you want someone to buy 
your rating, again, you understand that when you issue your 
rating in the first instance.
    Senator Shelby. And it is more than a perception.
    Ms. Schapiro. I believe that is right.
    Chairman Shelby. Thank you, Senator Dodd.
    Chairman Dodd. Thank you very much, Senator.
    Senator Reed.
    Senator Reed. Well, thank you very much, Mr. Chairman, and 
Senator Shelby has covered so many important questions that I 
feel I will sort of be duplicative, but if you would allow me.
    With respect to hedge funds, there was an initiative by the 
Securities and Exchange Commission to have these funds of a 
certain size register, in particular the ones that have 
significant influence in the marketplace. What is your view 
toward the greater transparency in the hedge funds?
    Ms. Schapiro. Well, I would absolutely support proceeding 
again with registration of hedge funds so that we could have a 
much better handle on who is out there and what they are doing. 
We should have better and stronger checks and balances and 
appropriate disclosure, at an absolute minimum.
    Senator Reed. And you and your staff will be working on the 
appropriate items of disclosure so that you could get an 
adequate picture of their operations?
    Ms. Schapiro. Absolutely.
    Senator Reed. And if this required legislation, you would 
quickly contact us?
    Ms. Schapiro. We will. I guess I would like to express 
generally my view that the laws are made here, and when the SEC 
needs help with the laws, I expect that we will be here often 
seeking that help.
    Senator Reed. Thank you. Senator Shelby has asked some very 
insightful questions about credit rating agencies and I will 
just simply note that this is a concern of everyone here. Your 
efforts to look a the agencies would be very useful. I know 
there are several at least preliminary proposals legislatively 
that are here and so we will be collaborating with you on that 
effort, also.
    In addition, as you indicated to Senator Shelby, the credit 
default swap issue, I know under the leadership of the New York 
Fed, the clearinghouse notion was moving. Are there any further 
comments you would like to make about, other than the need for 
them, any specifics?
    Ms. Schapiro. I have long been an advocate, frankly, since 
1994, for a mechanism to bring swaps--credit default swaps 
didn't actually exist at that time, but other swap transactions 
into a clearinghouse mechanism so that there would be 
assurances about the collateral that was supporting the 
positions and the minimization of counterparty risk. So I am 
strongly in favor of the efforts that have been undertaken to 
develop the clearinghouses. I think it is very important that 
there be strong oversight of those clearinghouses so that we 
have a level of confidence that they will be there and able to 
withstand the potential for any defaults that take place.
    Senator Reed. The Enforcement Division of the SEC has been 
an area of great concern. Senator Dodd and I contacted GAO. 
They are finalizing a report. But the general impression, I 
think, and an accurate one, is that they have been hobbled over 
the last several years. One aspect of this was a procedure 
where a penalty would have to be approved essentially by the 
Commission. I would hope that that procedure could be quickly 
abandoned and that the Enforcement Division could be given the 
direction to fairly but aggressively enforce the law.
    Ms. Schapiro. I would hope, if I am confirmed, Senator 
Reed, that one of the first things I will do will be to try to 
take the handcuffs off the Enforcement Division. The Penalty 
Pilot Program is an issue, but there are a lot of other 
procedural hurdles that have really been placed in the way of 
the Enforcement Division moving aggressively to issue subpoenas 
and get investigations initiated and I would plan to look at 
those immediately.
    Senator Reed. Another area that has been mentioned by 
Senator Schumer in his opening comments was the Office of Risk 
Assessment which Chairman Donaldson created, I think very 
perceptively. In fact, it perhaps could have been very helpful 
in the run-up to this crisis. What is your view about the 
Office of Risk Assessment?
    Ms. Schapiro. I think it is absolutely essential to 
reconstitute the Office of Risk Assessment. It has never really 
been fully staffed and fully equipped with the tools that it 
needs. When you have hundreds and hundreds of examiners, as the 
SEC does, that are unconnected to a really robust risk 
assessment process so you know where to send the examiners in 
order to have them focusing on the issues of greatest 
importance, that is a real problem, in my mind. So I would like 
to build an Office of Risk Assessment and I would like to have 
Risk Assessment permeate really everything the SEC does. There 
will never be enough resources to do everything, so we have to 
be able to focus on those areas of risk where we have investors 
at most danger.
    Senator Reed. Much of what you are going to do will have 
complications and consequences overseas as well as here in the 
United States, and one of the areas is the IFRS road map. We 
have repeatedly written to Chairman Cox to try to determine and 
develop a very deliberate road map. I think there was a rush to 
judgment on this issue. In fact, I met with the CEO of 
Honeywell Corporation who says similar concerns about disparate 
accounting treatment on the international rules that can be 
used to change income, can be used to treat R&D expenses 
differently. There is a host of potential, I hesitate to say--I 
won't. There is a potential arbitrage of the two systems which 
I think we have to avoid.
    Can you give us a notion of how you would like to proceed 
with this international accounting movement, with the 
recognition I think we all have that in the global economy, 
eventually, standards hopefully will converge to high levels.
    Ms. Schapiro. Well, I would proceed with great caution so 
that we don't have a race to the bottom. I think we all can 
agree that a single set of accounting standards used around the 
world would be a very beneficial thing, allowing investors to 
compare companies around the world. That said, I have some 
concerns about the road map that has been published by the SEC 
and is out for comment now and I have some concerns about the 
IFRS standards generally. They are not as detailed as the U.S. 
standards. There is a lot left to interpretation. Even if 
adopted, there would still be a lack of consistency, I believe, 
around the world in how they are implemented and how they are 
    The cost to switch from U.S. GAAP to IFRS is going to be 
extraordinary, and I have seen some estimates that range as 
high as $30 million for each U.S. company in order to do that. 
This is a time when I think we have to think carefully about 
whether imposing those sorts of costs on U.S. industry really 
makes sense.
    Perhaps, though, my greatest concern is the independence of 
the International Accounting Standards Board and the ability to 
have oversight of their process for setting accounting 
standards and the amount of rigor that exists in that process 
    I will tell you that I will take a big deep breath and look 
at this entire area again carefully and will not necessarily 
feel bound by the existing road map that is out for comment.
    Senator Reed. One area of mutual concern that you have and 
I have is the independence of the International Accounting 
Standards Board. Under the Sarbanes-Oxley Act, we thought we 
created a very clear rule that American public companies 
couldn't operate under standards promulgated by a non-
independent entity. That interpretation was not shared by the 
previous Commission. I would like very much for you to review 
that and indicate to us whether your view is--whether we need 
sufficient additional legislation to clarify that there must be 
an independent board.
    Ms. Schapiro. I will be happy to do that.
    Senator Reed. I believe that you have been very concerned 
about proxy access. Can you give us a notion of your priorities 
with respect to proxy access?
    Ms. Schapiro. I would be happy to. You know, the SEC has 
taken a couple different tacks with respect to proxy access 
over the last year and I think it is an area that is really 
calling out for some clarification and some clear direction. 
Forty of the largest markets outside of the United States allow 
investors or shareholders of some size and some duration access 
to the proxy. I think it is time for the United States to step 
into that club, and again, the devil will be in the details. 
But I think it is time for us to have a well-crafted, rational 
approach to the proxy for long-term large shareholders in the 
U.S. and I am prepared to sit down with my fellow Commissioners 
quickly and begin that discussion.
    Senator Reed. I think one of the contributing factors in 
the current economic crisis, and there are many, is the 
compensation schemes developed by companies. I know this is 
something not directly related to the responsibility of the 
SEC, but I think creatively and collectively, we might want to 
think about how we monitor those and how we ensure that they 
don't provide the kind of incentives for risk taking rather 
than compensation for wise judgments. That is just a general 
point that I would hope you would consider because I think it 
is hard to pick out a precise statute or precise even agency 
that would be charged with that. It is typically up to 
management, but management ought to be much more sensitive, I 
think, to these compensation schemes.
    Ms. Schapiro. I agree with that.
    Senator Reed. Just for the record, mutual recognition of 
Australia, fast, slow, medium?
    Ms. Schapiro. Well, I have shared with you and then shared 
with the SEC over the past year some concerns with the speed 
with which mutual recognition and amendments to rule 15(a)(6) 
have proceeded that allows foreign broker dealers access to 
U.S. investors at virtually a retail level without the 
protections that exist in the U.S. regulatory regime. So it is 
another area where I think we need to take a big step back and 
look at whether we are headed in the right direction. Again, I 
want to ensure that U.S. investors' protections are maximized 
going forward, not that they are compromised.
    Senator Reed. Thank you very much. Thank you, Mr. Chairman.
    Chairman Dodd. Thank you, Senator. I thank the Senator for 
raising the issue of the proxy access issue, as well. I have a 
strong interest in that, as well, and will be looking forward 
to further developing your thoughts on that. It has been a 
subject of some debate and discussion over the last number of 
months and it is one we are going to come back to on the 
    Senator Enzi.
    Senator Enzi. Thank you, Mr. Chairman, and I appreciate 
your questions and, Ms. Schapiro, your answers on the proper 
role of the SEC in the future, also Senator Shelby's questions 
about credit default swaps and the derivatives market and 
everybody's questions about credit rating reform. We have all 
been involved in that and I will have some additional questions 
on that, but I will submit them in writing. They are more 
detailed and I have found that that and accounting questions 
put people to sleep around here. I appreciate Senator Reed's 
questions about the converging of the accounting standards, and 
again, I will have some more detailed questions on those.
    As I mentioned in my brief opening remarks, I think one of 
your strongest assets is your career in the financial 
regulatory experience. Securities regulation is a complicated 
subject and the Chairman of the SEC should be well-versed in 
the language of finance. But I am very concerned about the 
growing scandal of Madoff and his investment fraud. As the 
chief executive of the financial industry regulatory authority, 
how did that expansive fraud scheme slip past the radar and 
when did your agency first receive notice about that possible 
fraud and what did you do with the information?
    Ms. Schapiro. Senator, I can't really speak to the SEC's 
handling of this matter. I have not had direct conversations 
with them. I am anxiously hoping to do that, as well as to 
receive their Inspector General's report on what went wrong 
    With respect to FINRA's responsibility, as we talked about 
a little bit earlier, one of the real lessons, I think, from 
this tragedy is the fact that we have this stovepipe regulatory 
regime where some misconduct can be hidden from at least some 
of the regulators some of the time. FINRA focused on the broker 
dealers' books and records. The investment advisory activity, 
the Ponzi scheme, didn't run through the books of the broker 
dealer. They were kept in separate books for the money 
management business. As a result, FINRA was not aware of the 
investment advisory fraud. FINRA also had not received any 
tips, either directly from anybody, nor did the SEC share those 
tips with FINRA.
    I think one of the lessons, in addition to the stovepipe 
problem of regulation, is that financial regulators, frankly, 
need to cooperate a whole lot more closely than we have 
historically. There has sometimes been a little bit of 
competition. There has sometimes been a little bit of jealousy 
about who gets to bring a case or who is the first mover. We 
need to think of the financial markets, policing as a community 
and our efforts as community policing and cooperate a lot more 
effectively in sharing whatever intelligence we have between 
State and Federal and self-regulatory organizations in order to 
make sure we have the maximum number of eyes looking at an 
institution or a problem at any given moment.
    Senator Enzi. So you are saying that you found out about it 
about the same time that the rest of us did?
    Ms. Schapiro. Yes.
    Senator Enzi. OK. I do have to ask an accounting question. 
In the fall, the Senate Banking Committee heard testimony about 
mark-to-market accounting and its ineffectiveness in pricing 
assets in a frozen market. In response, FASB and the SEC issued 
guidance clarifying how firms should price liquid assets. Do 
you believe this guidance is sufficient, or should the SEC 
revisit the mark-to-market accounting method for 2009 and 
    Ms. Schapiro. Well, as you know perhaps better than anybody 
in this room, the integrity of our accounting standards and the 
quality of our corporate disclosure is absolutely essential. It 
is the foundation of our marketplace.
    I think investors, as I have read what people have said, 
generally believe that fair value accounting, mark-to-market 
accounting, has provided transparency to the marketplace and 
enables better decisionmaking by investors. That said, I think 
there are circumstances in which hard-to-value assets are 
written down and have real implications for business as a 
    The SEC has just published its fair value accounting 
report, just about 2 weeks ago, I think. They make a number of 
recommendations in that report which I am anxious to study. I 
have read it. I am anxious to study in detail and see if there 
are further issues that should be addressed by the SEC with 
respect to fair value accounting. I know there is a 
recommendation for further guidance for some alternative 
approaches, perhaps, with respect to assets where there is no 
ready market or no readily ascertainable value, whether there 
can be additional disclosure that would be helpful to people in 
understanding what the true value of those assets might be. So 
it is an issue I will get immersed in quickly.
    Senator Enzi. Excellent. I will have some more detailed 
questions on all of those things----
    Ms. Schapiro. Thank you.
    Senator Enzi. ----but I will go ahead and yield the balance 
of my time.
    Chairman Dodd. Thank you very much, Senator.
    Senator Warner.
    Senator Warner. Thank you, Mr. Chairman.
    Ms. Schapiro, I have got two broad-based questions and if 
you could respond to both, I would appreciate. I share Senator 
Shelby and Senator Reed's concerns that you have voiced, as 
well, that some of these new tools that have developed, the 
credit default swaps, hedge funds, failure to have any 
regulatory oversight on those new tools. You made mention in 
your opening comments some of the migration taking place from 
some folks from the broker dealer coverage to the financial 
advisor coverage.
    How do we get--and with your comments, as well, about the 
stovepipe regulations. How do we get that broad-based 
regulatory oversight? And even if we take care of some of these 
new tools, do you have any thoughts on as the capital market--
never underestimate the capital market's ability to create new 
tools, is there any kind of proactive effort, not that would 
stymie the flow of capital by any means, but proactive effort 
to make sure that whatever the next decade's credit default 
swaps, we are not then coming back and revisiting years later.
    So, first, how do we get everybody underneath that 
regulatory umbrella, and second, and as we discussed a little 
bit earlier, even if we get everyone under the regulatory 
umbrella, it seems that a lot of the crisis that we are 
currently confronting comes about as the market has tried to 
price the credit risks of debt and we have seen the market 
continue to move forward in terms of becoming more and more 
efficient on pricing that last tranche of two, five or 10 
percent of a debt instrument. The question I know we discussed 
privately was, at some point, is the social utility of pricing 
that last two to 5 percent worth all of the side bet risks that 
now the system has taken on, and should you be confirmed, even 
if we have got these entities within some types of regulatory 
oversight, is regulation and transparency enough, or in some 
cases do we actually have to look at bright-line prohibitions 
on some of these tools?
    Ms. Schapiro. A very good question. I think the way we 
bring all of these products and institutions under the 
regulatory umbrella is by having an approach that has us look 
at what is systemically important that needs to be under the 
purview of a regulator that has the authority and the 
capability to assess the risks in the system and deal with 
those through capital, leverage limitations and other sorts of 
    And then I think the other way we do it is, at the same 
time, we look at the business conduct. We look from the 
perspective of the investor, what is being sold, what is being 
offered, and how is the investor being protected in that 
process, so that we stop worrying about who has responsibility 
for mortgages versus securities versus derivatives versus some 
other instrument, insurance, for example, and we start to think 
from the perspective of the investor across a broad panoply of 
products that may be offered to them that has an investment 
component or a financial component. How do we protect the 
    And I think by approaching it from both of those 
directions, a systemic protection direction and an investor or 
business conduct protection direction, we can probably cover 
the universe.
    Senator Warner. Does that mean proactively looking at new 
products? Would that be your screen in terms of as the market 
creates new products that we can't envision today, you would 
look at it from that kind of----
    Ms. Schapiro. It has to have that. That has to be a 
component of it, because we will always fight the last war if 
we don't look proactively at products as they are being 
developed, before they are introduced. Do they have systemic 
implications? What happens in a downturn? What happens if 
interest rates go through the roof? What does that product have 
the potential to do to our financial institutions? And at the 
same time, what do those products have the potential to do, 
good or ill, for investors who are being sold them?
    I think innovation has been a tremendous hallmark of our 
markets and I think it is important that we preserve that. I 
think we have seen some products that are innovative mostly in 
their fee structure----
    Senator Warner. Right.
    Ms. Schapiro. ----and their ability to generate new fees, 
rather than being innovative in their ability to help people 
achieve their goals in investing. And so I think that is, 
again, something a financial regulator, a business conduct 
regulator like the SEC in particular can have a focus on.
    Senator Warner. So as you get them within that regulatory 
umbrella, and I think you have now touched on my second point, 
regulation and transparency enough or actually looking, as you 
said, at, in effect, the social utility of some of these 
products in terms of prohibition or not? I mean, that gets into 
a touchy area, I know.
    Ms. Schapiro. It is a touchy area. We have generally had a 
system in this country where we go with disclosure and not so 
much the approval by regulators of particular products, 
although it is not unheard of. There are certain products that 
cannot be sold to retail investors. There are certain 
instruments that have, in fact, been deemed to not be suitable 
for anyone and therefore not for sale. To expand that approach 
would be different. I think it is worth exploring.
    Senator Warner. Thank you.
    Chairman Dodd. Thank you very much, Senator.
    Senator Corker.
    Senator Corker. Mr. Chairman, thanks for having this 
hearing, Ranking Member. I want to welcome Senator Warner. I 
think there is nobody that has come to the Senate with greater 
credentials and I certainly look forward to working with him 
and welcome him to this Committee.
    Ms. Schapiro, I also want to thank you for your tremendous 
years of public service and commitment to making things better 
here in our country and I look forward to working with you in 
the future and just have a few short questions.
    We watched--we had hearings here earlier in the year with 
the SEC and, of course, the Fed and Treasury and others and we 
watched our investment banking system just kind of dissipate. 
It evaporated. It is gone. And it appeared that the SEC didn't 
have the tools, if you will, to really deal with those 
particular organizations. Of course, they are no more.
    But I wondered if, just based on where you sit, if you see 
is there a need, if you will, for tools right now that the SEC 
does not have that it should have in the environment that we 
now live in?
    Ms. Schapiro. I expect I could give you a better answer if 
I am confirmed and get there and spend a little bit of time. 
But one almost has to conclude that the tools were inadequate 
to the task. The CSE program was a voluntary program. That was 
probably one of the flaws in it. But also the capability of the 
staff to really apply the kind of analytics and the kind of 
risk assessment approach that one would hope to see, I think 
those are two areas that probably need significant bolstering.
    I think as we move forward, we have to take a completely 
fresh look at how the SEC conducts examinations of all the 
entities it regulates, investment banks--there are some smaller 
ones left, investment advisors, mutual funds, and so forth, to 
see if we really are understanding the business and how the 
business is changing.
    My sense is that one of the hardest things for regulators 
is to really understand when the world is changing underneath 
them unless it is quite dramatic, because markets evolve, 
institutions evolve, products evolve. And I think it is going 
to be very critical to keep the SEC staff much more in tuned 
with the current events in the marketplace and the evolution of 
the institutions in order to be effectively finding the risks 
and helping to control them.
    Senator Corker. Yes. I think a lot of times, our regulators 
end up sort of figuring out the problem after it occurs and 
    Ms. Schapiro. Catching up.
    Senator Corker. ----by virtue of actions that are taken, 
almost create a self-fulfilling prophesy because their reaction 
to the issue is at the wrong time. Instead of on the front end, 
it is on the tail end and actually can make it worse, and I 
thank you for that input.
    In 2007, I guess the SEC did away with something called the 
uptick rule. A lot of people have said that if that had not 
occurred, then there wouldn't have been this--I am just 
repeating, by the way, and asking for your input--a lot of 
people have said that had that not occurred, then short sellers 
would not have been able to manipulate the market the way that 
they did. I wonder if you might give us your thoughts on that.
    Ms. Schapiro. Well, I am very happy to do that. And as you 
know, in addition, this past year, the SEC issued a series of 
orders related to naked short selling and restrictions on short 
selling through exemptions, temporary orders, emergency orders, 
and what that suggests to me is that we actually need to take a 
step back and reexamine the entire area of short selling, what 
restrictions may or may not be appropriate, and I think we do 
need to look at whether the uptick rule ought to be 
reinstituted, and that is one of the things that I would be 
committed to doing very quickly.
    Senator Corker. Well, thank you. I think even at the CFTC, 
there was a lot of concern about what speculators were doing at 
the time, and, of course, now with the world where it is, we 
are wondering where all these speculators were.
    Ms. Schapiro. Right.
    Senator Corker. But in any event, I do hope you will do 
that and I do hope we will come up with something that market 
players who really determine the exact pricing because of being 
on both sides of the equation, I hope you will be able to come 
up with something that is consistent and people know is going 
to be there into the future.
    Ms. Schapiro. I agree with that. I think markets deal with 
uncertainty. I mean, that is really what markets are about in 
some ways, and they deal with volatility. They don't deal so 
well with not knowing what the rules of the road are, and so we 
need to provide some certainty about how these issues will be 
handled on a going forward basis.
    Senator Corker. There has been a lot of comment, I guess, 
that the SEC is a revolving door. People come in and they learn 
a few things and then they leave and make a lot of money, and 
then they come in and vice-versa, not unlike the Senate, I 
might add. But what comments might you make about restrictions 
that you think ought to be in place for people who work at the 
SEC and relationships that they may have in the past or in the 
future as it relates to companies?
    Ms. Schapiro. I think this is an important area, and I 
understand the banking agencies have done some post-employment 
restrictions for bank examiners and I am anxious to talk to 
them about what their experience has been with that.
    I would think we have to balance--I worry about the 
revolving door very much. I hope that we can keep the best 
people at the SEC for the longest possible time. I worry, on 
the other hand, about restrictions that will make it impossible 
for people to come to the Commission in the first place. If I 
can't leave and go to the industry after 5 years or 10 years, 
if I am doomed to stay at the SEC for life, maybe I will never 
go in the first place, and I don't think that would be a good 
result, either.
    I am very anxious to explore some of the possibilities here 
that allow us to continue to attract people with current 
understanding of the markets and current experience, keep them 
as long as we possibly can, but then not create a conflict by 
their walking out the door and going to a firm and leaving 
everybody to wonder whether they showed some favor to that firm 
during their time at the SEC. So it is a very important issue 
for the integrity of the agency and its credibility. I am not 
sure yet how to tackle it.
    Senator Corker. Well, I have to tell you, I very much 
appreciate your balance on that issue. At the end of the day, 
you want to have the very best and brightest people in your 
organization that have the ability just due to their 
experiences to really assess what is happening with companies, 
and you do want to be able to attract those folks and you do 
want to be able to bring people in for 2 or 3 years and do a 
great job for you and leave. At the same time, obviously, you 
want to make sure that that is beyond reproach. It sounds like 
you very much have that balance in thought and I thank you for 
    With that, Mr. Chairman, I will stop my questioning and 
again thank the designee for coming in. I look forward to 
working with her and you and Mr. Shelby in this upcoming 
    Chairman Dodd. Thank you, Senator. On that last point, I am 
very interested in that subject matter, as well. I think we 
have all encountered people, particularly in their most 
productive years of employment that you might very well like to 
attract to come in and provide some valued service, who are 
reluctant to do so because of the prohibitions we place on the 
other side, not without merit, the prohibitions, but striking 
that balance, we lose a lot of talent, in my view. I don't have 
a quick answer for that one, either, but I think we really do 
need to think about it. We talk about it every 4 years in these 
cycles we go through in terms of who can come into government 
and it is an issue that does deserve attention, so I appreciate 
your raising it. I appreciate you bringing the question up, as 
    We have been joined by some additional members. I just will 
remind my colleagues, we have got some votes at about 12:15, I 
think. We have got a panel of a nominee for the Federal Reserve 
Board and three nominees for the Council of Economic Advisors. 
I don't know how we are quite going to get through all of this, 
but I want to turn to my colleagues. We are on a 10-minute 
cycle, but if there is some way to not use all of that 10 
minutes and open it up to questions in written form, we would 
appreciate the indulgence of my colleagues.
    Senator Menendez.
    Senator Menendez. Mr. Chairman, since you paid for dinner 
last night, I will try to accommodate you.
    Senator Menendez. A lot of my questions have been answered 
and I have been jumping between different hearings at the same 
time, but let me get to something that is more overarching. I 
spoke about it in my opening statement. And let me just say, I 
think you have tremendous experience. I think you have ability 
to do this job, unquestionably.
    Now, the question is some have said that you are a safe and 
predictable pick. Some have said that when we look at your 
record as a regulator, that it shows that infrequently, you 
have pursued tough action against big Wall Street firms. Some 
have said, like The Wall Street Journal in today's article, 
that even in a time of very significant market convulsions and 
Wall Street scandals, FINRA often filed tiny cases against 
small players and that employment fines against firms have 
    So I don't believe all of the--someone categorized my 
statements before saying that all of the Nation's economic woes 
lie at this position. That is clearly not the case. But you 
cannot have investor confidence, you cannot have the 
opportunity for the markets to regain their integrity, you 
cannot have all of those things that is one of the major 
barometers we look at in terms of the necessity to move this 
economy forward unless we have the Securities and Exchange 
Commission be the robust cop on the beat, willing to ensure 
that the industry does business in a fair, honest, transparent 
way, willing to, as I said earlier, take no prisoners and 
question every aspect of it. I think to some degree, the 
marketplace and these industries have gotten ahead of the SEC 
in terms of the financial instruments that are being used.
    So are you really ready and willing--able is not the 
question--ready and willing to take on what is necessary to 
restore the incredibly tattered facing confidence that exists 
in the marketplaces, and how do you respond to the criticisms 
that have been levied against you that, in fact, while you are 
a predictable and safe nominee, you will not be the robust 
nominee that we need?
    Ms. Schapiro. Well, Senator, I am absolutely ready to take 
this on. I am absolutely committed to building a Securities and 
Exchange Commission that is of the quality, the integrity, and 
the aggressiveness that the American people deserve for it to 
be and are entitled for it to be. I think the agency has to 
have a laser-like focus on fraud and investor protection. I 
think we have to move aggressively and with a sense of urgency 
with respect to all of these matters.
    I guess I would say to you that I started my career as an 
enforcement attorney. I absolutely understand what it takes. I 
understand that you can ignite real passion in enforcement 
lawyers by giving them the tools and the ability to pursue 
fraud and do what needs to be done to protect the interests of 
the public. There is nothing that is more exciting or more 
invigorating for people who have chosen to become enforcement 
    I will say that I think The Wall Street Journal article 
today presented a completely unfair picture of my record, in 
particular with respect to enforcement and enforcement cases. 
In my 13 years at FINRA, I have presided over nearly 15,000 
enforcement cases, including dozens of major cases against very 
large financial institutions--Morgan Stanley, Citigroup, 
Merrill Lynch, Lehman Brothers, Ameriprise, CSFB, with multi-
million-dollars fines. I have never been afraid to go after 
people I thought have violated the public trust. That will be 
not an issue for me at the SEC, as I said earlier.
    I think there are absolutely no sacred cows and I think 
there are areas where at FINRA we have been particularly 
leading the regulatory community with respect to the improper 
sales of variable annuity products to senior investors, 
improper sales to our military on bases who have been cheated 
by investment scams, late trading, market timing, IPO abuse, 
early retirement scams, insider trading, and a wide range of 
other issues where we have been very, very aggressive.
    So I hope that The Wall Street Journal piece doesn't color 
your impression of me because I think that I can be as 
aggressive an enforcer as anybody has ever been at the head of 
the SEC. I served under three SEC Chairman--David Ruder, 
Richard Breeden, and Arthur Levitt--when I was a Commissioner. 
I have seen the agency aggressively in court seeking TROs, 
seeking preliminary injunctions, stopping fraud in its tracks, 
and that is exactly the kind of enforcement program I want to 
    Senator Menendez. Mr. Chairman, I will submit some 
questions for the record.
    I am going to support your nomination. I am going to hold 
you to what I expect to see in robust enforcement----
    Ms. Schapiro. As you should.
    Senator Menendez. ----and I will not hesitate when you 
return to the Committee as the Chairlady to engage in this 
dialog. I hope it will all be complimentary----
    Ms. Schapiro. I hope so, too. Thank you.
    Senator Menendez. ----and I look forward to that being the 
    Ms. Schapiro. Thank you.
    Chairman Dodd. Thank you, Senator.
    Where did Senator Bennett go? We lost Senator Bennett here.
    Senator Akaka.


    Senator Akaka. Thank you very much, Mr. Chairman. I am 
delighted to be here and thank you for this hearing and I am 
delighted to be here to say aloha to Mary Schapiro and, of 
course, to your lovely family----
    Ms. Schapiro. Thank you.
    Senator Akaka. ----Molly and Anna, as well----
    Ms. Schapiro. Thank you.
    Senator Akaka. ----and to thank you for what you have done 
already for the people of Hawaii. We share a commitment to 
empowering our citizens through financial literacy in order to 
build stronger families, businesses, and communities. Without a 
sufficient understanding of economics and personal finance, 
individuals will not be able to manage their finances 
appropriately, evaluate credit opportunities successfully, 
invest for long-term financial goals in an increasingly complex 
marketplace, or be able to cope with difficult financial 
    Again, I have greatly appreciated your outstanding efforts 
in Hawaii with FINRA and I must tell you that I have heard back 
from many people who have been there with you that have 
appreciated this and have gained from your efforts there. I am 
looking forward to continuing to work with you to help improve 
the ability of investors to make better informed financial 
    Mr. Chairman, I will just have two questions. Ms. Schapiro, 
one of my question is what must the SEC do to ensure that 
investors can make informed investment decisions?
    Ms. Schapiro. Well, thank you, Senator. You and I do share 
a very deep commitment to investor literacy. While it is not 
within the purview of the SEC, I really believe that it should 
be a national priority, and perhaps we can talk about that some 
    I think the SEC has an important role here and it reflects 
on several different levels. The first is, of course, the 
corporate disclosure, the information that investors receive 
about the companies that they may choose to invest in or the 
mutual funds they may choose to buy has got to be accessible to 
investors. It has got to be complete, honest, accurate, and 
accessible, understandable, and usable.
    I also think that the SEC could work closely with the other 
Federal financial regulatory agencies on some broad investor 
literacy initiatives. There is tremendous ability at the SEC to 
produce plain English content, explanations about how mutual 
funds work, how does the bond market work, what is a 529 plan, 
and the SEC ought to be able to develop that information and 
material and broadly distribute it through its website in 
conjunction with other agencies, through financial 
institutions, as well as through the local offices of the SEC. 
The SEC has offices around the country. Those are people on the 
ground who could be working with local groups to try to 
increase investor awareness and investor literacy.
    So I think there are many opportunities for the SEC to 
improve its profile in the investor education space.
    Senator Akaka. Well, I thank you very much. I know the 
Chairman is looking for time and I will just submit the rest of 
my questions and say thank you very much, Mary.
    Ms. Schapiro. Thank you.
    Senator Akaka. Without question, you have my support. But I 
thank you so much for what you have done already----
    Ms. Schapiro. Thank you.
    Senator Akaka. ----not only for Hawaii, but for our 
country. You have really increased my confidence in SEC and in 
our country's financial community.
    Ms. Schapiro. Thank you.
    Senator Akaka. Thank you very much, Mr. Chairman.
    Chairman Dodd. Thank you very much, Senator. We have these 
other witnesses to bring up, so we are going to leave the 
record open for some questions.
    One that I intended to ask you, but as I said, I have to 
move along, were these reports, Ms. Schapiro, of the two 
lawsuits filed by FINRA members that you are aware of. Do you 
want to make a quick response? I will submit it as a question, 
again, but I want to give you an opportunity to respond to 
    Ms. Schapiro. Well, I guess I am happy to respond. I 
believe that the lawsuits are frivolous. They arise out of the 
transaction to merge the NASD and the New York Stock Exchange 
regulatory group. The first lawsuit was dismissed by a Federal 
judge. The second lawsuit was filed very close in time to my 
nomination for this position and I believe that there is no 
merit to the lawsuits.
    Chairman Dodd. I may follow up with a couple other 
questions on that.
    Ms. Schapiro. That is fine.
    Chairman Dodd. And also, Elizabeth Warren has recommended 
something akin to the Consumer Product Safety Commission, a 
Financial Product Safety Commission idea. It goes to the 
question that Senator Warner was raising about the anticipation 
of new products being developed that can circumvent a rule-
based system as opposed to a principle-based system, which has 
some appeal, but probably not a widely held view that that can 
actually be a more intimidating process than sometimes a rule-
based system.
    But I sort of like the idea, that idea that Senator Warner 
raised to be anticipatory about these matters, and again, in 
another setting here, I would like to pursue that idea with you 
on how we can do that, because I think that is one of the 
concerns we have here. We are always fighting, as you say, the 
last war, the last set of battles, and as we are doing so, 
there is some very bright 22-year-old who is sitting out there 
and figured out six ways to get around the rule you just 
designed with all the best intentions. And so we need to have 
some better system in place, it seems to me, that more broadly 
deals with principles, ideas, but gives some sense of 
confidence to investors that while we are taking care of the 
problem that occurred yesterday, we are not very well 
effectively dealing with these--and again, I think the point 
that Senator Warner made. I think the last thing you want to do 
is to be stifling the creativity and imagination that has been 
the hallmark of wealth creation. So it is a difficult balance 
to strike here, but one that I think deserves our attention.
    Ms. Schapiro. I agree.
    Chairman Dodd. With that, I thank you very much for 
appearing before us. As has been said by all of my colleagues 
here, you are extremely well qualified for this job, but I 
think all of us are anticipating some very aggressive and 
strong action here to get moving on these matters.
    Ms. Schapiro. I appreciate that.
    Chairman Dodd. We thank you, and I apologize----
    Ms. Schapiro. Thank you very much.
    Chairman Dodd. I apologize to your two children that I 
didn't filibuster longer----
    Chairman Dodd. ----but I want you to know that I am going 
to--you can go to your teacher and tell them that the Chairman 
of the Senate Banking Committee said you ought to have the rest 
of the day off, as well.
    Ms. Schapiro. Thank you very much.
    Chairman Dodd. Thank you very much.
    Senator Shelby. And they ought to get extra credit.
    Chairman Dodd. And extra credit for being here, too, by the 
    Chairman Dodd. I don't know if my colleagues have arrived. 
We want to move to our next panel.
    Chairman Dodd. I want to ask our--if we can, I appreciate 
people moving as expeditiously as they can so we can get to our 
second panel.
    Chairman Dodd. I want to welcome all of our second panel, 
Dr. Rouse, Dr. Romer, Dr. Goolsbee, you are here, as well, and 
Dan Tarullo, I see coming in. Who are we missing here? We have 
got everybody. The microphones are live, I would inform my 
colleagues. These are the kind of moments that get recorded for 
    Chairman Dodd. Senator Durbin is on his way, but our 
colleague, Bob Menendez, is here. I am not sure Senator Boxer 
is going to be able to be here, but I know she wanted to be 
here. Again, the schedules, with so many of these confirmation 
hearings going on simultaneously, it is understandable why 
people would very much like to be a part of it. I am going to 
make sure the record is open for our colleagues who would 
normally be doing introductions, that it will be available for 
them to include their introductions in our comments.
    I think I see families arriving here. Again, I am using all 
the powers of my chair today to provide free passes out of 
school. That is clearly exceeding the powers of a Chairman, but 
nonetheless. We give extra credit, too, for appearing. And if 
you could actually stay the full time, you really get extra 
credit. That is really the test.
    We have others coming in, so let us get people settled.
    Chairman Dodd. I know Senator Feinstein wanted to be here, 
as well, and I am getting messages that maybe one or the other 
may actually be here, Dr. Romer.
    All right, are we getting settled? That is very good.
    Senator Menendez, would you like to introduce Dr. Rouse?



    Senator Menendez. Thank you, Mr. Chairman, to you and to 
all my distinguished colleagues on the Banking Committee. It is 
my sincere honor to introduce Cecilia Rouse as President-elect 
Obama's nominee for the Presidential Council of Economic 
Advisors. I am confident that the Committee will see that she 
is eminently qualified for this position and will confirm her 
for this important post.
    Dr. Rouse is currently the Theodore A. Wells Professor of 
Economics and Public Affairs at Princeton University. Her 
primary research and teaching interests are in labor economics 
with a particular focus on the economics of education, 
something I know that my two colleagues who are sitting on the 
dais at this point, both distinguished members and the Ranking 
Member of the HELP Committee, are passionate about and leaders 
in. She has studied the economic benefit of community college 
attendance, studied the effect of financial aid on college 
matriculation, and the impact of student loans on post-college 
occupational choices, all incredibly important issues with a 
potentially profound impact on our economic choices moving 
    Dr. Rouse is currently a senior editor of the Future of 
Children, of which she has a few examples here behind us, and 
an editor of the Journal of Labor Economics. Additionally, she 
is the founding Director of the Princeton University Education 
Research Section and she is currently the Director of the 
Industrial Relations Section, as well.
    She is not walking into this job without experience in the 
public sector. In 1998, she served in the White House at the 
National Economic Council.
    I believe Dr. Rouse will bring a unique and important 
insight to the Council of Economic Advisors that is especially 
important during these troubling economic times. And while the 
students of Princeton University will sorely miss their 
professor, they can take solace in the fact that she will be a 
3-hour Amtrak trip away from the great Garden State.
    So, Mr. Chairman and distinguished Members of the 
Committee, I strongly support the confirmation of Cecilia Rouse 
to be a member of the President's Council of Economic Advisors. 
I think you will find her to be an exceptional addition to that 
important body and we look forward to working with her and the 
other nominees to get our economy back on track and bring much-
needed change to this country.
    Thank you, Mr. Chairman.
    Chairman Dodd. Senator, thank you very, very much for those 
introductory remarks. I had a chance yesterday to talk with Dr. 
Rouse, as well, and was very impressed with her knowledge, as 
    We have been joined by my colleague from Illinois, Senator 
Durbin. Dick, we appreciate you making it in to present Dr. 
Goolsbee to the Committee, who I had a chance, as well, to talk 
to the other day. But thank you for getting over.



    Senator Durbin. Thank you, Mr. Chairman, and Senator Enzi, 
Senator Warner, Members of the Committee.
    President-elect Obama has asked Dr. Austan Goolsbee to 
become a member of the Council of Economic Advisors. Austan 
will also direct the new Economic Recovery Advisory Board under 
Paul Volcker.
    Austan graduated from Yale University. He earned a Ph.D. in 
economics from MIT and was later a Sloan Fellow and Fulbright 
Scholar. He is now primarily an economist from the University 
of Chicago Graduate School of Business. He and the President-
elect's other economic advisors will be asked to help the new 
President make critically important decisions on how to best 
address perhaps the most challenging economic crisis in 75 
years in America. In fact, I know that Austan and many of his 
colleagues are already working very hard on that.
    Austan may teach and conduct research at the University of 
Chicago, but he is no orthodox Chicago School ivory tower 
economist. He understands that economics is about more than 
just abstract definitions and calculations. It is fundamentally 
about human behavior, why people make the decisions they do, 
what policies can help people make choices that are in their 
best interests and the best interests of our economy and our 
    He understands many of the modern aspects of our economy, 
the transformative power of the Internet. He served as a 
special consultant for Internet policy for the Department of 
Justice Antitrust Division.
    Austan is an admirer, incidentally, of a man that we both 
admire, Mr. Chairman, my first mentor in politics, Senator Paul 
Douglas. He happened to bring today Douglas's autobiography 
which the Chairman of this Committee has told me is one of the 
best books he has ever read about a Senator's public career. 
Paul Douglas, of course, may not be remembered by many, but 
those of us who do reflect on the fact that he was an excellent 
Senator and an outstanding economist on top of everything else.
    Of course, I have to add, when it comes to former Senators 
from Illinois, Austan's current and future boss is a pretty 
good fellow, too, who will leave a great legacy himself.
    Austan understands the importance of learning from history. 
I understand he hosted a program on the History Channel at one 
point. I understand he is also a triathlete, which I am not. 
Being really good at performing multiple tasks will be helpful 
to him with the challenges he will face with this economy.
    At this moment in history, now more than ever, we need the 
best and the brightest tackling the economic problems that face 
our Nation and our world. In the very short term, in a matter 
of days, Barack Obama will try to create an economic recovery 
that invests in our country's future, gets the economy growing 
again, and puts people back to work. Among the investments we 
must make, Austan has written in particular on the positive 
economic impact of education, which I think is fundamentally 
important at all times and even more so at this moment in our 
history, when the cost of education continues to rise for the 
middle class across America and their incomes are reduced and 
jobs are lost.
    Perhaps most importantly right now, we need advisors like 
Austan who understand the economy and can help us aggressively 
address the root cause of the recession, the foreclosure crisis 
that continues to devastate neighborhoods in Chicago and across 
America. Over the long term, the President has to deal with 
unsustainable deficits, which is a fact of life. Unlike most of 
the Chicago School economists, Austan believes deficits really 
do count, and I trust that he will help incoming OMB Director 
Peter Orszag and others plot a future course for the Nation's 
budget that is more sustainable than the current path.
    He has been an informal but tremendously valuable advisor 
to President-elect Barack Obama for many years and I know he 
will continue in that capacity if given this spot. As a member 
of the Council of Economic Advisors and as the day-to-day 
Director of the Economic Recovery Advisory Board, Austan 
Goolsbee will be filling two key roles at once.
    It is an honor to stand here and recommend and introduce a 
great economist and a proud resident from the great State of 
Illinois, Dr. Austan Goolsbee.
    Chairman Dodd. Well, Senator, thank you very, very much. I 
am impressed that you brought Paul Douglas's autobiography, 
because Senator Durbin and I have talked about this many times. 
My father thought he was the brightest man he ever served with 
in public life, Paul Douglas, and that autobiography ought to 
be required reading. It is the most wonderful autobiography. It 
is wonderfully self-deprecating. It has a wonderful view of his 
life, and a remarkable life he had. When you consider his 
origins, where he grew up, how he grew up, and the 
accomplishments he made, volunteering at age, I think, 42 for 
the Marine Corps as a private in World War II, rising to the 
rank, I think a field promotion to a colonel, just a remarkable 
individual. So I am impressed that you are impressed by him, as 
    We have been joined by my colleague from California. 
Barbara, we thank you very much for being here to introduce Dr. 
Romer and the floor is yours.



    Senator Boxer. Well, thank you so much, Mr. Chairman, 
Ranking Member Shelby, Senator Enzi, and Senator Warner. I am 
very happy to be here.
    This is a tribute to Dr. Romer. It is one of those days 
that we often have here where you want to be 17 different 
people. I just left Dr. Rice, questioned her, went down to hear 
Senator Biden, and I am here for you, Christina Romer, because 
I am so excited about this opportunity to elect President-elect 
Obama's nominee for the Chairmanship of the Council of Economic 
    Californians are so proud to have one of the world's great 
university systems, and today I am proud to introduce one of 
the finest scholars in that system.
    The job of Economic Advisor to the President has never been 
more important than it is today. I don't have to tell this 
Committee. You have been in the forefront of trying to work our 
way out of this, and I want to compliment all of you for the 
great work you are doing. I know a lot of the times there is 
not unanimity, but the problems are so hard, it is not that 
surprising, and I value all of your comments, all of your 
opinions, both sides of the aisle.
    And I want to say particularly to the Chairman, heavy is 
the head that wears this chairmanship. I just want you to know, 
aside from everything else, how much I appreciate what you do 
and Senator Shelby, trying to light a candle in this darkness.
    In 2008, we experienced more job losses than any year since 
World War II, and the past 3 months have seen the biggest jump 
in the unemployment rate since 1975. Yesterday's retail sales 
report showed the largest year over year drop ever recorded, 
and there is overwhelming evidence of serious deflationary 
pressures on the economy.
    We are in the midst of the greatest economic challenge we 
have seen in a generation and we need to look for leaders who 
understand this, who understand history, and who understand the 
way markets work, how markets should work, and I am sitting 
next to one of those, Dr. Romer, who is uniquely qualified to 
advise the President in these difficult times.
    A former Vice President of the American Economic 
Association, she is known in the economics community as one of 
the finest macroeconomic historians in the profession. She 
brings a combination, as I said, of a broad historical 
perspective and a deep knowledge of the way the economy works. 
Her research has examined the entire range of 20th century 
American economic history, and she has made particularly 
important contributions to our understanding of the Great 
Depression, a period that unfortunately seems more relevant 
today than it has for decades.
    Mr. Chairman and Ranking Member Shelby, I am going to tell 
you a little personal story, tell it to Dr. Romer and everyone 
who is listening. My dad was a child of the Depression. He and 
my mom got married just right when the Depression hit. And his 
attitude about life was so scarred by that experience that he 
was so frightened to ever buy a home. He was so frightened to 
move in ways that would have been the right ways to move. So it 
is all about confidence. And he knew in his heart that his 
children shouldn't have that attitude, and he always said to 
both of us, ``Go out, save your pennies, buy a home. It is 
America. You will be fine.''
    But the experience scarred him, and I think it is 
important, so important that we don't have a whole generation 
of young people scarred by this deep recession. And that is why 
people like Dr. Romer are so important. She is an expert in 
what happened during the Depression and she understands what we 
need to do to avoid another depression.
    So I look forward to working with this Committee in any way 
I can. I am an old economics major. That was my passion in 
college. I worked for a period of time on Wall Street, so 
economics is very interesting to me. I wish that I was better 
at giving solutions. But I do know that right now, we need to 
surround ourselves with people like this who will do everything 
in their power to lead us in the right direction and I hope you 
will confirm her speedily. We need her.
    Thank you very much.
    Chairman Dodd. Senator, thank you very, very much. It is 
very poignant. My father was trying to pay a way through law 
school and graduated in 1932, and all of us of our generation 
grew up listening to our parents night after night talk about 
those days and what it was like, people all across the country. 
So we thank you immensely for being here. And you are right, we 
all are 17 different places today with these various things 
going on.
    Senator Boxer. Eighteen for me.
    Chairman Dodd. Well, thank you very much.
    Senator Kennedy very much wanted to be here to introduce 
Dan Tarullo. Dan worked for Senator Kennedy going back a few 
years ago. Senator Kennedy isn't here today, but I am going to 
take a minute or so and just present Dan Tarullo to the 
Committee, as well.
    I have known Dan for some time. He is a professor of law at 
Georgetown University Law Center. He is no stranger to this 
Committee, by the way, as Senator Shelby has already pointed 
out in reference to Dan in his opening comments about how many 
times I think you have appeared before this Committee and 
various places. He has testified on important issues in the 
    He previously served as the Assistant to the President for 
International Economic Policy and as the President's personal 
representative to the G-7/G-8 group of industrialized nations 
and a principal on both the National Economic Council and the 
National Security Council during the Clinton administration.
    Professor Tarullo graduated Summa Cum Laude from the 
University of Michigan Law School and, of course, worked in the 
Senate as the Chief Employment Counsel on what was then the 
Labor and Human Resources Committee for Senator Ted Kennedy in 
the 1980s.
    So we welcome you to the Committee and congratulate you on 
your willingness to accept this position to be a Governor on 
the Fed. It is very, very important and we thank you for doing 
    We thank all of you, in fact, for your willingness to 
serve, and I am going to ask all of you to stand, if you will, 
and to swear or affirm. Raise your right hands.
    Do you swear or affirm that the testimony you are about to 
give is the truth, the whole truth, and nothing but the truth, 
so help you, God?
    Ms. Romer. I do.
    Mr. Goolsbee. I do.
    Ms. Rouse. I do.
    Mr. Tarullo. I do.
    Chairman Dodd. And do you agree to appear and testify 
before any duly constituted Committee of the U.S. Senate?
    Ms. Romer. I do.
    Mr. Goolsbee. I do.
    Ms. Rouse. I do.
    Mr. Tarullo. I do.
    Chairman Dodd. I see some folks here, some children who I 
presume are not economics majors yet, but why don't we begin 
with you, Dr. Romer. Any family you would like to introduce? I 
will ask each of you if you care to present them to the 
    Ms. Romer. Absolutely. I have with me today my father, 
Clifford Duckworth, a World War II veteran who is here from 
Massachusetts, my son, Matthew, the youngest of my three 
children, and my husband, David, also an economist.
    Chairman Dodd. Good. Well, welcome. Interesting 
conversations at your house, then.
    Dr. Goolsbee.
    Mr. Goolsbee. With me, I have--I will start with the love 
of my life, the prettiest girl in Chicago, Robin, my wife. She 
is holding our 2-year-old, Emmett. I cannot promise that he 
will still be sitting in that seat through all of this hearing. 
Next to them is our 5-year-old, Addison----
    Ms. Addison Goolsbee. Hi.
    Chairman Dodd. Hi.
    Mr. Goolsbee. Linda, my mom, and my dad, Arthur, who is a 
deacon at the Church of the Heavenly Rest and came from 
Abilene, Texas, to be at the hearing.
    Chairman Dodd. Good. We could use you. You might want to 
stay in town. We can use you here.
    Mr. Goolsbee. Our 8-year-old, Aden----
    Chairman Dodd. Hi, Aden.
    Mr. Goolsbee. ----who is being held by our family friend, 
    Chairman Dodd. Very good. A good crowd there. Thanks for 
bringing them along.
    Dr. Rouse.
    Ms. Rouse. Well, my family is here today in force. I am 
very happy to introduce them. I will start with my mother, 
Lorraine Rouse, and my father, Carl Rouse, my sister, Carolyn, 
and then we have my husband, Ford Morrison, and our children, 
Nidal and Safa Morrison, and they are all from New Jersey, and 
then we have my Uncle George, my Aunt Doris, George Haley, and 
Phyllis and Bill Taylor----
    Chairman Dodd. Is there anyone in the room who is not a 
Rouse or a Morrison?
    Ms. Rouse. And also Terrie Rouse, who is actually the CEO 
of the Capitol Visitors Center.
    Chairman Dodd. Ah, well, terrific. Great job, by the way, 
with that. Well, that is terrific. I am glad you have got them 
    Dan, anyone you would like to introduce?
    Mr. Tarullo. Yes. Thank you, Senator. I traveled a bit more 
nimbly here with my mother and my wife, Louisa.
    Chairman Dodd. Terrific. We are delighted to have both of 
you here, as well. It is an important day.
    And I apologize we are crowded on this schedule. We have 
already had opening statements, and so we are going to begin in 
the order, going right down the row, we will begin with you, 
Dr. Romer, any opening comments you would like to make, and 
then we will get to some questions.



    Ms. Romer. Great. Well, Chairman Dodd, Ranking Member 
Shelby, and Members of the Committee, it is an honor to come 
before you as President-elect Obama's nominee to Chair the 
Council of Economic Advisors. Obviously, I would like to thank 
Senator Boxer for those warm words and Senator Dianne 
Feinstein, who has submitted a written statement.
    Let me tell you just a little about myself. I received my 
Ph.D. in economics from the Massachusetts Institute of 
Technology. I have taught economics at Princeton University, 
and for the last 20 years, as Senator Boxer pointed out, at the 
University of California at Berkeley. I am a specialist in 
macroeconomics and economic history. I have studied topics such 
as the effects of tax changes and monetary policy on the 
economy, also what caused the Great Depression, and probably 
much more important, what caused the Great Depression to end.
    I have to say, I never dreamed that a knowledge of the 
1930s would prove useful in formulating current economic 
policy, and yet the stresses facing our financial system and 
the shocks hitting every corner of our economy are the worst 
since the Great Depression.
    My goal, if confirmed, would be to use all that we have 
learned in the last 75 years to ensure that the tragedy of the 
1930s is not repeated. Perhaps even more important, I would 
hope to create policies that not only allow us to turn the 
corner on the current downturn, but to put us on a road to a 
better and more productive future.
    Let me just say one word about the organization that I have 
been nominated to lead and that Austan and Ceci are also 
nominated to join. The Council of Economic Advisors was created 
to provide the President and through its reports the Congress 
the best advice professional economists have to offer. It is an 
institution with a proud history of providing honest, first-
rate economic analysis. If confirmed, I will do my utmost to 
protect the integrity of the CEA and to make it the center for 
unbiased scientific analysis of the crucial economic issues 
facing our country in the years ahead.
    Thank you, and I would obviously be delighted to answer 
your questions.
    Chairman Dodd. Doctor, thank you very, very much and we 
appreciate your willingness to serve our country, as well.
    Ms. Romer. Thank you.
    Chairman Dodd. Dr. Goolsbee.



    Mr. Goolsbee. Let me just start by saying what a thrill it 
was to have the senior Senator introduce me. He got his start 
in politics working for Senator Douglas, who was a great 
Senator, but was a great economist out of the University of 
Chicago, and for all the economists in the room, he was the 
namesake of the Cobb-Douglas production function. So that was a 
real thrill.
    By way of background, I have been at the University of 
Chicago for 14 years as a researcher. I am an empirical 
economist, what we call the old style data dogs. We just try to 
get out and get the data to figure out how the world works or 
what would be the impact of various policies. I have studied a 
lot of industries in the United States and how they compare to 
the rest of the world, innovation and technology, taxes and 
public policy.
    Many years ago, when I was just a freshman in college, I 
worked for the late great economist James Tobin, who was a 
Nobel Laureate, and he had served on the Council of Economic 
Advisors under John F. Kennedy in 1961. He used to recount that 
that was the hardest he had ever worked, but that he was very 
proud that he had been able to serve the country at that time 
and he believed in his heart--he, himself a child of the 
Depression--that economics was not just an academic field of 
study, that it could really affect people's lives, that you 
could help prevent or ease events like the Great Depression.
    It is my hope that at the CEA, under Christy's leadership 
and working with Cecilia Rouse, that we can try to equal the 
standards that they set back in 1961 in what most people 
consider the golden age of the CEA by giving hard-nosed, 
objective analysis of any economic policies that we are asked 
to. I can't guarantee that we will meet that gold standard, but 
I do know we will come to work every day. We will bring the 
best economic analysis we have. And we are motivated by this 
great legacy we inherit at the CEA.
    I thank Senator Shelby and Chairman Dodd for the 
opportunity to be here and I also am happy to answer any 
questions you might have.
    Chairman Dodd. Well, I thank you for that, as well. Jim 
Tobin was a good friend of mine. He taught at Yale, of course--
    Mr. Goolsbee. Yes.
    Chairman Dodd. ----and when he won the Nobel Prize in 
Economics, just a wonderful human being, very quiet individual. 
You have got a good pedigree with Paul Douglas and Jim Tobin, 
so that is not bad lineage.
    Dr. Rouse.



    Ms. Rouse. Mr. Chairman and distinguished Members of the 
Committee on Banking, Housing, and Urban Affairs, I am very 
pleased and quite honored to appear before you today as a 
nominee to be a member of the President's Council of Economic 
    I am currently a professor of economics and public affairs 
at Princeton, where I have been on the faculty for the past 16 
years. I don't really like to use that number, but I will.
    Ms. Rouse. As a labor economist, I am most committed to 
understanding the problems, choices, and tradeoffs that 
individuals face, particularly those that concern the labor 
market. I am particularly interested in understanding the ways 
to increase worker productivity, primarily through the 
acquisition of valuable skills or what we call human capital. 
As such, I have devoted much of my research to the economics of 
education at all levels.
    As a faculty member of a policy school, I have always been 
deeply committed to studying real world problems and real world 
implications rather than abstract theory. I was fortunate to 
have the opportunity to apply these skills to actual 
policymaking once before, in 1998, when I spent a year at the 
National Economic Council, and I would be most honored, should 
I be confirmed, to have the opportunity to do so again as a 
member of the Council of Economic Advisors.
    I should note that for the past several years, I have 
taught one of the main introductory micro-economics courses to 
first-year students at the Woodrow Wilson School in the 
master's program, and I should add that this year's class is 
particularly inquisitive and challenging. I emphasize to my 
students the power of economics, both theoretical and applied, 
in guiding analysis of policy issues. Should I be confirmed, I 
would bring this dedication and enthusiasm to the President's 
Council of Economic Advisors.
    Thank you very much, and I look forward to answering any 
questions you may have.
    Chairman Dodd. Thank you very much, Doctor. I appreciate 
    Dan, good to have you with us. We are more than happy to 
receive your opening statement.



    Mr. Tarullo. Thank you, Mr. Chairman, Senator Shelby, and 
other Members of the Committee. As honored as I am by the 
President-elect's designation of me as his intended nominee to 
the Board of Governors of the Federal Reserve System, I am also 
mindful of the enormous responsibility that would come with 
this position.
    As if we needed any reminder, today's headlines underscore 
the magnitude of the financial and economic problems faced by 
our Nation. The Federal Reserve has a critical role to play in 
responding to these challenges. As the Nation's central bank, 
it must pursue its dual mandate of promoting maximum employment 
and stable prices in an unusually trying environment. It has in 
the past year taken a number of unusual and innovative actions 
intended to ensure liquidity in important credit markets whose 
functioning has been significantly impaired in the course of 
this crisis. And very importantly, as a bank regulator, the 
Board must use its existing authority to provide both effective 
supervision and robust enforcement. Going forward, it must join 
with other parts of our government to help revamp the financial 
regulatory system so as to diminish the likelihood and severity 
of future financial crisis.
    If confirmed by the Senate, I will draw upon both my 
government and academic backgrounds in addressing each of these 
responsibilities of the Board. I have the highest respect for 
the tradition of independence associated with our country's 
central bank. At the same time, I understand that although so 
much of the Fed's work is necessarily grounded in technical 
analysis, the ultimate purpose of this work is to create the 
conditions under which Americans can make a good life for 
    Thank you very much, and I would be pleased to respond to 
any questions.
    Chairman Dodd. Well, I thank you, Dan, very, very much for 
    We have a vote that is literally just about to start in 2 
minutes, two votes on the floor of the U.S. Senate, and so what 
I am going to do at this point is declare a recess for about 30 
minutes. I think it will take us that long to cast both those 
votes and get back. I apologize to all of you for this delay, 
but we had a lot of questions obviously with the nominee for 
the Securities and Exchange Commission. So we will get back 
shortly to you and we will complete the process, hopefully in 
an hour or two. So thank you very much for waiting.
    The Committee will stand in recess.
    Chairman Dodd. The Committee will come back to order. I 
hope you used this time to get to know each other better.
    It took a little longer than we anticipated and I apologize 
to you, in advance, for that.
    I am going to ask, and I have notified my friend from 
Alabama, that we will begin a question period. And obviously, a 
lot going on. In fact, the debate on the so-called TARP program 
is going to begin shortly and I will go through some questions 
for you myself and then Senator Reed has agreed to step in for 
me as I then go to the floor and try to manage that debate.
    I would rather stay here, quite candidly, but the job of 
the Chair of this Committee with jurisdiction over the matter 
is to be out on the floor. So I will be doing that.
    Let me raise with all of you the TARP issue, in fact. This 
is the debate and subject of the hour. President Bush has made 
the request. President-elect Obama has endorsed the request, 
and said that this is a tool that he needs as the President-
elect coming in.
    Obviously, I do not need to tell anyone in this room or 
elsewhere how unpopular all of this is, primarily because 
people one, believe that this was not a natural disaster, it 
was an avoidable one. That, in my view, had actions been 
taken--and I appreciate Senator Shelby has shared his thoughts 
with me, as well--that we tried 2 years ago to raise the issue, 
the closure issue, on numerous occasions in this very room, and 
had very little response to it. And certainly we will take some 
time in the coming weeks to go back and find some space to go 
back and review. We already have a couple of hearings on this 
matter about how we got to this position.
    I think both of us agree that while that is important 
because you are not going to know where to go unless you know 
where you have been, that we also want to take our time to 
start talking about what needs to be done to avoid problems 
like this from occurring again. So I consider that actually a 
more important function, not to minimize the importance of a 
    But I would like to ask all of you, and I will begin with 
you, Dr. Romer. I see Ben Bernanke has bluntly warned a few 
days ago that the Government would probably have to infuse more 
money into the financial institutions in the months ahead. The 
issues involved in this, I wonder if you agree with Dr. 
Bernanke, Chairman Bernanke, about the additional funds needed? 
And can you help explain to the American public, and I would 
ask all four of you to do this in different capacities. 
Obviously Dan, down at the Fed, has a different role than the 
Council of Economic Advisors.
    But I think one of the glaring problems has been here is 
the failure to explain clearly to the American public what is 
going on here. Why are we needed? Why is it needed to put 
capital into these lending institutions? We hear now Bank of 
America may be requesting new resources. The news this morning 
is not good, 17,000 people a day losing their jobs, 9,000 homes 
a day falling into foreclosure.
    So the concerns and the evidence out there about an economy 
in deep trouble, but the public has a hard time understanding 
why we are where we are and why this approach is needed as part 
of the solution to get us back on our feet again.
    I am not even articulating the question very well. But Dr. 
Romer, would you begin and I would ask each of you to go down 
and share your thoughts.
    Ms. Romer. Of course, and I think you are expressing the 
frustration that certainly I feel and that we know the American 
people feel about what has happened so far.
    I think I feel quite strongly that Chairman Bernanke is 
correct, that no one has as good a window on the banking system 
and the financial system as he does. And by all accounts, they 
are still under incredible stress, and are going to need our 
help, our resources, to get them through this.
    Maybe where I could be the most helpful is trying to 
explain why the financial system is so important. I think part 
of the frustration is in helping them there is the sense of we 
are just helping the Wall Street bankers. And drawing the link 
between what happens in the financial system and what happens 
in the rest of the economy, I think, is crucial. It is exactly 
when lending dries up, people cannot get mortgages, they do not 
buy houses. They cannot get car loans, they do not buy cars. 
Firms cannot get loans to meet payroll, they shut down and 
people are unemployed.
    And so it is--any resources that we are putting there are 
fundamentally really resources we are putting into American 
businesses, to American consumers. And I think that is the 
crucial piece.
    The fact that if we let the financial system go under, 
suffer a catastrophic failure, it will not just be catastrophic 
for Wall Street. It will be catastrophic for everyone of us. So 
I think that is the key point.
    Chairman Dodd. Dr. Goolsbee, what are your thoughts on 
    Mr. Goolsbee. Mr. Chairman, in broad terms, I agree with 
what Dr. Romer has just said.
    As a guy that focused a lot on American industry in my own 
research, I will say the prospects of an unprecedented credit 
crunch and the damage that would do to American industry, and 
the spillover on millions more people doing their jobs, at this 
exact moment I think we have got to be very careful with doing 
things that threaten to make this problem worse.
    Now that said, I completely agree with Dr. Romer, and with 
many members of this Committee who have been, for a long time, 
been expressing well founded frustration in the lack of 
transparency in the way this specific TARP has been conducted, 
that we ought to have, in my view, and we ought to bring our 
analytical resources to bear. We ought to have some 
understanding of what it is they are doing, why do we think it 
will work? What will the money be used for? That it will not be 
wasted. And that this not just be some grand allowance program 
that we are handing out money with no upside to the Government, 
no chance for it coming back. That is not where we want to be.
    But on the fundamental matter of is it needed, if you look 
out at the credit markets, the financial markets, and the job 
markets, I think it is needed. I mean, it is a very fragile 
time in the economy.
    Chairman Dodd. Dr. Rouse.
    Ms. Rouse. Thank you, Mr. Chairman. I think this is a 
wonderful question. As someone who just arrived in Washington 
on Sunday, I have not been part of the inside discussions about 
the TARP, but I have had the opportunity to look on the 
    And I myself, as I am teaching my students about 
microeconomics about insurance, we are saying why do we want to 
reward failure? As a taxpayer, I am wondering is this really 
    But I have to say that the other thing that I teach my 
students is that well-functioning credit markets are 
fundamental to a well-functioning economy. Without well-
functioning credit markets, consumers cannot make long-term 
investments in their cars and their houses. Students have 
difficulty getting student loans to make investments in their 
human capital going forward.
    And so I think a well-functioning credit market is 
essential. I think this is part of a well-balanced program to 
try to get the economy up and running. But I do endorse Mr. 
Bernanke's suggestion that this TARP money is essential.
    Chairman Dodd. Dan.
    Mr. Tarullo. Thank you, Mr. Chairman.
    We have all been commenting on the gravity of the economic 
situation facing the country. I think in these circumstances we 
need, as a Government and as a country, all of the tools that 
are potentially at our disposal. We need, obviously, the tools 
of macroeconomic policy, monetary policy, and the various 
liquidity facilities that the Fed has created. We need the 
guarantee authority in the Federal Deposit Insurance 
Corporation. We need the fiscal measures which the U.S. 
Congress will be taking up.
    But we also need this reserve of resources, which can be 
deployed to strengthen the capital positions of the American 
financial system right now, which are under enormous stress. I 
might add, though, that from the potential perspective of the 
Federal Reserve, the TARP can serve a complementary purpose as 
    As you probably know, in one of the recent facilities which 
the Fed created in an effort to inject liquidity into various 
consumer loans and into small business loans, there is some 
credit risk. And given the Fed's policies on not assuming 
credit risk, the Treasury was willing to provide some portion 
of the TARP as a kind of credit backup, which allows that 
liquidity facility to be created. And that is obviously 
critical to getting those markets affecting consumers and small 
businesses moving again.
    Chairman Dodd. A lot of our colleagues, in talking about 
this--and obviously, they are going to start a debate here in a 
matter of minutes--and asking their views on this, they have 
been disappointed in how the program has been run over the last 
number of weeks since it was adopted in the end of September, 
early October, and are asking questions about a greater 
specificity on how the program could be run and operated 
    One of the concern is--well, there are number of them: 
accountability standards, transparency. Warrants I think are 
not really a debate. We understand that will be in place. The 
issue of foreclosure mitigation, utilizing these resources to 
try and minimize the cascading problem of home values and 
people losing their homes.
    There are concerns being raised as well about whether or 
not these funds ought to be used in any way other than within 
the financial system. We had a debate recently on the 
automobile issue. And while I think a case could have been 
made, obviously it was made, and the administration--the 
outgoing administration--endorsed putting some loans out there 
for the three major automobile manufacturers.
    I wonder if you might comment on these various points: on 
executive compensation, on accountability standards, 
transparency, as well as foreclosure mitigation. And again, Dr. 
Romer, let me begin with you if I can.
    Ms. Romer. I could not agree more that we absolutely, in 
thinking about going forward, want to have a much clearer sense 
of what we are trying to accomplish, articulate what the 
program is going to do, and put a lot more restrictions and 
teeth on it.
    So the things you mentioned about accountability, the 
American people, the Congress. We ought to know who is getting 
funds, where it is going.
    I think your point about using it certainly for foreclosure 
mitigation, I know the President-elect is absolutely committed 
to that and that will be a fundamental part of this program 
going forward.
    On the issue of conditionality, I think one of the ways 
that I have heard the President-elect describe it is as 
sensible conditionality. For example, of course it should not 
just go into executive compensation. Of course, you should put 
some limitations on what you can do with dividends and mergers 
and acquisitions. Certainly, they want to have much stronger 
references on or certainly reporting on what is happening to 
    And I think all of that--because it is a trust. It is the 
American people's money that is being--these resources are 
being invested in financial institutions, as we have all 
suggested, for a very important purpose, to keep our financial 
system helping the rest of the economy. But it needs to be done 
in a responsible way. And I think that is the key going 
    Chairman Dodd. Adam Posen, who is the Deputy Director of 
the Peterson Institute for International Economics, described 
the problem with TARP in the following words, and I quote him. 
He said ``The problem is not that we have wasted the money. The 
problem is that we have put too few conditions on the banks.''
    Dr. Goolsbee, how do you react to that?
    Mr. Goolsbee. I agree that we had problems and that we did 
not put enough conditions. I guess I do not agree that that is 
the only problem. It sounded like he was saying that is the 
only problem. I think in an area of this that I have been 
somewhat involved in on housing, I think it was a big mistake, 
and I think most experts now looking at the operation of TARP 
think it was a mistake not to directly confront the foreclosure 
crisis directly. Because if you are just trying to deal with 
the financial system and you are not thinking about the real 
economy influences, the number one most important of which is 
the housing market, I am not sure that you can get out of that 
    Now the President-elect was, as you know, very early on 
saying that. So before the first TARP was voted on, he was 
saying look, we may have to do things because there is this 
terrible moment of crisis. But let's not forget, our problems 
are rooted in the problems of the real economy, on the squeeze 
on ordinary middle class Americans whose incomes have been 
stagnant, and the dramatic developments in the housing market 
that have left a whole bunch of people unable to make the 
payments on their houses.
    That is what the root of this problem--that is where it is 
to be found. And we are going to have to confront those issues 
    Chairman Dodd. I apologize.
    Dr. Rouse, any comments on that at all? Do you want to pick 
up on that line?
    Ms. Rouse. I guess what I would add to that is the first 
half of the TARP is relatively new. And I think to really 
understand and analyze where things went wrong and what the 
different pieces are that have contributed to its success or to 
the performance it has to date is something that I would look 
forward to, should I be confirmed, to really understand as part 
of the Council of Economic Advisors.
    Because I think you are right, it is hard to understand how 
to go forward without really understanding where we have been.
    Chairman Dodd. Dan.
    Mr. Tarullo. Thank you, Mr. Chairman.
    A couple of things here. First, I think with respect to 
conditions or the structure of the program, everyone needs to 
keep in mind--and I believe that at this point, because of what 
you and others have done, people will keep in mind the aim of 
this very unusual action by the Congress last fall in making 
these resources available.
    The aim is the stabilization of the financial system in 
this country. The aim is to return our financial system to the 
circumstances in which growth is again going to be promoted. 
And keeping that aim in mind, I think, should help shape the 
program as a whole and the conditions that are deployed along 
the way.
    The second point I would add is that the importance of 
transparency is, I think, obvious as a matter of democratic 
accountability and one that I wholeheartedly endorse. But there 
is another important role that transparency can play, and that 
is in the signal it provides to the markets as to what the 
Government policy is and how the Government intends to lead the 
economy out of its present situation.
    When that is made clear through statements by the President 
and the President's senior officials, then markets get a better 
sense of where the effort is being made and they are in a 
position to judge how the results of those efforts are yielding 
or not yielding the kinds of changes they would like to see.
    So I think if it is done well, you get a double benefit--
the actual stabilization of the institutions or markets in 
question and, second, more confidence to economic actors as a 
whole that there is a plan for moving us forward.
    Chairman Dodd. I had a constituent of mine, I met with a 
group of people and talked about this issue, they were 
knowledgeable about the subject matter. All of them were in the 
financial services sector. A lot of things were said that made 
sense to me a couple of weeks ago.
    But one thing that one of them said, there needs to be a 
framework for this. There seems to have been an absence of a 
framework that people can understand. And I think that is the 
point you are making.
    Let me just ask you this last point, and then turn to my 
colleagues. As all of you here have watched all of this from 
one vantage point or another, in your view would the situation 
be substantially worse today had we not acted in September?
    Mr. Tarullo. Yes, I think it would, Mr. Chairman. With all 
of the reservations that you and your colleagues on both sides 
of the Hill have expressed, and the American people have 
expressed, many of which are very well founded, I do not think 
we can deny that the situation in the fall was a very grave one 
    It is always hard, of course, to prove the counterfactual, 
what would have happened if. But I, at least, and I think many 
observers, are convinced that the situation was sufficiently 
dire at that point that action was called for.
    Chairman Dodd. Do you want to quickly comment on that, Dr. 
    Ms. Rouse. I guess I would agree. Ultimately I do not have 
a crystal ball and I do not know what would have happened had 
we not had the first--had the TARP not been exercised. But from 
everything that I have read, everything that I have seen, the 
downside risk was very high. And that is what worries me going 
forward, as well.
    Mr. Goolsbee. I guess I would say almost everybody can 
agree that there was at least a significant chance of a really 
fundamental collapse of the credit system at that time. And 
just the prospect that there was a chance of that, we had to do 
something to prevent that.
    Chairman Dodd. Dr. Romer.
    Ms. Romer. I would like to agree very much, and actually, 
to again put this in the context of going forward. Because I 
think, coming back to your initial question about Chairman 
Bernanke, I think it is very important to realize the U.S. 
financial system is still very weak. And that is precisely why 
we are having this debate about the second tranche, is 
exactly--and here, I will use a little bit of my economic 
    When you look at the Great Depression, we had one shock to 
the financial system. But then what happened is as the economy 
went down, that further weakened the financial system and we 
had a sequence of--there were four waves of banking panics.
    And that is--certainly, when I arrived shortly after 
Thanksgiving and started looking at the forecasts and thinking, 
very much what was so much in my mind was we have been through 
a huge shock to our financial system. Now, as those effects are 
feeding into the real economy and we are starting to see the 
unemployment rate go up, housing prices go down more, that just 
puts additional stress on the financial system.
    So that is why going forward those resources, knowing we 
have behind us the ability to help our financial institutions 
is just absolutely crucial.
    Chairman Dodd. I appreciate you all very much. I have 
mentioned this to Senator Shelby and Senator Reed. We are going 
to try, in the midst of everything else, given the time we are 
in--and I say this particularly to the Council of Economic 
Advisors, but we do not exclude Fed members--to get together 
even informally and spend some time talking about some 
historical consequences and historical examples and how we can 
better understand what steps we need to be taking.
    So I know your primary responsibility is obviously to the 
President, but you are confirmed by the Congress. And so we 
feel as though we can have an opportunity to take advantage of 
your expertise and knowledge as well. And we would like to do 
that. I do not know how frequently we can, but it is something 
I would very much like to institute during this very difficult 
time we are in so that we are well aware of the ideas and 
thoughts that you bring as a result of your expertise and 
    So I thank you very much. And I apologize for now going up 
and trying to see what we can do to get this TARP money 
    I would like you to keep Senator Shelby here as long as 
    Senator Shelby. Thank you, Mr. Chairman.
    Chairman Dodd. My dear friend, Senator Shelby.
    Senator Shelby. Thank you.
    I want to direct this question primarily to you, Dr. 
Goolsbee. This question is probably one we need to be thinking 
about in the future.
    It has been reported that credit derivatives peg the 
probability of a U.S. debt default over the next 10 years 
compared to 1 percent a year ago. Analysts point to a 
combination of factors, including the economic downturn, 
financial sector fragility, concerns over the increase in the 
size of the Federal Reserve's balance sheet, and the projected 
size of the budget deficit.
    The chances of these risks resulting in a downgrade of U.S. 
credit rating probably, some would say, is remote. There is, 
however, some precedent as Japanese debt was downgraded in the 
1990s, as you all know, as economists.
    Dr. Goolsbee, do you have any concern about these market 
data, and this is your field, and their implications for our 
fiscal policy going forward?
    Mr. Goolsbee. Well, Senator, I did not----
    Senator Shelby. And if not, why not?
    Mr. Goolsbee. Sorry to cut you off there.
    Senator Shelby. No, you did not cut me off.
    Mr. Goolsbee. I did not have those statistics, and that is 
very striking to hear that sixfold increase. It may be a small 
percentage. But as I indicated before, even a small percentage 
of something as terrible as that----
    Senator Shelby. Well, we have got unprecedented debt out 
there, have we not?
    Mr. Goolsbee. We do have unprecedented debt.
    Let me answer your question directly in two ways. The first 
is at this exact moment, facing the fragility that Dr. Romer 
has spoken of and that you are familiar with, I do not believe 
that over the next 2 years we can make major deficit reduction 
or balancing the budget a goal. I think that would run the risk 
of repeating one of the mistakes of Herbert Hoover, that led us 
into the Depression.
    Once we get out of that----
    Senator Shelby. Did he want to raise taxes during----
    Mr. Goolsbee. His goal was let's try to balance the budget, 
and as the thing gets worse let's raise taxes and cut spending 
to balance the budget, in the face----
    Senator Shelby. That certainly did not work.
    Mr. Goolsbee. And that was a bad idea. That is the 
motivation behind the recovery package.
    The answer to two is once we are out of that, I believe 
absolutely, we need to pay close attention to fiscal 
responsibility in the medium and the long run of thinking about 
health care costs and the things facing the country.
    Senator Shelby. What was basically, within figures--and 
probably all three of you know this, or should know it--what 
was our national debt say in 1932 overall? It was not much.
    Ms. Romer. It was very small.
    Senator Shelby. As a matter of fact, I believe that we had 
paid down a lot of the first World War debt during the 1920, 
had we not?
    Ms. Romer. We had, absolutely.
    Senator Shelby. So we, as far as a Nation, we were not a 
Nation of debt then, were we not?
    Ms. Romer. Oh, you are absolutely correct.
    Senator Shelby. As compared to today. Is that fair?
    Ms. Romer. That is fair.
    Mr. Goolsbee. Yes, that is fair.
    Senator Shelby. So we had more options this way.
    Professor Romer, I want to direct this to you because you 
have worked in this area and you have published in this area. 
You note that tax increases can have, quoting your words, 
``Have a large, rapid, and highly statistically significant 
negative effect on output.'' Those are your words.
    You wrote that quote, and these are your words too, ``Tax 
increases have a large negative effect on investment.''
    I hope you continue to voice these opinions when giving 
economic advice to the President. And I agree with you on that 
basic philosophy. Have you changed any? Do you still believe 
that? Or have you compromised those principles?
    Ms. Romer. That was the result of an empirical study and I 
am, at heart, an empirical economist. And I absolutely----
    Senator Shelby. You stand by that?
    Ms. Romer. I absolutely stand by them.
    I think there are a couple of things to say. One is I also 
think that Government spending----
    Senator Shelby. Absolutely.
    Ms. Romer. Changes in Government spending have big effects. 
Another way to state those same findings is that tax cuts have 
positive effects on the economy, and that is part of why they 
are a piece of the recovery package, as we have been 
    Senator Shelby. Dr. Tarullo, the Federal Reserve's balance 
sheet--and you will be joining the Federal Reserve as a member 
of the Board of Governors--has grown to over $2 trillion. As a 
central bank, the Federal Reserve has been providing direct 
support to various aspects of the credit market. You are very 
familiar with this.
    While these actions, some argue, may be necessary to 
restore the normal functioning of markets, they also lead a lot 
of people to believe and be concerned about how the Federal 
Reserve will be able to smoothly withdraw from all of the 
markets in which it has intervened. This is real intervention 
in the market.
    Others refer to the Fed, as you have heard, as printing 
money--and they are obviously printing money--to deal with the 
crisis and that we will deal with inflationary concerns later.
    How difficult do you believe it will be for the Federal 
Reserve, which you will be part of, to remove itself from these 
various credit markets? And how will the Federal Reserve know 
when such action can take place? And do you have any concerns 
regarding the scope of the Fed's involvement?
    Mr. Tarullo. Senator, let me begin by saying that the exit 
strategy is going to be an exercise in innovation, just as the 
entry strategy was an exercise in innovation. I think that 
inevitably means that there are going to be difficult questions 
of judgment and timing along the way.
    With respect to the balance sheet itself, there are, of 
course, a lot of assets now on the balance sheet of the Fed. 
The purpose of the Fed, as I understand it, in creating these 
liquidity facilities has not been directly to increase 
reserves. But reserves have nonetheless been increased along 
the way. And as I think the gravamen of your question suggests, 
that leads at least to the potential for monetary consequences 
later on.
    Under the current circumstances, of course, inflation is 
not an imminent concern. In fact, I think most economists would 
suggest that deflation is more of a concern at the moment than 
    Senator Shelby. At the moment.
    Mr. Tarullo. At the moment. But as you rightly suggest, 
there will come a point at which the unwinding, the exit, is 
critical. And I think that precisely because of the novelty of 
the situation, there is not going to be an obvious point based 
on a pre-existing data series which suggests now is the time.
    But I think two things will happen. First, because a number 
of these facilities are themselves dependent upon demand from 
private markets, as those markets normalize you will probably 
see a decreased utilization of some of those Fed facilities. 
And so that will both begin to draw down the size of the 
balance sheet and to help provide some signal as to when credit 
markets are normalized.
    Second, I believe that the Fed, as a matter of ongoing 
policy, will need to be vigilant in absorbing all data sources 
in observing the economy and putting together risks of 
inflation with getting the economy moving again.
    And although I cannot sit here today, as I say, and tell 
you here is the point at which one has to more actively begin 
to reverse course, I think it is critical to bear that in mind. 
And I can assure you that, if confirmed by the Senate, I will 
be in that mindset.
    Senator Shelby. Professor Romer, you have written that--and 
these are your words--I quote, ``Fiscal policy was a little 
consequence'' in ending the Depression, that almost all of the 
recovery was due to monetary expansion. Is that correct?
    Ms. Romer. That is.
    Senator Shelby. What is different in today's economy that 
would indicate that a massive fiscal stimulus will work now, 
when it did not work in the 1930s?
    Ms. Romer. Actually, I think that is a wonderful question 
and I am glad to have a chance to answer it because one of the 
most famous statements about the Great Depression is not that 
fiscal policy did not work, but that it was not really tried. 
And that, I think, is the crucial point. It is not that it 
would not have worked but sort of as----
    Senator Shelby. We do not know if it would have worked, do 
    Ms. Romer. ----as an empirical question, the size of the 
fiscal stimulus, we think of Roosevelt as coming in with a big 
Government spending. In fact, compared to what we are 
considering today, it was relatively small.
    The other thing, just as we have today, we are talking 
about how States are tending to start to run--they are running 
up against balanced budget requirements. In the 1930s, as soon 
as Roosevelt came in, the very interesting thing is that the 
States said oh thank heavens, the cavalry is here, we can get 
our budgets back in order. And so actually, on net, very little 
fiscal stimulus.
    So the reason I think there would be a big difference today 
is we would be doing a lot more. I think the evidence is very 
strong that it will do good. And so I expect it to be very 
    Senator Shelby. You have a background in monetary policy 
    Ms. Romer. I do.
    Senator Shelby. What role do you believe that expanding the 
monetary policy played in creating the housing bubble? Does it 
not always create problems? And you do not know when to quite? 
Is that a role of the Fed?
    Ms. Romer. I actually think this is an empirical question 
for which we do not really have the answer yet. I think that 
that certainly is a relationship you hear, that low interest 
rates fed the bubble.
    I think, as an empirical matter, it is not at all clear. It 
is something again, I am sure, the Fed is going to be thinking 
about this for going forward. It is something I would, in my 
previous life, think would have been one of--as a university 
professor--one of the key issues to be thinking about because 
in thinking about going forward, obviously, we do not want to 
go through this again.
    Senator Shelby. I want to direct this, I am not going to 
get Dr. Rouse get by yet, and I have already questioned Dr. 
Goolsbee. But I want to direct this question to Dr. Goolsbee 
and Dr. Rouse, if I can.
    Many analysts have written that a cut to payroll taxes will 
result in a more immediate and widespread stimulus by putting 
more money in people's pockets, especially if the tax cuts are 
concentrated in lower to moderate-income brackets. In other 
words, our working people in the country.
    This approach would also, according to them, have the added 
benefit of avoiding having the Government pick winners in 
losers in terms of where any stimulus funds would be spent. It 
would be up to the people, the market.
    Dr. Goolsbee and Dr. Rouse, have you discussed this 
approach with President-elect Obama? And if not, will you? And 
has it been included in the stimulus plans that your team has 
    You three are going to be advisors to the President on 
    Mr. Goolsbee. Senator, thank you for that question. I 
believe that the issue you are raising about cutting payroll 
taxes and giving tax relief to ordinary working Americans can 
be more than just a benefit to a group that has been squeezed. 
It can serve as a stimulus.
    Not to get too much into what our specific discussions were
    Senator Shelby. Even if it is for a couple of years or so 
it would help? And how much money are we talking about?
    Mr. Goolsbee. It is potentially a very substantial amount 
of money. I would point out that the President-elect's making 
work pay tax credit is premised on exactly this idea. It is to 
give up to $500 per worker of tax relief based on the payroll 
taxes paid. It is serving very much that function.
    Senator Shelby. Yes, but that has to come later when he 
claims that credit on his tax return, does it not?
    Mr. Goolsbee. Well, much of the discussion now is to try to 
utilize that credit, perhaps change the withholding tables, so 
that it would serve very much that function.
    Senator Shelby. Doing the same thing in a different way.
    Mr. Goolsbee. It would be doing the same thing in a 
different way. And the only reason one is wary about directly 
changing the payroll tax is obviously that the payroll tax is 
going into the Social Security Trust Fund. So then one has got 
to have a different discussion about what is happening to the 
money that would be going into the Social Security Trust Fund.
    Senator Shelby. Maybe you ought to discuss that with the 
young people of America. They, I think, consensus-wise they 
believe that they are not ever going to get any of it. And they 
are probably right.
    Mr. Goolsbee. I do not know the answer to that one, but 
look, I do take your point, Senator. It is an important point 
that we ought to keep in mind.
    Senator Shelby. Dr. Rouse, do you disagree with Dr. 
Goolsbee, agree with him?
    Ms. Romer. Have I ever disagreed with Dr. Goolsbee?
    Senator Shelby. Absolutely, I am sure you have.
    Ms. Romer. I have to say, I have not yet had the privilege 
of directly advising President-elect Obama. But going forward, 
should I be confirmed, I certainly look forward to doing so. 
And I certainly believe that, especially in this time where we 
are trying to jumpstart the economy, a balanced portfolio would 
include tax cuts, especially for the middle class and for the 
working class, as well. And I would encourage him to look at 
that, as well.
    Senator Shelby. Professor Tarullo, bank regulation. As a 
member of the Board of Governors of the Fed, you will likely 
consider financial regulatory reform with all of us this 
Congress. I believe before we examine what changes should be 
made, that it is important that we first understand--not just 
the Fed, but the White House and this Committee--what 
regulatory mistakes helped produce the current financial 
crisis. There are probably many.
    In your view, what have been the biggest regulatory 
failures that have played the biggest role in creating the 
current financial crisis? I do not think we can exclude any of 
the regulators.
    Mr. Tarullo. I would endorse that last statement of yours, 
Senator. I think that there have been enough shortcomings to go 
    It struck me a few days ago that you and I were sitting in 
this same room more than 3 years ago talking about financial 
regulation. And I regret to say that the concerns that I had at 
the time have been more than justified by subsequent events.
    I think that we have got to begin with a recognition that 
when you have depository or other financial institutions with 
potential access to liquidity facilities of the Fed, or with 
Federal deposit insurance, that the capital buffer to be 
required for those institutions needs to be an adequate buffer. 
And that premise, which has been central to much financial 
regulation, I think has not been implemented in such a way as 
to provide the necessary safety and soundness for our financial 
system. And I think going forward the first thing we are going 
to need to do is to determine how we are going to ensure 
adequate capital, because capital provides a buffer against 
losses no matter what their source. That is a good reason for 
it to be a key part of financial regulation.
    Second, I think that we have learned that too much 
financial regulation has focused only on a particular 
institution, in a kind of silo-like fashion. But as we now 
know, and as I think some observers were suggesting some years 
ago, much risk is developed in markets because of the actual or 
potential interactions among market actors. I think we saw 
recently, for example, that firms have strategies which entail 
reliance upon being able to sell assets in a particular moment. 
And it works just fine up until the moment where everybody 
wants to sell those same assets.
    So we also are going to need devices like central 
counterparties and more transparency and a greater sense of the 
interactions among market actors to supplement what I will just 
say I believe to be the need for more rigorous institution-
specific regulation.
    Senator Shelby. You have testified before the Committee 
before on Basel II and your concerns, and we have had those 
concerns, too. What is your view on the adequacy of capital 
levels of U.S. banks? We know it is inadequate. That is what 
our problem is today.
    Mr. Tarullo. Correct.
    Senator Shelby. And for a number of years, the trend was 
going the other way, as you know. The trend has got to come 
back to strong banks, strong capitalized banks. And what will 
be your role as a member of the Board of Governors of the Fed 
and also as a Central Bank member, and also a bank regulator 
    Mr. Tarullo. Well Senator, first I would hope to contribute 
to the role of navigating through the current crisis. And 
obviously that requires a substantial amount of oversight on 
the financial institutions in question. As you say, at present 
my strong suspicion is that the capital levels in many 
institutions are not where we would want them to be. And under 
present circumstances, they are going to have substantial 
difficulty raising capital from the normal sources from which 
they would otherwise seek to obtain it.
    Going forward though--I think you were alluding to this a 
moment ago--I think collectively, by which I mean the 
administration, the independent regulators, this Committee, and 
the rest of the Congress are going to need to reshape a 
financial regulatory system in a way that is adequate to not 
just the risks we have seen in the last 18 months. Because as 
you know, Senator, so often we respond to a crisis by making 
sure that that crisis does not happen again. Well, that 
particular crisis not going to happen again.
    The key is to put in place systems that both monitor and 
identify potential new sources of stress, and that have the 
wherewithal to contain it. And that, I think, is our collective 
task for--my own personal hope----
    Senator Shelby. Our challenge?
    Mr. Tarullo. ----2009.
    Senator Shelby. You cannot let the market run ahead of you, 
can they?
    Mr. Tarullo. The market is going to be----
    Senator Shelby. As a regulator that would put risk and 
stress in it?
    Mr. Tarullo. That is right, Senator. The market is always 
going to be innovating.
    Senator Shelby. Oh yes, and we want it to be innovating.
    Mr. Tarullo. And we want it to be innovating, but we need 
to have at least three things in place. One, the capital buffer 
to which I alluded.
    Senator Shelby. Absolutely.
    Mr. Tarullo. Two, an assurance that the risk management 
systems of these institutions are sound. And I think another 
thing we have learned is that risk management within financial 
institutions fell well short.
    And third, as I said a moment ago, the capacity to respond 
to and contain risks as we see them bubbling up.
    Senator Shelby. Dr. Goolsbee I have one last question, Mr. 
Chairman, and then a short statement.
    Dr. Goolsbee, you have cautioned in the past that any 
efforts to reregulate the mortgage market should not limit 
innovation. You just alluded to that and I agree with you.
    For instance, you have argued--and these are your words--
``The historical evidence suggests that cracking down on new 
mortgages may hit exactly the wrong people.''
    You have also stated, and I quote again your words, 
``Almost every new form of mortgage lending, from adjustable 
rate mortgages to home equity lines of credit to no money down 
mortgages, has tended to expand the pool of people who 
qualify'' in this country.
    Dr. Goolsbee, moving forward, what restrictions, if any, do 
you believe this Committee should place on the types of 
mortgage products offered? Or should it be our role to place 
that? It should be on the regulator or what? I know we will do 
harm. Every time you are doing good you can do some harm, too. 
What do you believe in this area?
    Mr. Goolsbee. Senator, thank you for bringing that up. Let 
me observe one thing about the quotes that you mentioned.
    That was from an article. I wrote a column, an economics 
column, for The New York Times, which was not an opinion 
column. It was my writing about other people's research.
    Senator Shelby. But it was your words though, was it not?
    Mr. Goolsbee. They were my words, writing about the 
research of a Republican economist----
    Senator Shelby. You are not repudiating that, are you?
    Mr. Goolsbee. ----Harvey Rosen. I am not repudiating that I 
wrote it, but it was about the implications of the work of 
economists that had done research on this 1970 to 2001 period.
    Senator Shelby. I just want to put it in the proper 
    Mr. Goolsbee. So that is the proper context, that I was not 
trying in that to give my own opinion.
    Senator Shelby. OK.
    Mr. Goolsbee. The thing that changed, and I have talked 
with Professor Rosen about his study and what the lessons were 
going forward past that, in the mid-2000s, which are outside 
the data in the Willen-Rosen paper, they threw all pretense of 
prudence to the wind. In many cases, there were mortgage 
brokers, there were people outside the regulatory apparatus 
that were committing even illegal activities.
    Senator Shelby. What about the----
    Mr. Goolsbee. I think for this Committee----
    Senator Shelby. What about the investment bankers?
    Mr. Goolsbee. And the investment bankers are not excluded 
for that, absolutely right.
    Senator Shelby. And what about Fannie Mae and Freddie Mac?
    Mr. Goolsbee. Look, they are, as Professor Tarullo and as 
you indicated, Senator, there is a lot of blame to go around.
    What I would say for this Committee, one principle that is 
worth bearing in mind is that through the 2000s, our disjointed 
regulatory oversight apparatus allowed for regulatory 
arbitrage. So if you look at subprime lending, two-thirds of 
the subprime lending was done by non-banks. So even if the Fed, 
for example, had put in completely reasonable rules on what our 
sensible--what would sensible lending origination standards be, 
that would not have applied in most cases to most of the 
subprime lending.
    I think one thing this Committee might consider, 
respectfully, would be thinking about this issue of regulatory 
arbitrage and trying to bring some rationalization of that 
across sectors.
    Senator Shelby. We have got to make the system work.
    One last observation, I thank you for your ability and 
willingness to serve, all four of you, and your patience here 
today. We wish you well. I plan to support your nominations.
    Mr. Goolsbee. I appreciate that.
    Senator Shelby. Do markets work, people say. Yes, I believe 
they do work. They nearly always work. But you have to have--
and you alluded to this. But you have to have trust, integrity, 
and transparency in the market. And I believe that trust is 
absent today. And that is our challenge, how do we bring it 
back together, is it not?
    Mr. Goolsbee. It is.
    Senator Shelby. Thank you, Mr. Chairman.
    Senator Reed [presiding]. Thank you very much, Senator 
Shelby. And thank you all, not only for your very thoughtful 
responses, but also for your willingness to serve the Nation at 
a very difficult time.
    Dr. Romer, I was listening very carefully to a very 
interesting discussion about deficits and taxes that you had 
with Senator Shelby. I recall 8 years ago at this time, when we 
had a significant surplus in the Federal Government after the 
Clinton Administration, some of which was the result of 
difficult tax votes to increase taxes.
    And then we had a proposal by the Bush Administration to 
dramatically lower taxes. The two justifications I heard most 
frequently were, first of all, they pay for themselves. You 
just cut taxes and economic activity grows so much. Apparently, 
over the longer run, that does not seem to work.
    Or they, as you have done some studies, they starve the 
beast. It forces us, the legislature and the administration, 
frankly, to be much more restrained in spending.
    But you did a study with your husband, and I will quote 
from the abstract, ``The results provide no support for the 
hypothesis that tax cuts restrain Government spending. Indeed, 
they suggest that cuts may actually increase spending. The 
results also indicate that the main effect of tax cuts on the 
budget is to induce subsequent legislative tax increases.''
    I presume that is accurate, because those are your words?
    Ms. Romer. That is the correct summary of the paper.
    Senator Reed. And I think one point that could be made, 
which I think was the thrust of Senator Shelby's comments, that 
we are in a much weaker position now because of the policies of 
the last 8 years which have seen deficits pile up upon 
deficits, some of which is a direct result of tax cuts and 
spending on the war, failing to pay for that spending. And I 
can go on and on.
    Is that accurate?
    Ms. Romer. Absolutely, and I think a crucial--if you say 
what is prudent fiscal policy? You run surpluses in good times. 
That is what gives you the buffer that when you hit a period 
like this you can run the large deficits that are the 
appropriate policy when the economy is this sick. So no, I----
    Senator Reed. Well, certainly before 9/11, which was an 
event of monumental consequence, the apparent policy of the 
Bush Administration was to at least cut taxes at a time where 
it was not quite clear you could maintain the surplus. And that 
is exactly what happened.
    Ms. Romer. That is correct.
    Another thing, since Senator Shelby mentioned my other 
paper, I think it is important to get on the record that while 
we find that tax increases taken for sort of exogenous 
philosophical reasons tend to have negative consequences, we 
also find if you look at the subset of tax changes explicitly 
for deficit reduction, kind of getting your fiscal house in 
order, those actually--the standard errors are big, we are not 
very sure. But the point estimates certainly say those kind of 
tax increases can actually be beneficial.
    So thinking about the Clinton Administration experience, 
that sometimes getting your fiscal house in order can improve 
confidence, can lower long-term interest rates, and can be 
    Senator Reed. You seem to be implying that sometimes short-
run pain has long-run gain, and short-term gain or tax cuts has 
long, long-run pain.
    Ms. Romer. That certainly is a----
    Senator Reed. The other aspect of the tax issue, I think, 
is it is not so much cutting taxes because that has a certain--
in terms of the economy--an overall number. It is who gets the 
benefits. One of the things, again, I think the discussion that 
Senator Shelby had was very interesting about well, why don't 
we cut payroll taxes? It will benefit working Americans. In 
fact, you could have a cutoff.
    I thought a year ago, when the President proposed his tax 
rebate across the board, that would have been an appropriate 
way to respond. That was apparently rejected by the 
    But the point is, I think, and I think Senator Obama is 
trying to make this point, that if we can target tax benefits 
to low and middle-income Americans, those benefits will not 
only, I think, sort of even the playing field in the struggle, 
the race of life as Lincoln said, but also provide more 
stimulus to the economy. Is that accurate?
    Ms. Romer. Yes, and certainly the President-elect has made 
it very clear that he wants to cut taxes on 95 percent of 
Americans. That is certainly in the stimulus package. It is a 
credit for working Americans.
    And so yes, we certainly expect that people that are 
struggling to make month-to-month payments, you give them a tax 
cut, you lower their withholding, they do go out and spend it. 
And that would be incredibly beneficial to the economy at this 
    Senator Reed. Let me raise a general question I would like 
to address to all three of the nominees to the Council of 
Economic Advisors. Let me start with Dr. Goolsbee and then Dr. 
Rouse, and then come back to you. Give you a breather, Dr. 
    One of the issues that we have to respond to is the fact 
that for the vast majority of Americans over the last decade or 
more, they have virtually no increase in their income. Now we 
have seen tremendous increases in income at the upper levels, 
historically unprecedented increases. But we have seen no 
growth in the middle class and working Americans, broader than 
    I think the challenge is that we have got to restore that 
type of growth. I mean, it was there in the late 1990s, for a 
combination of reasons: Federal Reserve policy, our fiscal 
policy, the benefits of the huge technological revolution in 
computerization, and all of these things, and not one cause. 
But we saw that.
    We have to get back there. And the general question is how 
do we get back there, where we can confidently tell the 
American people that if you work hard you can expect a growth 
in your wages and your income--not if you are at the very top 
but in every income level we hope, but at least lower and 
middle-income Americans.
    And one other comment. The flip side of that, and this is 
the reality we all understand, is if your income is not going 
up but your level of life has to be maintained, you go to the 
credit cards. And we have become a huge debtor Nation. So the 
flip side of this, not just in terms of our international 
obligations, but in terms of households, household debt has 
accelerated dramatically.
    So this is two sides of one coin. How do you increase 
income so people can consumer from income rather than credit 
cards? How do you increase income to give them the confidence 
that this country is going to provide opportunities, as it has 
in the past? Dr. Goolsbee.
    Mr. Goolsbee. Senator, I do not think there is a more 
important question to put to the economy than that for our long 
run. We obviously have to deal with the immediate crisis.
    Senator Reed. I agree.
    Mr. Goolsbee. But once we are through that, I believe that 
the issues you raise are the No. 1 thing, that it is a 
fundamentally different America where the median family's 
income is falling by almost $2,000 over the course of a boom, 
as it did in the boom that just ended. That was the first time 
in recorded American history where that ever happened. And that 
is fundamentally not the America that any of us grew up in and 
it is not what we believe the country should be.
    In the short run, I think tax relief to working Americans 
and the middle class is a direct form of help. In the medium 
and long run--and I am sure Professor Rouse is going to have 
more input on that--investing in the skills of our own 
workforce, investing in the industries of the future, and 
investing in our own Nation's capabilities, be they the 
infrastructure and the things that lay the groundwork for 
future growth, there has to be an element of all of those 
things to restore his rising tide that lifts all boats.
    Senator Reed. Dr. Rouse.
    Ms. Rouse. Thank you very much. I do agree that one of the 
ways that we want to really try to shore up the middle class is 
to--one, we really need to understand what are the forces that 
have been at work that have led to the stagnation in income. 
But one of them that we can see immediately is the increased 
globalization and the fact that our workers are competing 
against workers all over the world.
    And I think that really points to the very importance of 
our education system, our training system. We need to really 
look hard at it to understand the ways in which it can be 
adapted and made more nimble so that it also can train our 
workers to be competing in this new economy.
    I would also say that I think another big component is 
dealing with health care, which is a big budget item for many 
families and puts many of them at risk for bankruptcy and makes 
them economically fragile.
    Senator Reed. Dr. Romer.
    Ms. Romer. I mainly want to say--I think my two colleagues 
have spoken very eloquently.
    The one thing I would add as a little bit of a statement of 
what is so fabulous about the American recovery and 
reinvestment plan that is out there is that it is very much 
aimed at being something that gets us through the hard times 
now, but is doing exactly these investments. It has a lot of 
money for infrastructure that will make our industries more 
profitable and should make wages go up. It has money for 
education and 21st century classrooms, which is just going to 
be crucial for going forward.
    So I think one of the things that is so important is if we 
have to spend all of this money to get the economy going again, 
let's make sure we get the crucial long-run dividends like 
rising incomes for those people who have stagnated for the last 
8 years.
    Senator Reed. I have one question, and I am not ignoring 
you. I have got some Federal Reserve questions. Just take a 
rest in place, I guess.
    I have one more question. We have talked about targeting 
tax benefits to those who need it. We have talked about getting 
the resources, the direct spending, to places that need it. 
This has geographic consequences. My State of Rhode Island has 
the second highest unemployment rate in the Nation, just behind 
Michigan. It is suffering grievously.
    I would hope that in the advice you are giving to the 
President about not just this round of assistance but going 
forward, that there would be a special attention to those parts 
of the country that are really under extreme duress and have 
limited resources to be able to cope with this problem. And I 
    Ms. Romer. No, I mean, absolutely. One of the roles that I 
took on when I started trying to help the transition was 
exactly to monitor situations and notice which States are 
suffering more than others, what industries are suffering more 
than others. And that has played a big role in kind of thinking 
about what we want in parts of this package.
    And so as you know, for a State that is important in 
manufacturing, one of the things that is good about the 
stimulus package is that it is going to create a lot of jobs in 
manufacturing. It is going to create a lot of jobs in 
    And then I think the other thing to point out is things 
like State fiscal relief. That is going to be, I think, 
something very important for helping so many of the States that 
are genuinely suffering.
    Senator Reed. Dr. Goolsbee, any comments?
    Mr. Goolsbee. Look, I agree with that. And Senator, your 
admonishment, let's pay attention to where people are really 
hurting, we have got to remember that. I mean, there are wide 
swaths of the country where they are already in the thing that 
we are warning everybody about. We do not need to warn them. 
They have already been living it for several months or, in some 
cases, even up to a year.
    Rhode Island is similar to Illinois in that way. My own 
home State has been really hard hit by this downturn. And I 
hope we keep that foremost in our mind when we are designing 
these policies.
    Senator Reed. Thank you.
    Dr. Rouse, any comments?
    Ms. Rouse. Not really. I think that is absolutely--I think 
we not only have to pay attention to the average, but we have 
to look at the distributional consequences and the 
distributional suffering, geographically, by demographic 
characteristics, et cetera. But I think that is all very 
    Senator Reed. Thank you very much.
    Now, Mr. Tarullo, I thought Senator Shelby made some 
excellent comments about the need for introspection by every 
Federal regulator, every State regulator also, and not just as 
an intellectual exercise but to have going forward a clear 
sense of what went wrong and how we are going to fix it.
    As I mentioned to you in my discussions, at a hearing 
months ago I raised this issue with Governor Kohn of the 
Federal Reserve. I would hope that when you go to the Federal 
Reserve, that you would quickly ensure that this appropriate 
self-analysis is going forward.
    And then at some point it is going to have to be public. I 
think the best way to do that is to have the Federal Reserve 
come up here with their version of lessons learned and 
corrective action. Your thoughts on that?
    Mr. Tarullo. Senator, as you know, from my earlier response 
to Senator Shelby and from our conversation, I absolutely agree 
with the need to begin with an understanding of what went 
wrong. Not, as I say, because we think that an additional or a 
new crisis is going to unfold in the same way. It never does. 
But because I have been concerned that the regulatory 
shortcomings that allowed the circumstances that have existed 
over the last few years to develop might similarly allow future 
risky circumstances to develop.
    So I could not agree more. My only concern--and this is not 
directed toward you. My only concern is to make sure that this 
is done not just at the Fed but throughout the Government, not 
in the spirit of trying to assign or avoid blame, but in an 
effort to figure out what it is that needs to be done going 
forward. Because, as I know you agree, that is the shared task 
which is critical.
    Senator Reed. I absolutely concur. That is why my sense is 
that it would be better for the Federal Reserve to come to make 
this presentation on their term rather than try to coax it out 
of them or somebody else. I think that would be very helpful.
    And it is not about assigning blame. It is about avoiding 
problems in the future and ensuring that we have taken the 
right steps going forward. That is, at least, my view.
    You are an expert on Federal regulation, banking 
regulation, and to a degree the Federal Reserve from your 
academic position. Recently, there has been a change in a 
policy toward ownership of bank holding--participation in the 
ownership of bank holding companies by private equity 
companies. GMAC has been given bank holding company status. 
Their private equity owner had to adopt a minority position, 
but still a significant position.
    Do you have any concerns given the kind of wide ranging and 
generally undisclosed nature of the activity of the private 
equity companies? They may not own more than 25 percent, but 
with a 10 or 15 or significant percentage interest, could have 
influence on the company. Do you think the Federal Reserve, 
from your perspective now as an academic expert, has the 
ability to monitor those activities? Is this something that 
introduces another degree of perhaps problems?
    Mr. Tarullo. Senator, my--the inference I have drawn here 
is that with sources of capital for financial institutions 
obviously not what they used to be, that there has been renewed 
interest on the types of issues that have been talked about for 
some years now--the conditions under which minority investments 
could be made in financial institutions without triggering all 
of the regulatory consequences that have normally attended such 
an acquisition. That is obviously an important consideration 
not just today but going forward.
    Having said that, I think the monitoring and regulatory 
question you raised is the salient one. That is, if there is an 
expectation that a certain kind of investment will be made in 
what in investment terms we refer to as a passive fashion, then 
the terms of that regulation need to be carefully monitored and 
enforced. And I do think that if and when people get to the 
point of proposing things which would fundamentally alter the 
separation between banking and commerce, that that is a 
judgment for the Congress to make ultimately. That was a 
judgment the Congress chose to--they chose to maintain that 
separation in 1999. And if there are to be changes which 
significantly affect the current statutory regime, those 
appropriately go through the Congress.
    So while there is obviously room to modify and to allow 
capital infusions from a variety of sources, the monitoring 
issue to ensure that the investments are conducted only in the 
terms that have been suggested needs to be carried through. And 
all regulators need to be attendant to Congressional intent as 
embodied in our existing statutes.
    Senator Reed. Thank you.
    One just final thought, and again you have described the 
situation, I think, the present situation which is there was, 
for the longest time, a reluctance to get into this issue of 
sovereign wealth fund investments, private equity investments 
and bank holding companies because the standards were pretty 
strict. Once you went over--it was a 25 percent ownership or--I 
mean, I think----
    Mr. Tarullo. That would be definite control, but well under 
that could be control.
    Senator Reed. Control. There was pretty tough standards 
about who was controlling the company. I think the presumption 
was, for these entities in particular, that anything more than 
a modest investment and a very passive investment was 
controlling and they stayed out of it.
    Now we are desperate for capital and desperate people do 
desperate things. I think this is something that when you go on 
to the Board, you have to ensure--and your colleagues--that 
there is a kind of policing of these arrangements, as you 
suggested. And also, it is not so much just the commerce and 
banking combination. It is information which a significant 
shareholder might have which could be very relevant to the 
marketplace. I think that has to be--the Fed has to be 
interested also. And influences that can be brought to bear not 
to make decisions--and this is in the context of sovereign 
wealth funds--to make decisions that otherwise might not have 
been made.
    And some of that it is so complicated, some of it might be 
the management anticipating a bad reaction from their 
shareholder so avoiding action because of that.
    I do not envy your task, but I think this is something 
serious. And long before it raises to such a bright level issue 
that Congress is going to have to step in, you and your 
colleagues will have to face it, is my sense.
    Mr. Tarullo. Understood.
    Senator Reed. I think that on behalf of Senator Dodd I can 
thank you all profusely for your responses and, as I said 
initially, for your commitment to public service.
    Thank you very much and the hearing is adjourned.
    [Whereupon, at 2:20 p.m., the hearing was adjourned.]
    [Prepared statements and response to written questions 
supplied for the record follow:]
    Thank you, Chairman Dodd for holding the hearing for today's 
nominees. All of us here today are very concerned about the current 
state of the economy, especially as our Nation continues to confront a 
crisis in the capital markets. This crisis has had negative 
consequences for American families, workers, businesses and investors. 
Today's nominees will all play an important role in our Nation's 
economic recovery, and I congratulate you all on your nominations.
    While this Committee has a lot on its plate this year, I do believe 
that the confirmations of a new Chairman of the SEC, a new member of 
the Federal Reserve Board of Governors and three members of the 
President's Council of Economic Advisors may among some of the most 
important actions we take.
    The next Chairman of the SEC faces the daunting task of restoring 
confidence, integrity and fairness to our securities markets, as well 
as enforcing securities laws and protecting investors. Achieving these 
goals may mean serious reform at the SEC. I look forward to hearing Ms. 
Shapiro's vision for this critical position.
    The effects of the current crisis have been felt far beyond Wall 
Street and the SEC, and we will be looking to all of you for advice.
    Chairman Dodd, Ranking Member Shelby, thank you for convening 
today's hearing. And I want to thank the witnesses for appearing here 
today and for their agreement to serve their country.
    Ms. Schapiro, you are seeking one of the most important positions 
in the Federal Government at a time of economic uncertainty. Very 
simply--you have a tremendously difficult but important job to do as it 
is my opinion that the most recent financial regulators have not been 
steadfast in their duties.
    Over the course of the past few months, it seemed that a different 
titan in the financial sector was facing imminent collapse each week. 
This Committee was being asked to support a bailout and the regulators 
were left with questions and few answers. That has to change and this 
Committee is going to need your help.
    We need to work with the SEC and the other financial regulators to 
put in place common sense regulations--regulations that protect the 
consumer first. As we start tackling legislative initiatives to revamp 
the patchwork of regulations, your guidance will be critical.
    At the same time, you will need to increase the level performance 
of the enforcement division at the Commission.
    Last October, former Chairman of the SEC, Arthur Leavitt told the 
Senate Banking Committee in written testimony,

        Enforcement is so important not because the SEC can catch every 
        cheat and prevent every abuse. It's important because it holds 
        people accountable and serves as a powerful deterrent to bad 
        behavior--and is the most powerful tool a regulator has to keep 
        a market functioning. Indeed, the signals the SEC can send to 
        investors are critical. By bringing a tough enforcement action, 
        making a well-timed public statement, or taking action on a 
        critical need, the SEC builds the investors' confidence that 
        someone is looking out for them which, in turn, builds market 
        trust. Yet at critical moments and on critical issues, the SEC 
        has been reactive at best or has shown no real willingness to 
        stand up for investors.

    Thousands of Montanans have told me over these past few months that 
we need to find the criminals who brought us into this situation and 
send them to their 8x10 cells. They demand accountability to make sure 
no crime goes unpunished when American taxpayers are picking up the 
tabs for their crimes. I agree with them, and I want the SEC to make 
sure those investigations are a priority.
    I look forward to your testimony. Thank you.
    In the past several months, Americans have seen unprecedented 
developments in the financial and housing markets. Beginning with the 
rise in home foreclosures and delinquencies that caused a panic in our 
mortgage industry, by September 2008, the Federal Government had seized 
Freddie Mac and Fannie Mae. The five largest investment banks, 
previously the primary entities regulated by the SEC, were either being 
sold, restructured, or going bankrupt. Our economy started falling 
faster, and the credit markets became completely frozen.
    Our Federal response so far has been to throw money at the problem 
and hope it goes away. However, some of my colleagues and I realize 
that it takes more than blind spending to get our economy back on 
track. We need to take an honest assessment of our current financial 
regulatory system and address the fundamental problems that have caused 
this meltdown. Efficient and responsive market regulation is the best 
answer to a crisis of confidence. Common-sense reforms combined with 
pro-growth economic policies will get our economy humming again. 
However, it is going to take a lot of work to get there.
    Before we talk about a sweeping financial modernization, I must 
note that, for many Americans, this global financial crisis has exacted 
a very real and very personal price. Many workers have seen a lifetime 
of retirement earnings shrink down to nothing. Others have lost their 
home, their most stable financial asset in past years, due to rising 
unemployment and a frozen credit market. For those Americans without a 
job, they face dismal employment prospects as companies cut their 
workforces to stay in the black.
    These Americans expected a market that was transparent, 
accountable, and fair to the average retail investor. They have been 
failed by investment fraudsters, deceptive credit ratings, misleading 
lenders, and, most importantly, by the regulators who are tasked with 
preventing such behavior. The SEC is not solely responsible for 
policing the entire financial market, but as the agency charged with 
investor protection, we must be able to look to the SEC to prevent 
outright fraud and manipulation of American investors. The SEC has been 
front and center in the debate about our financial crisis, and that is 
why this nomination hearing is so important. We stand on the brink of a 
financial sea-change. Our organic system of financial regulation has 
been built-up over a century, responding to individual crises with 
targeted changes to regulation. However, the institutionalization of 
this patchwork quilt of regulation has made our system slow to respond 
and confusing to navigate. We must create a system that is proactive, 
not reactive. Regulators should have the surety to act swiftly and 
prevent fraud and manipulation in our markets. Participants should not 
have to operate in a regulatory ``grey areas'' or worry that market 
innovation will be stifled by cumbersome regulation.
    The SEC is on the front lines of this movement, and Ms. Schapiro, 
if confirmed, will be charged with implementing these reforms. This is 
no easy challenge. There are several issues the SEC must confront in 
order to be the regulator our markets need in the 21st century.
    First, a primary role of the SEC is investor protection. Last 
month, the confidence of American investors was badly shaken with the 
revelation that Bernie Madoff, former Chairman of the NASDAQ stock 
exchange, was running a $50 billion investment fraud scheme. According 
to a statement from Chairman Cox last month, this scam is at least a 
decade old, owing its success to ``multiple failures'' at the SEC and 
elsewhere to catch this crook. More amazingly, news reports are stating 
that many investors on Wall Street knew about this scheme and may have 
invested with him because he was cheating the system to gain illicit 
returns. This is outrageous.
    As President-elect Obama's designee for chairman of the SEC, I am 
curious to hear your reaction to this scandal and how, as chairman, you 
plan to ensure it will never happen again. I am also curious to hear 
about your experience as a regulator both with the NASD and with the 
Financial Industry Regulatory Authority. Why did FINRA, under your 
management, miss this investment scam when so many on Wall Street 
seemed to know about it?
    I am also interested in hearing your opinions about the credit 
rating agency registration system at the SEC, and if you believe the 
conflicts of interest inherent in credit rating agencies can be 
properly managed.
    Ms. Schapiro, I would like to hear your opinions about several 
initiatives already underway at the SEC. These include mark-to-market 
accounting, credit derivative swaps, and the convergence of U.S. and 
international account standards. I look forward to your testimony and 
the question and answer period.
    I also look forward to the testimony of our second panel of 
witnesses, especially Mr. Tarullo. There is no doubt that the role of 
the Federal Reserve as a financial regulator will be addressed in the 
coming months, and I am interested in understanding Mr. Tarullo's 
perspective on the future of the FED as the agency in charge of U.S. 
monetary policy and interest rates, as well as a regulator of banks and 
other financial institutions.
    Chairman Dodd and Ranking Member Shelby have made clear that 
regulatory modernization will be a priority in the 111th Congress and I 
look forward to joining them in this important debate. Thank you.
                   Securities and Exchange Commission
                            January 15, 2009
     Mr. Chairman, Senator Shelby, and Members of the Committee--it is 
an honor to appear before you today as President-elect Obama's nominee 
to serve as Chairman of the Securities and Exchange Commission.
    I also want to thank Senator Reed for his very kind introduction, 
and all the members of the Committee and your staff who have been so 
generous with their time and advice during this confirmation process.
    As Senator Reed mentioned, I grew up in New York a short train ride 
from Manhattan, but miles away from Wall Street. My father was a 
printer; my mother a librarian.
    Like millions of families, my parents worked hard to save enough to 
buy a home, send their children to college, and have a secure 
retirement. They taught my siblings and me right from wrong--and that 
we could get ahead by working hard and playing by the rules.
    Perhaps that's why I've spent my career--at the SEC, CFTC, and most 
recently at FINRA--committed to building a financial regulatory system 
that protects investors and supports and strengthens free and fair 
    We cannot underestimate the situation we are now in: the capital 
markets have collapsed; trillions of dollars of wealth have been lost; 
our economy is in recession; and investor confidence has been badly 
shaken. Middle-class families who were relying on that nest egg to pay 
to send a son or daughter to college or for a secure retirement now, 
don't know where to turn.
    There are many reasons for this crisis--and one of them is that our 
regulatory system has not kept pace with the markets and the needs of 
    It is precisely during times like these that we need an SEC that is 
the investor's advocate--that has the staff, the will and the resources 
necessary to move with great urgency to bring transparency and 
accountability to all corners of the marketplace, to vigorously 
prosecute those who have broken the law and cheated investors, and to 
modernize our country's regulatory system to match the realities of 
today's global, interdependent markets.
    These urgent responsibilities would fill any agenda, but, Mr. 
Chairman, allow me to highlight a few of my top priorities.
    First and foremost, if confirmed as Chairman, I will move 
aggressively to reinvigorate enforcement at the SEC. With investor 
confidence shaken, it is imperative that the SEC be given the resources 
and the support it needs to investigate and go after those who cut 
corners, cheat investors, and break the law. As the first SEC Chairman, 
Joseph Kennedy, told the Nation 75 years ago in explaining the agency's 
role, ``The Commission will make war without quarter on any who sell 
securities by fraud or misrepresentation.''\1\
    \1\ Remarks to the National Press Club, 25 July 1934.
    I look forward to working closely with you, Mr. Chairman, and the 
members of the Committee to ensure the SEC has the capability, to 
fulfill this critical mission--as well as to perform all of its other 
important duties.
    Second, I want to re-engage the SEC with the people we serve, 
namely, investors. The investor community--from the largest pension 
fund to the family who has scrimped and saved in their 401(k) or 529 
plan--needs to feel that they have someone on their side, that they can 
go to the SEC for advice, to seek redress, or to have their opinions 
    Third, as I work to deepen the SEC's commitment to investor 
protection, transparency, accountability, and disclosure, I also want 
to ensure these commitments are preserved in any regulatory overhaul 
that may be undertaken.
    Indeed, as a member of the President's Working Group on the 
Financial Markets, I hope I can offer its members, the Administration, 
and Congress both the benefits of my years as a regulator as well as 
the decades of experience the professionals at the SEC have in these 
    The American people want and expect us to update the regulatory 
system that has failed them--and to prevent the kinds of abuses that 
have contributed to the economic crisis we now face. I assure you that 
I will always keep their concerns front and center.
    Seventy-five years after the SEC was founded, the Commission finds 
itself in a situation where, once again, it must play a critical role 
in reviving our markets, bolstering investor confidence, and 
rejuvenating our economy.
    I am under no illusion that this will be an easy job. There is a 
lot of work to be done--quickly and diligently--in the months ahead. 
But I look forward to this challenge, to helping the millions of 
investors who rely on strong markets and a strong economy, and to 
working with the professionals at the SEC and the Members of this 
    To be entrusted with leading the SEC at this moment, would be a 
great honor, and I am grateful for your consideration.
    Mr. Chairman, before closing I want to thank my husband, Chas, and 
our daughters Molly and Anna, for their support and understanding. They 
are here with me today.
    Thank you, Mr. Chairman, and I am happy to answer any questions.
                      Council of Economic Advisors
                            January 15, 2009
    Chairman Dodd, Ranking Member Shelby, and members of the Committee, 
it is an honor to come before you as President-elect Obama's nominee 
for Chair of the Council of Economic Advisers.
    I want to thank Senators Feinstein and Boxer of California for 
their warm introductions. I am truly honored to have both of my home 
state Senators with us today and appreciate their kind words.
    Before I begin, I would like to introduce three people who are with 
me today: my husband of 25 years, David Romer, who is also an 
economist, my father, Clifford Duckworth, from Massachusetts, and my 
12-year-old son, Matthew. My two other children, Katie and Paul, are 
away at school and are not able to join us today.
    Let me take a moment to tell you a little about myself. I was born 
in Illinois and lived in Connecticut, Ohio, Alabama, and New Jersey as 
I was growing up. I attended the College of William and Mary in 
Virginia and received my Ph.D. in economics from the Massachusetts 
Institute of Technology. I was an assistant professor at Princeton 
University for 3 years before moving to the University of California, 
Berkeley. I have been a professor at Berkeley for almost exactly twenty 
years, and have had the honor of teaching introductory economics to 
thousands of Berkeley freshmen.
    As we are all far too aware, economic conditions in the United 
States, and indeed in much of the world, are weak and deteriorating 
rapidly. The unemployment rate announced last Friday was 7.2 percent, 
more than 2 percentage points above its level at the start of this 
recession. Job loss has now topped two and a half million and shows no 
evidence of stopping. And, our financial institutions remain in a 
precarious position and crucial credit flows have not been restored, 
despite unprecedented actions by the Congress, the Treasury, and the 
Federal Reserve.
    As you may know, my area of expertise is the history and effects of 
monetary and fiscal policy. I have also done extensive work on the 
causes of the Great Depression of the 1930s and the sources of recovery 
from that national crisis. I never expected my knowledge of the 1930s 
to be useful in a modern policy setting. And, certainly, as bad as 
current conditions are, they remain far better than what our parents 
and grandparents experienced 75 years ago. But, the U.S. economy over 
the past year has suffered the worst macroeconomic shock since the 
1930s, and the risks to the economy are by far the greatest they have 
ever been in my lifetime. The possibility that continued economic 
decline will further weaken the financial sector and lead to a 
devastating rise in joblessness is a risk that demands immediate and 
unprecedented action.
    It is for this reason that, if confirmed, I am dedicated to working 
with President-elect Obama and Congress to forge an economic recovery 
plan to help stabilize the U.S. economy. Making crucial investments in 
infrastructure, education, healthcare, and energy, will not only help 
us through the current crisis, but also put us on a path to a much 
better future--a future in which we deal with our long-run energy 
needs, equip our children to compete in the world economy, and ensure 
that middle-class families once again realize the full promise of the 
American dream.
    The vision of hope that the President-elect has given the American 
people is one that I share. The resilience of the American people and 
the fundamental strength of the market system are the most important 
reasons for optimism. But I also believe that well designed, aggressive 
government policies will make a crucial difference. Indeed, much of my 
academic research has shown exactly this: government policies to 
increase aggregate demand do indeed increase output and reduce 
unemployment in the short and medium run. And, while I have not 
personally done research on the effects of government spending, I 
firmly believe that the evidence shows that timely government 
investment will be very beneficial.
    Of course, getting through the current crisis and putting us on the 
road to better long-run growth will not be the end of the economic 
agenda. Much more work will need to be done in a wide range of areas, 
from health care to energy to financial market reform. And, all of this 
work will have to take place in the context of medium- and long-run 
budget projections in which government revenues and expenditures are 
painfully out of balance. Dealing with all of these issues will be 
difficult and will require extensive analysis and hard choices. But, I 
can think of no greater honor than to be a part of such an important 
endeavor, and I can think of no President whose leadership and judgment 
I would trust more than the President-elect.
    In closing, let me say just a word about the organization I have 
been nominated to lead. The Council of Economic Advisers was created to 
provide the President, and through its reports, the Congress, with the 
best advice professional economists have to offer. It is an institution 
with a proud history of providing honest, first-rate economic analysis. 
This is a tradition I would intend to continue and strengthen. As 
someone who has spent my entire professional life as a scholar and 
teacher, I am a firm believer in the power of knowledge and research. I 
would do my utmost to protect the integrity of the CEA, and make it a 
center for unbiased, scientific analysis of the crucial economic issues 
facing our country in the years ahead.
    Thank you. I would be happy to answer any questions you might have.
                      Council of Economic Advisors
                            January 15, 2009
    Let me start by thanking my senior Senator for his kind 
introduction. And what a thrill and how appropriate that Senator Durbin 
himself got his start in politics working for the late Senator Paul 
Douglas--a legendary figure in Illinois politics but also originally a 
famous economics professor from the University of Chicago (for those 
economists here today, none other than the namesake of the Cobb-Douglas 
production function).
    Chairman Dodd, Senator Shelby, Members of the Committee, thank you 
for your time and the chance to be here today.
    Before I begin, I would like to introduce you to my family. My wife 
Robin--the love of my life and, as you can see for yourself, prettiest 
girl in Chicago--is here with our three kids. Our daughter Aden is 8, 
our son Addison is 5, and our son Emmett is 2. Emmett is a lot more 
interested in trucks than he is in economics so he may not sit still in 
that seat for too much longer. Next to them there is my mom, Linda, and 
my dad, Arthur, who came up for this hearing all the way from Abilene, 
Texas. My Dad recently got ordained as a Deacon at the Church of the 
Heavenly Rest in Abilene and I especially appreciate his being able to 
take time out from his new duties to be here.
    By way of background, I was born in Waco, Texas, and spent most of 
my childhood in Whittier, California. I went to school at Yale and then 
M.I.T. before becoming a professor in 1995 at the Business School at 
the University of Chicago (recently named the Booth School of 
Business). I am currently the Robert P. Gwinn Professor of Economics 
and the co-director of the Initiative on Global Markets.
    As a researcher, I am an empirical economist--one of the old-style 
data dogs. My research has covered public policy and taxation, the 
Internet, telecom and innovation, capital investment, and the study of 
industries in America and the world like manufacturing, airlines, 
media, computers, and others.
    Now given the expertise of the Members of this Committee and the 
situation Professor Romer just described, I don't think that anyone 
here needs further convincing that we arrive at a time of great moment 
in the Nation's history and one as intimidating as any since the 
    But at a moment like this I cannot help but remember my old friend 
and mentor, the late Nobel laureate and former CEA member James Tobin. 
When I was a freshman I took the last class of Jim Tobin's career and 
he took me under his wing as a research assistant. He had grown up in 
the Great Depression and always believed that economics was more than 
just an interesting field of study, that it could make the world a 
better place. In 1961, President Kennedy asked him to join the Council 
of Economic Advisers. He used to say that he never worked harder in his 
life than those years at the CEA. He was proud to have served the 
country and given sound economic advice.
    I think it's appropriate to remember Tobin these days because he 
spent his life teaching his students that economics could be used to 
fight catastrophes just like this. And as I sit before you now--almost 
a half-century later--as the nominee for Tobin's old seat at the CEA, 
it is my sincere hope that we will live up to the standard the CEA set 
back then in what most view as its Golden Age. If we are confirmed, Mr. 
Chairman, I can assure you that we will come to the job every day ready 
to work hard, to bring the best economic thinking we have, and to be 
motivated by the great CEA legacy that has come before us.
    I thank you for the opportunity to be here and will be happy to 
answer any questions you might have.
                      Council of Economic Advisors
                            January 15, 2009
    Mr. Chairman and distinguished Members of the Committee on Banking, 
Housing, and Urban Affairs: I am pleased and honored to appear before 
you today as a nominee to be a Member of the President's Council of 
Economic Advisers.
    Before I begin, I'd like to introduce my family who is here today 
in force. First is my husband and partner in life, Ford Morrison, along 
with our two girls Nidal (who is 7) and Safa (who is 5). There is also 
our contingent from the great State of New Jersey, my parents, Carl and 
Lorraine Rouse, and my sister and niece, Carolyn Rouse and Skylar 
Schiltz-Rouse. Next to them are my cousin, Terrie Rouse who is also the 
CEO for Visitor Services for the Capitol Visitor Center, and my Aunts 
and Uncles Doris and George Haley, and Phyllis and Bill Taylor. And 
while she really wanted to be here, my mother-in-law, Toni Morrison, is 
unable to attend.
    I am currently a Professor of Economics and Public Affairs at 
Princeton University where I have been on the faculty for the past 16 
years. As a labor economist I am most committed to understanding the 
problems, choices, and tradeoffs that individuals face, particularly 
those that concern the labor market. I am particularly interested in 
understanding ways to increase worker productivity, primarily through 
the acquisition of valuable skills or human capital. As such, I have 
devoted much of my research to the economics of education at all 
    As a faculty member of a public policy school, I have always been 
deeply committed to studying real-world problems with real-world 
implications, rather than abstract theory. I was fortunate to have the 
opportunity to apply my skills to actual policymaking once before in 
1998 when I spent at year at the National Economic Council and I would 
be most honored to have the opportunity to do so again should I be 
confirmed as a member of the Council of Economic Advisers.
    Indeed, these are extraordinary times. As Professor Romer has 
already described, the macroeconomic shock is the worst that it has 
been in a generation and by all expectations the unprecedented job loss 
will continue in the short term. Importantly, we are seeing that some 
sectors are suffering more than others forcing many unemployed workers 
to search for jobs that require a different set of skills than those 
they currently possess. As such, I believe that investments in 
education and training are critical to any strategy to help jumpstart 
our economy and should I be confirmed I look forward to working with 
the other members of the Administration and this Committee to provide 
the economic insights and analysis you need to craft wise and effective 
    As a concluding note, I would like to add that for the past several 
years I have taught one of the main introductory micro-economics 
courses to first-year students in the Woodrow Wilson School's master's 
program. (This year's class was particularly inquisitive and 
challenging!) I emphasize to the students the power of economics--both 
theoretical and applied--in guiding analysis of policy issues. Should I 
be confirmed, I would bring this dedication and enthusiasm to the 
President's Council of Economic Advisers.
    Thank you. I would be happy to answer any questions you or other 
Members of the Committee might have.
            Board of Governorsof the Federal Reserve System
                            January 15, 2009
    Thank you, Mr. Chairman, Senator Shelby, and other Members of the 
Committee. I am honored by President-elect Obama's designation of me as 
his intended nominee for the Board of Governors of the Federal Reserve 
System. I am also mindful of the enormous responsibility that would 
come with this position.
    We are all aware that our country faces greater financial and 
economic challenges than at any time since the Depression. The Federal 
Reserve has a critical role to play in responding to these challenges. 
As the Nation's central bank, it must pursue its dual mandate of 
promoting maximum employment and stable prices in an unusually trying 
macroeconomic environment.
    As a bank regulator, the Board must use its existing authority to 
provide both effective supervision and robust enforcement. Going 
forward, it must join with other parts of our government to help revamp 
the financial regulatory system. In particular, we need sensible 
changes that will contain potential sources of systemic risk in 21st 
century financial markets, and thus diminish the likelihood and 
severity of future financial crises.
    Over the last decade, I have devoted considerable time to thinking 
and writing about banking regulation and international financial 
regulation, including the management of international financial crises. 
In the last few years, I have focused on capital regulation. This work 
has reinforced my views on the importance of adequate capital buffers 
for ensuring the safety and soundness of financial institutions. This 
study of capital has, I believe, provided a good foundation for 
participation in the Board's regulatory functions and, more generally, 
in the process for reforming financial regulation.
    Prior to returning to an academic position, I was directly 
involved, as Assistant to the President for International Economic 
Policy, in responding to the international financial crisis of the late 
1990s. Each financial dislocation has its own unique features, of 
course, and the severity of current problems far outstrips the impact 
on the United States of that earlier episode. Thus experience with one 
crisis cannot provide the answers for dealing with the present 
situation. Still, such experience does help prepare one to consider 
options and make decisions in times of great uncertainty and stress.
    If confirmed by the Senate, I will draw upon both my government and 
academic backgrounds in serving on the Board of Governors. I have the 
highest respect for the tradition of independence associated with our 
country's central bank. At the same time, I understand that, although 
so much of the Fed's work is necessarily grounded in complex economic 
analyses and highly technical rules, the ultimate purpose of this work 
is to create the conditions under which Americans can make good lives 
for themselves.
    Let me close by thanking the Committee for expeditiously scheduling 
this hearing. I hope to work with each of you in the months and years 
ahead. I would be pleased to answer any questions you may have for me.

Q.1. Investment Advisers: Investment advisers serve an 
important role in the helping Americans improve the management 
their finances. I have been contacted by investment advisers 
from Connecticut who have expressed concerns that you would 
join the Commission with the intent to require investment 
advisers to register with a self-regulatory organization, based 
on statements made during your tenure at FINRA. One of their 
letters to me stated:

        [W]e have very serious concerns with her stated support for 
        extending FINRA's reach to become the self-regulatory 
        organization for investment advisers. Investment advisers are 
        already subject to strict oversight and examination by the SEC 
        and any additional layer of bureaucracy would be redundant, 
        inefficient and confusing to the investing public. FINRA would 
        be an especially poor fit to regulate investment advisers 
        because it is geared to police the brokerage industry which, as 
        you know, is not held to the same fiduciary duty under law as 
        are investment advisers.

    If confirmed, would you approach this issue and other 
issues affecting investment advisers with an open mind, 
independent of past employment affiliations? Prior to taking 
any action in this area, would you invite and consider the 
views of interested parties?

A.1. I will approach this and all issues with an open mind and 
consult broadly on actions that the Commission might take.

Q.2. Financial Professionals: Investor advocates have expressed 
concerns that some registered representatives are marketing 
themselves as advisers without being subject to the same 
standards as investment advisers, who have a fiduciary duty to 
place the customer's interests first.
    Do you feel that there should be increased regulatory 
attention to requiring registered representatives to more 
accurately inform their clients of the nature of the duties 
owed to the clients and distinguish themselves from those 
professionals who owe their clients a fiduciary duty?

A.2. Whether or not a registered representative owes a client a 
fiduciary duty depends upon the activities that the 
representative has undertaken to perform on the client's 
behalf. SEC rules and regulation should ensure that all 
investment professionals, whether broker-dealers or investment 
advisers, accurately inform their clients of all relevant 
matters, including the scope of their responsibilities, fees, 
and conflicts of interest.
    In addition, I believe that we need to have more uniform 
regulation across product lines and industries to help ensure 
that consumers receive the same basic regulatory safeguards and 
protections no matter which investment product or service they 
purchase. Regulation of the U.S. financial industry is 
fragmented and inefficient. If a firm offers a security, an 
insurance product and a futures contract, it will be subject to 
disparate regulatory standards for each product imposed by 
different agencies. If the firm underwrites mortgages, it may 
be subject to little substantive regulation.
    Both the SEC and Treasury have noted the rapid and 
continued convergence of the services provided by broker-
dealers and investment advisers and the resulting regulatory 
confusion due to an outdated statutory regime. Most securities 
professionals are either ``broker-dealers'' or ``investment 
advisers'' under the federal securities laws. Both offer 
financial advice for compensation and serve as intermediaries 
between investors and the securities markets. However, broker-
dealers are regulated under the Securities Exchange Act of 1934 
and FINRA rules. Investment advisers are regulated under the 
Investment Advisers Act of 1940 (Advisers Act), and are not 
governed by any SRO.

Q.3. Transparency of SEC Decision-Making: I am pleased to hear 
your intent to reconsider the proxy access issue. I want to 
raise an issue about the Commission's decision-making process 
that arose in 1990 when its interpretation that the shareholder 
proposal rules allowed proxy access proposals was changed. From 
1976 to 1990, the Commission had a policy of, essentially, 
allowing shareholder proxy access proposals. Then, staff in the 
Division of Corporation Finance reversed this significant 
policy and denied proxy access in a no-action letter decided 
for reasons that, as the Second Circuit Court of Appeals said 
in the AFSCME v. AIG case, ``the SEC has not provided, nor has 
the Division ever provided.'' This led to new rulemaking 
(through which the Commission received many thousands of public 
    If confirmed, would you have the Commission use transparent 
decision-making processes on issues of such significance?

A.3. Yes.

Q.4. Shareholder Proposal Rule: If confirmed, would you 
preserve and protect shareholders' rights to raise important 
issues through the shareholder proposal process consistent with 
the letter and spirit of Rule 14a-8?

A.4. Yes.

Q.5. NRSRO Data Disclosure: If confirmed, would you consider 
the potential benefits to investors and to the integrity of the 
markets if Nationally Recognized Statistical Ratings 
Organizations were required to make available to the public 
more of the data they have obtained from issuers in the course 
of formulating a credit rating on securitizations, such as bond 
structure, types of assets (e.g., size of and geographic 
locations of loans), debt service coverage, loan to value 
statistics and services?

A.5. As we look at the entire area of NRSRO regulation, we will 
consider this option.

Q.6. Cooperation with State Securities Regulators: State 
securities regulators perform important work in protecting 
investors and have made key contributions to national 
enforcement and education efforts over the years. If confirmed, 
would you fully cooperate with and support the work of State 
securities regulators?

A.6. Yes.

Q.7. Broker Voting: The Commission has before it a rule 
proposal submitted by the New York Stock Exchange that would 
prevent brokers from voting in elections for corporate 
directors without receiving instructions from the beneficial 
owner of the shares.
    New York Stock Exchange Rule 452 allows brokers to vote on 
certain ``routine'' proxy proposals if the beneficial owner has 
not provided voting instructions at least 10 days before a 
scheduled meeting. The uncontested election of directors is 
among the proposals the NYSE has considered to be routine. Some 
investors have long argued that director elections are not 
routine. The Council of Institutional Investors has noted that 
some observers have said that broker votes are virtually always 
cast for management, and believes that the rule taints the 
integrity of proxy voting by effectively stuffing the ballot 
box for management.
    In April 2005, the NYSE created a Proxy Working Group to 
review the exchange's regulation of proxy voting. In October 
2006, the NYSE submitted for SEC approval a plan to redefine 
director elections as ``non-routine,'' in effect eliminating 
uninstructed broker votes from director elections. The SEC 
staff responded to the proposal with comments. Subsequently, 
the NYSE board resubmitted the original proposal with an 
amendment to exclude board elections at investment companies 
(mutual funds).
    If confirmed, would you seek for the Commission act on the 
issue of broker voting within a reasonable period of time?

A.7. Yes.

Q.8. Review of Disclosures by Public Companies involved with 
Securitizations: If confirmed, would you ask the Commission 
staff to carefully review disclosures in periodic filings of 
public companies that were extensively involved with 
securitizations, such as investment banks, during the past few 
years for compliance with Federal securities laws and to take 
any appropriate enforcement actions?

A.8. Yes.

Q.9. Public Company Disclosures: In light of the recent credit 
crisis and its damage to the values of investments, are there 
any additional public disclosures that you would recommend the 
Commission require public companies in the securities or 
banking industries, particularly those involved with 
securitizations, to make for the protection of investors?

A.9. This is an issue that we review carefully. It is essential 
that investors have a full assessment of the risks of the 
companies they own or seek to own.

Q.10. Accounting Restatements: The SEC has received the 
recommendations of the Advisory Committee on Improvements to 
Financial Reporting (CIFiR). A tremendous amount of work went 
into this analysis and some recommendations have been uniformly 
praised. However, others have drawn criticism for excessively 
limiting the circumstances under which errors in financial 
reports have to be restated--by making it easier to deem 
quantitatively large errors to be immaterial and by encouraging 
greater deference toward judgments by public companies and 
their auditors. Some retail and institutional investors are 
concerned that these would undermine reliability and 
comparability of financial disclosures, and undo improvements 
to accounting made in the wake of the Enron and WorldCom 
scandals. They argue that continued efforts should be made to 
reduce the number of errors, rather than reducing the number of 
errors that have to be restated.
    If confirmed, would you seek to protect investors and 
preserve and enhance the integrity of the financial reports of 
public companies by advocating improvements in the quality of 
accounting, so that the number of errors would be reduced, and 
by requiring appropriate accounting restatements?

A.10. Yes.

Q.11. GAAP and IFRS Accounting: Will you proceed cautiously and 
carefully on any proposal to allow U.S. firms to file financial 
reports using International Financial Reporting Standards 
instead of Generally Accepted Accounting Principles, 
particularly while significant differences exist between the 
two standards and in the governance, independence and funding 
of the standard setters?

A.11. Yes.

Q.12. Mutual Recognition: Will you proceed cautiously and 
carefully on proposals relating to mutual recognition, and 
perform extensive analysis of the comparability of regulations, 
resources devoted to regulation, agency independence, rule of 
law, commitment to investor protection and other key factors to 
assure the adequate protection of U.S. investors, prior to 
taking any action?

A.12. Yes.

Q.13. Credit Default Swaps: Broadly speaking, how would you 
propose that the Commission address recent problems which have 
occurred in the over-the-counter derivatives markets? Do you 
support the Commission's recently adopted rule ``Temporary 
Exemptions for Eligible Credit Default Swaps To Facilitate 
Operation of Central Counterparties To Clear and Settle Credit 
Default Swaps''?

A.13. I think it makes sense to answer these questions in 
reverse order. I do support the temporary exemptions for credit 
default swaps. First, there is an overriding compelling need to 
reduce the counter party risk that attaches to any bilateral 
contract and is not transferred to a clearing agency for 
settlement. The temporary exemption does not exempt application 
of the federal anti-fraud rules, applies only to credit default 
swaps not otherwise exempt from SEC purview, applies to 
contracts entered into by sophisticated customers as defined in 
the rule and allows clearing platforms to be established 
without registration at this time with the Commission. Given 
the compelling risk of further possible systemic damage without 
reducing these contracts to the guarantee of performance that a 
clearing platform offers, I believe the temporary order is 
warranted. The temporary rule itself asks a series of questions 
that will allow the Commission to determine the future of the 
temporary rule and how it may better perfect its purposes.
    I would direct that the Commission address recent problems 
in the over-the-counter derivative markets from transparency 
and market structure viewpoints. With estimates of $70 billion 
or more in notional credit default swap contracts we have to 
understand who is holding these positions. Clearly many of 
these contracts represent a leverage risk position rather than 
insurance for many participants. In the listed options markets 
we have position and exercise limits because of the perverse 
market effects that transpire in their absence. We can't 
determine the extent of such concerns in the over-the-counter 
derivatives market if we don't know the holdings of various 

Q.14. NASD Merger With NYSER: The New York Times in an article 
entitled ``SEC Choice is Sued Over a Merger of Regulators,'' 
published on January 12, 2009, reported that two lawsuits by 
FINRA members claim that, as Chairman and CEO of the NASD, you 
made misleading statements to NASD members in order to obtain 
support to complete a merger of the New York Stock Exchange 
Regulation and the NASD. The alleged misstatements reportedly 
were to the effect that the I.R.S. in a ruling limited the NASD 
from paying each member more than $35,000.
    Were the representations that you made accurate and 
consistent with applicable law?

A.14. The NASD, as is FINRA, was a Delaware non-stock 
corporation exempt from federal taxation under Section 
501(c)(6) of the Internal Revenue Code. As such, (and under its 
own corporate charter) the corporation's assets cannot inure to 
the benefit of its members. The faulty premise of the lawsuits 
is the belief that the assets were the property of the members. 
We were working to obtain a ruling from the IRS that would 
allow the proposed distribution but there was not any guaranty 
that such a payment would be allowed. The statements made were 
accurate representations in the judgment of the Board and 
management as to the payment that could be made under 
applicable law.

Q.15. FINRA Regulatory Authority: FINRA and its predecessor, 
the NASD, have had broad authority to examine and investigate 
members and their associated persons, and perform periodic 
exams, pursuant to their corporate rules and bylaws as well as 
the Federal securities laws. Bernard L. Madoff Investment 
Securities LLC was founded in 1960 and the firm was registered 
as a broker-dealer with FINRA and its predecessor, the NASD. In 
2006, this firm additionally registered as an investment 
advisor (there was not a separate corporation). The press 
reports that Madoff operated a fraudulent ``Ponzi scheme'' for 
decades from the premises of the brokerage firm, using 
discretionary accounts which were charged trading commissions 
but not advisory fees.
    You indicated that ``FINRA had jurisdiction over Madoff's 
broker-dealer activities but not over its investment advisory 
activities.'' Please identify the FINRA and NASD rules and 
bylaws or securities laws that, as has been indicated to the 
Committee, have prevented FINRA and NASD from examining for 
fraudulent activity such as Madoff's during the extensive 
period this fraud reportedly was taking place.
    Also, please describe how FINRA and NASD distinguished 
between ``broker-dealer activities'' and ``advisory 
activities'' when determining what they could look at in an 
examination of Bernard L. Madoff Securities LLC or associated 

A.15. Section 15A of the Securities Exchange Act of 1934 
establishes the statutory jurisdiction of FINRA. That section 
authorizes FINRA to ``enforce compliance by its members and 
persons associated with its members, with the provisions of 
[the Securities Exchange Act], the rules and regulations 
thereunder, the rules of the Municipal Securities Rulemaking 
Board'' and FINRA rules. Under our fractured system, broker-
dealers are regulated under the Securities Exchange Act and 
investment advisers are regulated under the Investment Advisers 
Act of 1940. Section 15A does not authorize FINRA to enforce 
compliance with the Investment Advisers Act--even when a 
broker-dealer also conducts investment adviser activities. 
Authority to enforce the Investment Advisers Act is granted 
solely to the SEC and to the states.
    Madoff Securities represented, and the books and records it 
provided to examiners showed that, but for a de minimis number 
of employees, it had no customer accounts. In its regulatory 
filings and examinations, the Madoff BD has consistently 
represented itself as a wholesale market-making firm that also 
conducted proprietary trading and that had counterparty 
relationships with other BDs, which sent order flow to the 
Madoff BD for execution. The Madoff BD has consistently 
reported that 90 percent of its revenue comes from proprietary 
trading and 10 percent comes from market making. There was no 
evidence in the Madoff firm's BD books of the BD executing 
trades for the IA business or of any customer account 
statements being issued by the BD.

Q.16. FINRA Enforcement Statistics: The Wall Street Journal 
published a front-page article on January 15, 2009, that 
describes FINRA enforcement metrics over recent years. It 
stated, for example, that: ``Finra levied fines against 
financial firms totaling $40 million in 2008, according to a 
Wall Street Journal analysis. That was the third straight 
annual decline in fines levied by Finra or one of its 
predecessor agencies, the NASD. The total was 73 percent below 
the $148.5 million in fines collected in 2005, the year before 
Ms. Schapiro took the helm of the NASD.'' [``Obama's Pick to 
Head SEC Has Record of Being a Regulator with a Light Touch,'' 
The Wall Street Journal, January 15, 2009.]
    Please describe the major reasons for changes in the amount 
of fines levied by FINRA in the years since 2005.

A.16. Fine levels for 2007-08 are in fact lower than the 2004-
06 time frame, but are higher than the prior time period. The 
2004-06 numbers were driven by a small number of high fine 
settlements involving the mutual fund and research analyst 
scandals. It is important to note that I have been responsible 
for the Enforcement program at NASD/FINRA since 1996, including 
the 2004-06 time frame that saw record high fines.

Q.17. Cooperation with NTEU: If confirmed, would you work 
cooperatively with the National Treasury Employees Union?

A.17. Yes.


Q.1. In connection with the Madoff matter, FINRA has maintained 
that it was unable to look into the activities in question. Two 
May 2001 news articles discussed concerns about Madoff's money 
management activities and the links between those activities 
and its broker-dealer activities. See, Erin E. Arvedlund, 
``Don't Ask, Don't Tell: Bernie Madoff Is So Secretive, He Even 
Asks His Investors To Keep Mum,'' Barron's (May 7, 2001) and 
Michael Ocrant, ``Madoff Tops Charts; Skeptics Ask How,'' MAR/
Hedge (May 2001). Further, Madoff's 2006 Form ADV noted that 
the Madoff was compensated for investment advisory services 
through commissions. What is the specific legal constraint that 
would have prevented FINRA examiners from looking into whether 
those commissions were reflected in the books of the broker-
dealer or otherwise asking questions about investment advisory 
activities' connection with the firm's brokerage activities? 
Would the normal course have been for FINRA examiners to ask 
questions about these allegations about Madoff's firm and then 
refer them to the SEC if they appeared credible, but related 
solely to advisory activities? To your knowledge, did FINRA 
make any referrals to the SEC related to the Madoff firm?

A.1. Section 15A of the Securities Exchange Act of 1934 
establishes the statutory jurisdiction of FINRA. That section 
authorizes FINRA to ``enforce compliance by its members and 
persons associated with its members, with the provisions of 
[the Securities Exchange Act], the rules and regulations 
thereunder, the rules of the Municipal Securities Rulemaking 
Board'' and FINRA rules. Under our fractured system, broker-
dealers are regulated under the Securities Exchange Act and 
investment advisers are regulated under the Investment Advisers 
Act of 1940. Section 15A does not authorize FINRA to enforce 
compliance with the Investment Advisers Act--even when a 
broker-dealer also conducts investment adviser activities. 
Authority to enforce the Investment Advisers Act is granted 
solely to the SEC and to the States.
    Typically an investment adviser is compensated in the form 
of a flat fee or an asset based fee, while a broker-dealer is 
compensated through commissions. However, an investment adviser 
also could be compensated in the form of commissions. As a 
matter of fact, in 2005 the SEC adopted, and in 2007 
reproposed, a rule that requires that any broker-dealer that 
exercises investment discretion over customer accounts register 
as an investment adviser, even if its compensation for that 
business comes in the form of commissions.
    The fact that Madoff's advisory business was apparently 
compensated through commissions did not compel it to be run 
through a broker-dealer. In fact, in 2006 the SEC required him 
to register as an investment adviser even after he apparently 
asserted to the SEC that he was being compensated in the form 
of commissions. The SEC did not require Madoff to run his 
investment adviser business through the broker-dealer; in fact, 
he did not execute any of his trades for that business through 
the broker-dealer. The broker-dealer was a wholesale market 
maker and there was no reason to suspect that it was offering 
an advisory business as well.
    We have found no records of referrals from NASD or FINRA to 
the SEC regarding Mr. Madoff.

Q.2. Given FINRA's position that the Madoff Ponzi scheme took 
place outside the broker-dealer, do you think that it is 
appropriate for SIPC to be involved in the liquidation of the 
firm and the processing of the claims of Madoff's victims?

A.2. I am not privy to SIPC's legal or investigative analysis 
at this time. Historically, however, I believe that SIPC has 
compensated victims of securities fraud when those customers 
have been led to believe that they were customers of a broker-
dealer, irrespective of the fact that there was no record of 
them being customers of a registered broker-dealer.

Q.3. As president of NASD starting in 1996, you were 
responsible for the examination and enforcement programs. 
Knowing what you now know about the Madoff fraud, are there any 
steps that you could have taken to make it more likely that 
your staff would have detected the fraud? After learning of the 
fraud, what steps did you direct your staff at FINRA to take to 
determine whether other firms are engaging in fraudulent 

A.3. The ease with which market participants can move an 
advisory business outside the broker-dealer makes it 
extraordinarily difficult for FINRA to detect such a Ponzi 
scheme. Historically, Ponzi schemes are among the most 
difficult to detect, because the essence of the fraud is the 
absence of customer complaints until the fraud collapses. In 
order to discover a Ponzi scheme, an examiner needs the ability 
to verify information provided by the perpetrator, such as by 
making inquiries to the custodian of the securities (if there 
is one), the auditor, or the customers.
    FINRA does examine for fraud within a broker-dealer. We 
also have an active automated fraud detection program, although 
admittedly it focuses on trading activity in the secondary 
market. At my direction, FINRA staff is in the process of 
launching two broad reviews, one involving custody issues in 
joint broker-dealer/investment advisers, and the other 
involving the role of broker-dealers as feeders or finders to 
money managers such as Madoff. On the latter issue, many 
finders and feeders are registered as investment advisers, not 
as broker-dealers.

Q.4. As chairman of the SEC, you will be responsible for making 
changes to the SEC's enforcement and inspections programs to, 
among other things, increase the likelihood that frauds of the 
magnitude of the Madoff Ponzi scheme get detected before 
billions of dollars are lost. What kinds of changes to the 
inspections and enforcement programs do you have in mind and 
what characteristics will you look for in selecting heads of 
your enforcement and inspection programs?

A.4. I look forward to the Inspector General's review of the 
Madoff matter. Pending that, it goes without saying that the 
investing public demands nothing less than the most aggressive, 
creative, and collaborative enforcement and examination program 
possible. I will remove the procedural limitations that have 
been put in place over the past few years, and ensure that 
these programs have all the tools, technologies and resources 
available to them. I also plan to centralize the responsibility 
for receiving and tracking tips received by the agency. But as 
important, I will ensure that our programs view themselves as 
part of a community of regulators, and I will stress 
cooperation and the free flow of information between federal, 
state, and SRO enforcement groups. It's difficult to say 
whether that flow might have detected the Madoff fraud earlier, 
but it is clear that segmentation of information can permit 
frauds to avoid detection for longer periods of time.

Q.5. In your testimony you have stated that, ``First and 
foremost, if confirmed as Chairman, I will move aggressively to 
reinvigorate enforcement at the SEC. With investor confidence 
shaken, it is imperative that the SEC be given the resources 
and the support it needs to investigate and go after those who 
cut corners, cheat investors, and break the law.'' Is it your 
view that the reason for the SEC's recent failure to discover 
the Madoff fraud was a lack of resources and if so, on what do 
you base that determination? Do you believe that before we can 
discuss the need for more resources, there needs to be an in-
depth consideration of how the SEC has been utilizing the 
resources it presently has at its disposal?

A.5. It is not clear to me yet what the cause or causes were 
that led to the SEC's failure to stop the Madoff fraud. I agree 
that an in-depth analysis is required to ensure the right tools 
are put in the right places, and such an analysis will be one 
of my first priorities.

Q.6. Last year, the SEC reproposed long-awaited amendments to 
investment advisor disclosure in an effort to give investors 
easy access to critical information about the people who manage 
their money. What are your plans with respect to revamping 
investment advisor disclosure and making it more accessible to 

A.6. As you note, in March 2008 the SEC reproposed for comment 
changes to Part 2 of the Form ADV, which is the disclosure 
document given to clients of investment advisers. The changes 
are intended to replace the current ``check-the-box'' model 
with narrative disclosures written in plain English. As a 
general matter, I support providing investors with disclosures 
that are clear, complete and written in a manner that the 
average person can understand. I intend to closely review this 
proposal, as well as public comments, to ensure that we will be 
providing critical information to investors in the most user-
friendly manner possible.

Q.7. Do you plan to revisit the question of whether there needs 
to be greater uniformity in the regulation of broker-dealers 
and investment advisors that provide similar services to 

A.7. It is clear from the RAND study that was commissioned by 
the SEC, that investors are confused by the differences between 
investment advisers and broker-dealers, the services they each 
provide, how they are compensated and how they are regulated. I 
will revisit the question of whether investors would be better 
served by greater uniformity.

Q.8. You have been widely commended for your role in overseeing 
the merger of the NASD and NYSE Regulation into the newly 
created entity, FINRA. There are, however, some critics, who 
argue that certain firms, particularly small ones, were 
disadvantaged by the merger and cite NASD misrepresentations 
about constraints on the amount of cost-savings it could pass 
on to member firms. How do you respond to these critics? What 
steps will you take as chairman of the SEC to ensure that the 
voices of small broker-dealers and investment advisors are 

A.8. Contrary to the views of these critics I believe that the 
merger actually served to lock in significant representation of 
regulated firms, large and small, at a time when the trend was 
in the direction of taking Board representation away from the 
industry. I believe that the balance struck between 
representation of large firms that account for a very large 
proportion of the securities business in the United States and 
the small firms that are large in number but which do a very 
small proportion of the business, was fair and equitable to 
both sectors. The smaller firms represent an important form of 
access to the markets for many individual investors. It is 
therefore important that the rules applicable to the industry 
take into account the risks inherent in the variety of business 
models of firms, for example whether they hold customer funds 
and securities, and not impose burdens not necessary for the 
protection of investors. As I have at FINRA, I will consult 
broadly, through the notice and comment process, and other 
means, to gather the views of interested parties.

Q.9. What are your ideas for improving the communication and 
coordination among different parts of the SEC?

A.9. I will set a tone from the very beginning that I expect 
complete communication and coordination among divisions and 
nothing less will be acceptable. I plan to have senior staff 
meet regularly to discuss all ongoing and planned initiatives. 
I will explore the possibility of staff rotations to encourage 
greater understanding of the work of all divisions. In some 
areas, like the handling of tips, where miscommunication seems 
to have caused serious breakdowns, I intend to centralize the 
function and track the results which will be shared with the 
Commission and senior staff.

Q.10. What role do you see for economists at the SEC and how 
has FINRA used economic analysis?

A.10. FINRA has a small economics analysis group that assists 
the policy makers in understanding economic trends, keeping 
current with economic literature and dissecting how particular 
products will function in different economic cycles. This group 
is an excellent resource for the entire organization. I believe 
the SEC would benefit from a similar group that provides 
support and expertise to the Commission and staff.

Q.11. What changes, if any, are you thinking about to 
streamline the approval process for self-regulatory 
organizations' rules while still affording interested parties 
an opportunity to weigh in on those rules?

A.11. I am committed to ensuring that the SEC's resources are 
used as effectively as possible. I would be interested in 
streamlining the rule approval process for SRO rules where 
those rules do not implicate investor protection or other 
issues that should be subjected to the notice and comment 

Q.12. Over the past several years, a number of the SEC's rules 
have been invalidated in court. In addition, we saw the rapid 
demise of the consolidated supervised entity program, a program 
that was not authorized by statute. What steps will you take to 
ensure that the SEC is acting within its statutory authority?

A.12. First of all, I would note that all State and Federal 
agency rulemaking is generally subject to legal challenge and 
subsequently set aside because the agency believed it had legal 
authority with which courts subsequently disagreed.
    I would require that we first have a clear and rationalized 
legal basis for our actions before engaging in rulemaking. That 
would not guarantee against legal challenge, but it does mean 
that the matter would have been fully considered in advance and 
that statutory authority is a matter of first concern. If we 
lack the authority to engage in rulemaking that we believe is 
necessary, we will engage Congress in that discussion.

Q.13. The SEC has been accused of short circuiting the notice 
and comment rulemaking required by the Administrative Procedure 
Act. What steps do you plan to take to ensure that the SEC 
adheres to the notice and comment requirements for rulemaking?

A.13. Again there can be reasonably different interpretations 
as to the notice provisions required under the Administrative 
Procedure Act. Building on my prior answer that our statutory 
authority and obligations will be the first order of 
determination in any decision or rule making, I would add that, 
absent systemic, market or investor emergency where we believe 
the Commission has the authority to act under the law, I would 
err on the side of Notice and Comment. My track record at FINRA 
demonstrates that well over 90 percent of our proposed rule 
making went out for Notice and Comment before it was sent to 
the SEC (and there is nothing in federal law or the SEC rules 
that required such Notice and Comment). Consequently, I bring a 
notice and comment bias based on prior experience because it is 
an extremely valuable discipline.

Q.14. During your first stint at the SEC, you recognized that 
there were problems with the SEC's treatment of credit rating 
agencies. Since then, Congress passed the Credit Rating Agency 
Reform Act of 2006 and the SEC adopted rules under that 
statute. Unfortunately, these rules came too late to prevent 
the great failings of credit rating agencies in connection with 
subprime securitizations. Subsequently, the SEC has adopted 
additional rules. Will you support the proposals to eliminate 
credit ratings from the SEC's rules?

A.14. The current business model under which credit rating 
agencies operate is flawed because the issuers themselves pay 
for the ratings that they receive. I believe that the SEC 
should consider other compensation models that do not present 
these fundamental conflicts of interest. For example, fees 
collected by securities exchanges or regulatory authorities 
might be a more appropriate source of credit rating agency 
compensation. Reform of the system under which credit agencies 
operate should be undertaken hand in hand with an analysis of 
the appropriate role and use of these ratings under SEC rules.

Q.15. What role should the SEC have in regulating credit 
default swaps?

A.15. I believe that the Commission needs to move together with 
its fellow regulators to rules that allow for the functioning 
of clearing agencies for credit default swaps. This is 
necessary in order to reduce counter-party risk for these over-
the-counter traded derivatives and to bring increased 
transparency to these markets. It is critical that we have 
efficient and effective oversight of the clearing agencies at 
the Federal level.

Q.16. Do you think that the SEC's decision to impose a short 
sale ban on financial stocks last fall, a decision that 
Chairman Cox recently called into question, was appropriate?

A.16. The SEC's series of orders last fall, led to some 
confusion and uncertainty in the markets. Whether or not these 
orders were a mistake, I think it is critical for the agency to 
take a fresh look at short-selling and determine an approach 
that will not require continuously acting on an emergency 

Q.17. The SEC is facing a number of important accounting 
issues, including issues related to International Financial 
Reporting Standards and fair value accounting. What will your 
priorities be in this area and what plans do you have for 
working with other entities such as the SEC's international 
counterparts and the FASB, PCAOB, and IASB?

A.17. The SEC's roadmap for IFRS implementation is currently 
out for comment. I am anxious to review the comment letters and 
determine whether the roadmap as currently proposed is 
sufficient to ensure that the accounting standards used by US 
issuers will continue to be of the highest quality. The SEC has 
also recently published its findings with respect to Fair Value 
Accounting. I will move quickly to examine the recommendations 
suggested in that report to determine what changes may be 
    Cooperation with PCAOB, FASB, and IASB will be essential in 
addressing both of these issues. I hope to build a more 
positive and cooperative relationship among all of the 

Q.18. Do you have any specific plans with respect to business 
development companies, which are a source of capital for small 
and mid-sized companies?

A.18. I recognize the importance of a healthy small business 
sector to our economy. I have no specific plans at this time 
with respect to business development companies, but will be 
very interested to explore these issues.

Q.19. You have spent almost all of your career as a regulator. 
This background has provided you with an excellent 
understanding of how regulatory agencies work and deep insight 
into ways that the regulatory process can be improved. How will 
you compensate for the fact that you have not spent a 
significant amount of time in the private sector and therefore 
have not had to implement new regulations in a business context 
with the attendant concerns for regulatory costs and legal 

A.19. At FINRA, I made it a practice to solicit broadly the 
views of those who are ultimately responsible for implementing 
regulations. Through the notice and comment process, advisory 
committees and roundtables, we will give interested parties the 
opportunity to provide business and operational context to our 
rulemaking. Equally, we will solicit the views the investors 
and others who are affected by our rules.

Q.20. There has been talk of FINRA--and before that, the NASD--
adding investment advisors to the portfolio of firms that it 
regulates. This idea is controversial. If you are asked to 
weigh in on this debate in your new role as chairman of the 
SEC, what steps will you take to consider all sides of the 
issue of whether an SRO is appropriate for investment advisors 
and, if so, whether FINRA should be that SRO?

A.20. I believe that investor protection requires us to look 
beyond the title of the person providing financial services. 
Whether the provider is an investment adviser or a broker 
dealer, the investor desires high quality service and 
comparable regulatory protections. I will be open to all 
possibilities for achieving this result, including the 
possibility of an SRO for advisers, but I have not concluded by 
any means, that that is the only possible approach.

Q.21. What role do you believe the SEC should play in a 
reformed regulatory structure?

A.21. The mission of the SEC is to protect investors; maintain 
fair, orderly, and efficient markets; and to facilitate capital 
formation. I believe that it is essential that the SEC continue 
to pursue this mission in a reformed regulatory structure. This 
can best be achieved through preserving and strengthening the 
many critical functions that the SEC performs today.
    Preservation and strengthening of the many critical 
functions of the SEC are essential in a reformed regulatory 


Q.1. Beginning to restructure the financial services' 
regulatory structure is a complicated undertaking, and one that 
this Committee will spend much time addressing. What do you 
believe is the starting point for restructuring at the SEC? 
What is the number one structural regulatory deficiency at the 
SEC that needs to be corrected by Congress?

A.1. I believe the starting point for regulatory reform must 
rest on two principles. The first is that systemically 
important financial institutions and products must be brought 
under the regulatory umbrella. The second is that our focus 
must be equally upon the management and limitation of systemic 
risk on one hand, and the protection of investors through 
rigorous business conduct regulation, on the other.

Q.2. As you know, Native American issues are important in my 
state of South Dakota. The Regulation D definition for 
``governments'' inadvertently did not explicitly include Tribal 
governments when it was created. As a result, Tribes are the 
only governments required to register with the SEC and are 
currently excluded as ``accredited investors.'' This makes 
raising money costly in Indian Country and has had the perverse 
effect of preventing successful Tribes from investing in 
emerging Tribes. Would you support a simple regulatory fix to 
recognize Tribal governments as government, and equalize access 
to the capital markets?

A.2. This is an important issue. I will study the implications 
of recognizing Tribal governments and will look forward to 
discussing the issue with you.

Q.3. What you will do to stop the illegal practice of naked 
short selling? Do you believe Regulation SHO (pronounced 
``show'') should be amended? In 2007, the SEC rescinded the 
``uptick rule.'' Do you believe this rule should have been 

A.3. I intend, as quickly as possible, to engage in a full 
review of the SEC's actions with respect to short selling, 
including an evaluation of whether the uptick rule should be 

Q.4. Do you feel that the executive compensation disclosure 
rules are adequate and would you propose any changes?

A.4. Executive compensation disclosure is of enormous interest 
to the SEC, Congress, and the public. The SEC recently 
strengthened the disclosure requirements and has been engaged 
in a dialogue with public companies about the quality of their 
disclosure. I am committed to requiring public companies to 
present clear, cogent, and full disclosure of executive 
compensation and how compensation decisions are made.

Q.5. There have been many concerns about how accounting issues 
contributed to our current economic crisis. What do you believe 
should be the relationship between the SEC and FASB? What do 
you believe should be relationship between the SEC and PCAOB 
(Public Company Accounting Oversight Board)? Would you propose 
any changes to either of these two relationships?

A.5. The SEC has statutory authority to establish financial 
accounting and reporting standards for public companies. The 
agency has relied on the private sector--FASB--to fulfill this 
function, under the Commission's oversight. I believe in the 
U.S. model of independent standard setters, so long as the 
standard setters operate in the public interest. I also believe 
that the creation of the PCAOB to protect investors by 
promoting informative, fair and independent audit reports, 
under the oversight of the SEC was an important development. It 
is critical that the SEC have a strong relationship with both 
of these entities. I am not certain at this point, whether 
changes are necessary.

Q.6. What are your thoughts on the adequacy of current funding 
for the SEC?

A.6. While I have not yet had an opportunity to engage in a 
careful review of the SEC's budget and allocation of resources, 
it is clear that the agency's funding has been severely 
constrained over the past several years. I am looking forward 
to working with Congress to secure the resources necessary to 
fund the SEC at a level commensurate with its responsibilities.


Q.1. When will the SEC finalize the updating of the Financial 
Responsibility Rules for broker-dealers under Rule 15c3-3 to 
permit government-only money market funds to be used in meeting 
reserve deposit requirements, and by allowing money market 
funds to be used as collateral where broker-dealers borrow 
securities from customers and others?

A.1. On March 9, 2007, the SEC proposed amendments to several 
of the broker-dealer financial responsibility rules, including 
Rule 15c3-3. On May 17, 2007, the Commission extended the 
comment period. The amendments remain pending before the 
Commission. I look forward to considering them after I arrive 
at the agency.


Q.1. Would a merger or rationalization of the roles of the SEC 
and CFTC be a valuable reform?

A.1. How best to structure the regulatory oversight of our 
financial markets is a subject that deserves careful 
consideration by the Congress, the Administration and the 
independent regulatory bodies. As I said in my testimony, the 
SEC performs essential functions and it is vital that all of 
the current functions of the SEC be preserved. I think we need 
to carefully examine what is the best way to preserve and 
strengthen these functions while filling in the regulatory gaps 
that currently exist, including those between the SEC and the 

Q.2. Recent events in the credit markets have highlighted the 
need for greater attention to risk management practices and the 
counterparty risk in particular. The SEC recently promised to 
issue a key exemption that would allow various initiatives to 
offer clearing services for credit default swaps. Do you agree 
that interim temporary final rules need to be issued as soon as 
possible to allow these important initiatives to proceed? 
Additionally, do you believe that these vital markets need to 
remain open and functioning?

A.2. Clearly the Commission needs to move with its fellow 
regulators to rules that allow for the functioning of clearing 
agencies for credit default swaps. This is necessary in order 
to reduce counter-party risk for these over-the-counter traded 
derivatives and to bring increased transparency to these 
markets. One of the contributing factors to the current crisis 
has been an inability to more precisely size the volumes of 
these contracts and the notional underlying value. Further, 
despite past practices that created risk that was both 
excessive and difficult to quantify, when properly managed 
these products are important risk management tools, and the SEC 
should take the necessary steps to ensure they remain 

Q.3. The SEC recently implemented changes to regulation SHO. It 
is my understanding that a number of commenter's suggested that 
because of a technical issue these changes have resulted in 
less liquidity in the securities lending market and this has 
forced securities firms to try to borrow funds from financial 
institutions rather than allowing them to borrow from each 
other. This could be addressed by simply altering the timing of 
closing out the trade. In an environment where credit is tight, 
should the SEC alter this rule to address these concerns rather 
than taking already limited funds out of the financial sector?

A.3. The SEC's recent actions in the area of short selling, 
including emergency orders issued last year and the more recent 
interim final temporary rule, have been intended to address 
continuing concerns about the potential impact of ``naked'' 
short selling on the already weakened financial markets. While 
certainly not all short selling is fraudulent, ``naked'' short 
selling--where the securities sold are not delivered on 
settlement date and there is then a fail to deliver to the 
buyer of the security--may deprive shareholders of the benefits 
of ownership, such as voting and lending, and can facilitate 
manipulative activity, further undermining critical investor 
confidence. The SEC, through its temporary rulemaking, has 
imposed stricter time frames for delivery of securities by 
short sellers until July 2009. The SEC's Office of Economic 
Analysis has been monitoring closely the impact of these new 
requirements and has already reported a significant decline in 
fails to delivers. I intend to review the full results of the 
Office of Economic Analysis study and other relevant 
considerations before determining whether a continuation of 
these new restrictions is warranted.

Q.4. Many financial institutions are subject to regulation and 
oversight as both a broker-dealer and investment adviser. How 
do you propose to strengthen the regulation and oversight of 
their activities and improve investor protection, while 
insuring that the regulatory burdens do not hurt competition 
and place professional financial advice and services out of the 
reach of all but the wealthiest Americans?

A.4. First, it is interesting to note that the least 
regulatorily burdened investment areas--buyout funds, private 
equity, and hedge funds--have traditionally been available to 
only the wealthiest Americans. Broker-dealers that service the 
full spectrum of Americans all operate under essentially the 
same regulatory burdens when it comes to investor protection. 
All investment professionals who serve the public should be 
subject to similar standards of investor protection (but not 
always by identical rules) and there is no reason to believe 
that this would price services beyond the wealthiest Americans. 
The biggest regulatory costs for broker-dealers come from 
systems to execute and report trades on an automated basis and 
investment advisors would not incur those costs. Existing law 
already requires investment advisors to have compliance 
officers and policies and procedures. I believe we can level 
investor protection across financial services providers without 
driving costs to a level where competition is hampered.

Q.5. Should the SEC act in the near future on proposals to 
toughen rules for credit rating agencies?

A.5. I strongly agree that we need strengthened rules for 
regulating the credit agencies. One of the main problems in 
this area is resolving conflicts of interest in the 
compensation model for credit rating agencies. There are a lot 
of proposals being discussed now to deal with this. I believe 
we should explore them and move quickly to a conclusion--and I 
intend to make sure that we implement rigorous oversight and 


Q.1. Market Oversight: In 1998, former Securities and Exchange 
Chairman Arthur Levitt, Treasury Secretary Lawrence Summers, 
and Federal Reserve Chairman Alan Greenspan all opposed an 
attempt by the Commodity Futures Trading Commission (CFTC) to 
examine the over-the-counter (OTC) swaps market and then 
supported statutory restrictions on the SEC's and CFTC's 
authority over swaps in the Commodity Futures Modernization Act 
of 2000 (CFMA). Former Chairman Levitt recently stated that he 
now regrets the position he took during those years: ``The 
market was too large, too explosive in growth to merely allow 
pure market forces to suffice as self-regulatory mechanisms. I 
have some regrets about it, clearly.'' In October 2008, Mr. 
Levitt wrote:

        Our Nation's financial markets are in the midst of their 
        darkest hour in 76 years. We are in this situation because of 
        an adherence to a deregulatory approach to the explosive growth 
        and expansion of America's major financial institutions. Our 
        regulatory system failed to adapt to important, dynamic and 
        potentially lethal new financial instruments as the storm 
        clouds gathered.

    a. Do you agree with former Chairman Levitt's statement 
that our regulatory system has failed to adapt to the 
development of new financial instruments and that the positions 
taken in 1998-2000 to deregulate markets was, in retrospect, a 
    b. Should SEC oversight be strengthened with respect to new 
financial products, including new derivative and complex 
structured finance products, and, if so, how?
    c. Would you support repealing the statutory prohibitions 
in the CFMA on federal regulation of swaps? If so, should these 
swaps be regulated as commodities or securities?
    d. What would you do to get credit default swap clearing 
functions up and running?

A.1. As the events of this past year have made clear, one of 
the problems with our financial regulatory architecture is that 
there are large gaps in it, leaving important products and 
market actors beyond the oversight of regulators. Investors 
deserve to have quality disclosure about all products, actors, 
and strategies so they can make smart investing decisions, and 
our markets absolutely require this information, as well as a 
strong cop on the beat to enforce the rules of the road. With 
regards to swaps, I personally have supported the repeal of 
statutory prohibitions in the CFMA on the federal regulation of 
swaps and I believe that centralized, mandatory clearing of 
standardized swaps should be required.

Q.2. Former Federal Reserve Chairman Alan Greespan testified in 
October that he, too, now believes that the conceptual 
framework underlying the deregulation of swaps in the CFMA was 
a mistake. Mr. Greenspan testified: ``I made a mistake in 
presuming that the self-interests of organizations, 
specifically banks and others, were such as that they were best 
capable of protecting their own shareholders and their equity 
in the firms. . . . So the problem here is something which 
looked to be a very solid edifice and, indeed, a critical 
pillar to market competition and free markets did break down.''
    a. Do you agree with Mr. Greenspan's recent statements that 
the financial collapse of 2008 has demonstrated the errors in 
the assumptions underlying the deregulatory approach in the 
CFMA? Can we rely on market participants and unfettered free 
market forces to prevent systemic risks and unreasonable price 
    b. Do you support stronger regulation of securities markets 
to protect market participants and prevent systemic risks, and, 
if so, how?
    c. Should SEC user fees be increased to fund additional 
oversight capabilities?

A.2.a. I believe that markets need oversight and regulation to 
ensure that operate fairly.
    b. I believe that all systemically important market 
participants and products need to be brought under the 
regulatory umbrella.
    c. I have not yet had an opportunity to do a thorough 
review of the SEC's budget or resource allocation. It is 
probably safe to say however, that the agency has not been 
funded at a level commensurate with its responsibilities. I 
believe additional oversight capability is essential and I look 
forward to working with Congress to ensure that the agency has 
the resources it needs.

Q.3. What are your views on whether and how SEC oversight be 
strengthened with respect to:
    a. the holding companies of securities firms?
    b. hedge funds?
    c. companies that are not broker-dealers, but buy and sell 
financial swaps and other products, like AIG Financial 

A.3. I believe that all systemically important financial 
institutions need to be regulated. I would specifically endorse 
the registration of hedge funds.

Q.4. Should the SEC strengthen capital requirements for broker-
    a. At the time they were made in 2004, did you support the 
revisions by the SEC to the net capital requirements rule? Do 
you support those changes at the current time or should the SEC 
restore the prior rule?
    b. Should the SEC impose stronger capital requirements on 
broker-dealers that trade in over-the-counter derivatives or 
complex structured financial products?

A.4. I did not take any position in 2004 regarding the net 
capital requirements rule. Moving forward, I believe that we 
need to strengthen capital requirements across the board.

Q.5. What is your view of the relationship between the SEC and 
federal banking agencies with respect to banks that buy and 
sell securities? How can this relationship be improved?

A.5. It's important that all the regulators in our system work 
collaboratively in ensuring that investors are protected and 
that the markets are operating soundly. Moving forward, we need 
to close the gaps in our regulatory system, a system that is 
too stove-piped allowing determined market actors to avoid 
oversight. As we work to reform the financial regulatory 
architecture this should be a priority.

Q.6. What lessons should be learned from the recent collapse of 
the markets for asset-backed securities, collateralized debt 
obligations (CDOs), structured investment vehicles (SIVs), and 
auction-rate securities? Should the SEC attempt to restore the 
markets for these products? Should the SEC make distinctions 
between these categories of products and, if so, how and why?

A.6. The biggest lesson from these market collapses is that we 
cannot allow financially important products that have a massive 
impact on our markets and our economy to operate in our system 
without high standards of oversight, transparency, and 
accountability. As Chair of the SEC, I will move aggressively 
with my fellow Commissioners and working with members of 
Congress to close the gaps in our regulatory structure and 
bring these markets under control.

Q.7. What needs to be done to resolve the conflicts of interest 
affecting credit rating agencies? What can be done to restore 
their credibility?

A.7. As early as 1994, I've called for stronger regulation of 
credit rating agencies when, at that time, it became 
increasingly clear that their importance to the markets was 
outstripping the amount of oversight. Since then and especially 
this year, there are real questions about conflicts of interest 
and transparency that have surfaced. Moving forward on credit 
rating agency reform is a top priority of mine. We need to 
examine how the rating agencies are compensated, how they 
manage conflicts of interest, and what role they should play in 
our markets. There are some interesting proposals out there 
that need to be studied. I look forward to working with you on 
this issue.

Q.8. In 2004, Congress enacted legislation imposing a one-year 
cooling-off period before federal bank examiners could take a 
job with a bank they oversaw. If confirmed, would you support a 
similar cooling-off period for securities regulators?

A.8. Now more than ever, it's critical that the SEC is able to 
attract a new group of highly qualified and motivated 
individuals to serve in the agency. As we do that, we need to 
balance this need with the highest standards of ethics and 
accountability for SEC employees to ensure that the public good 
is always first and foremost in their minds. I look forward to 
working with you on this matter and to learning from the bank 
regulators about their experience with post-employment 

Q.9. Financial Accounting Standards: What is your view of the 
relationship between the SEC and the Financial Accounting 
Standards Board (FASB)? What is your view on whether Congress 
should legislate accounting rules?

A.9. The SEC needs to diligently oversee the FASB to ensure 
that accounting rules are keeping pace with innovations in the 
markets and the needs of investors of clear, usable financial 
reporting. I believe that FASB needs to be shielded from 
outside economic and political pressures, and that they and not 
Congress should write accounting rules.

Q.10. The SEC recently issued a report supporting the existing 
mark-to-market valuation rules, but recommending some 
improvements. What is your view of the current mark-to-market 
valuation rules?

A.10. We know that certain banks were not presenting investors 
with the full picture of their financial health, utilizing off-
balance sheet vehicles and other accounting methods. This was a 
disservice to investors as the integrity of the numbers is 
critical to their making smart investment decisions and to the 
smooth functioning of our markets. While there are a lot of 
different views on whether mark-to-market accounting 
contributed to this crisis, my personal view is that it was not 
a significant factor. As Chair, I will read the recent SEC 
report on this matter fully, talk with other regulators, and 
get their views as we move forward.

Q.11. Do you believe U.S. banks have fully applied mark-to-
market valuations to the structured finance transactions on 
their books, including asset-backed securities, credit default 
swaps, and CDOs? Do you believe inaccurate valuations are 
currently impeding U.S. credit markets? If confirmed, what 
actions would you take to insure accurate book valuations for 
U.S. banks?

A.11. I am not in a position at this time to opine on whether 
U.S. banks fully and appropriately applied mark to market 
valuations. See above.

Q.12. Current SEC Chair Christopher Cox has indicated that he 
thinks the SEC should allow U.S. publicly traded companies to 
use international financial reporting standards (IFRS) issued 
by the International Accounting Standards Board (IASB) instead 
of U.S. generally accepted accounting principles (GAAP) in 
their financial statements.
    a. Do you believe the Sarbanes-Oxley Act allows the SEC to 
delegate the development of U.S. accounting standards to the 
IASB? If confirmed, would you try to advance such a proposal?
    b. Section 404 of the Sarbanes-Oxley Act requiring auditors 
to review a company's internal controls has still not be 
applied to publicly traded small businesses. If confirmed, 
would you allow Section 404 to take effect for small businesses 
without additional delay?

A.12. When it comes to international accounting standards, it's 
critical that these standards are converged in a way that does 
not kick off a race to the bottom. American investors deserve 
and expect high standards of financial reporting, transparency, 
and disclosure--along with a standard-setter that is free from 
political interference and that has the resources to be a 
strong watchdog. At this time, it is not apparent that the IASB 
meets those criteria, and I am not prepared to delegate 
standard-setting or oversight responsibility to the IASB.
    Regarding, SOX 404, accurate, robust, and easy-to-
understand financial reporting--and the internal controls that 
guarantee it--are critically important to investors and to the 
efficient functioning of our markets. Right now, we have a 
system where some issuers are complying with 404 and others are 
still exempt from it. It's time that we bring uniformity to the 
system so that investors know what to expect from companies, 
while being sensitive to the needs of small businesses. I look 
forward to working with the small business community in making 
sure they have the tools they need to comply with 404.

Q.13. What is your view of FASB's accounting standard requiring 
stock option compensation to be treated as an expense on 
corporate financial statements? If confirmed, would you support 
efforts to change this standard? If so, what changes would you 

A.13. No, I would not support changing this decision.

Q.14. In 2004, the Office of the Comptroller (OCC) and the 
Office of Thrift Supervision (OTS) in the Treasury Department, 
the Federal Reserve, the Federal Deposit Insurance Corporation 
(FDIC), and the Securities and Exchange Commission (SEC) issued 
a proposed Interagency Statement on Sound Practices Concerning 
Elevated Risk Complex Structured Finance Activities 
(``Interagency Statement on Sound Practices''). In 2006, the 
same agencies issued a revised proposal and, in 2007, a final 
    a. Did you participate in any discussions or provide any 
comments on the 2004, 2006, or 2007 guidance? If so, please 
describe the circumstances, including the date, persons 
involved, and the issues addressed.
    b. Did you support the proposed guidance at the time it was 
issued in 2004?
    c. Did you support the revisions proposed in 2006 and 
adopted in the final guidance at the time it was issued in 
2007? Do you support those revisions now?
    d. The Interagency Statement on Sound Practices became 
effective on January 11, 2007. According to the statement, the 
OCC, OTS, Federal Reserve, FDIC, and SEC were to use the 
Statement as guidance for reviewing the internal controls and 
risk management policies, procedures, and systems of financial 
institutions engaged in Complex Structured Finance Transactions 
(CSFTs) as part of their ongoing supervisory process. Were you 
aware of this guidance, and do you know if the guidance was 
regularly applied and adhered to by securities firms since its 
effective date?
    e. The Interagency Statement indicates that CDOs and credit 
default swaps (CDS) typically would not be considered to be 
CSFTs subject to the guidance. In light of the role played by 
CDO and CDS transactions in the current financial crisis, would 
you support revising this approach so that CDO and CDS 
transactions are covered by the Interagency Statement on Sound 

A.14. I did not participate in discussions surrounding the 
2004, 2006, or 2007 guidance. I think it would be appropriate 
to consider whether the Interagency Statement should be 

Q.15. Public Company Accounting Oversight Board: What is your 
view of the relationship between the SEC and the Public Company 
Accounting Oversight Board (PCAOB)?

A.15. In addition to its oversight responsibilities, the SEC 
should ensure that the PCAOB has what it needs to enforce the 
rules of the road for auditors.

Q.16. Chairman Cox has indicated that he thinks the PCAOB 
should stop inspecting auditing firms in other countries and 
instead delegate its inspection authority to foreign oversight 
bodies where those firms are located. Do you believe the 
Sarbanes-Oxley Act allows the SEC to make this delegation? If 
confirmed, would you try to advance such a proposal?

A.16. No, I do not; and no, I will not.

Q.17. Financial Institutions Facilitating Tax Abuse: The U.S. 
Treasury loses an estimated $100 billion each year from 
offshore tax abuses, some of which are facilitated by broker-
dealers. If confirmed, would you work with the IRS to curb such 
activities? Do you support enactment of S. 681 from the 110th 
Congress, the Levin-Coleman-Obama Stop Tax Haven Abuse Act?

A.17. Yes. I look forward to working with the Internal Revenue 
Service, you, and other Senators to curb such activities.

Q.18. Some financial institutions are facilitating tax-dodging 
by non-U.S. persons. In particular, the Senate Permanent 
Subcommittee on Investigations, which I chair, held a 2008 
hearing showing that U.S. firms like Morgan Stanley, Lehman 
Brothers and others have helped offshore hedge funds and others 
to avoid payment of U.S. taxes on U.S. stock dividends, by 
assisting them to convert taxable U.S. stock dividend payments 
into allegedly tax-free dividend equivalents or substitute 
dividend payments. If confirmed, would you support ending this 
activity by securities firms?

A.18. Yes.

Q.19. Investor Rights and Protections: Former SEC Chair William 
Donaldson proposed establishing a mechanism to allow certain 
shareholders of publicly traded corporations to nominate a 
candidate to the board of directors. If confirmed, would you 
support a rule to allow shareholder nominations of some board 

A.19. Yes. A central tenet of our market system is that 
shareholders are the owners of the company in which they hold 
shares, and they should have a way to hold their 
representatives--members of the board of directors--accountable 
for their actions. Access to the proxy has been debated for 
many years, and I believe it is time for a thoughtful approach 
to proxy access for significant, long term shareholders.

Q.20. What is your view of the compensation paid to executives 
and market traders at financial institutions? If confirmed, 
would you support a rule to allow shareholders to express an 
advisory opinion on executive compensation?

A.20. Yes. Like you and millions of Americans, executive 
compensation has been a concern of mine for some time now, and 
I believe that it's an appropriate measure to give shareholders 
an advisory vote on these matters.

                       CHRISTINA D. ROMER

Q.1. Members of the CEA provide the President advice and 
analysis concerning the state of the economy. What will be your 
first piece of economic advice for our new President as a 
member of the CEA?

A.1. The first piece of advice that I gave the President-elect 
when I joined the transition before Thanksgiving was to move 
swiftly and boldly on an economic stimulus plan. After studying 
the forecasts of both private firms and public agencies, as 
well as talking with businesspeople and policymakers, I was 
deeply concerned about the rate of deterioration of the 
economy. I believed that monetary policy could not do enough to 
stop the rapid decline, and felt that aggressive fiscal action 
was crucial.
    If confirmed, my first piece of advice as CEA chair would 
be to reiterate that view and then to stress the need to remain 
alert and flexible. The President will need to work closely 
with the Congress to pass a good stimulus bill quickly. We will 
then need to monitor the economy closely. We must watch for new 
unexpected weak spots in the economy that could require 
additional action. And, should we be fortunate enough to have a 
very brisk recovery, we may eventually need to be alert for 
signs of excessive strength and bottlenecks in some areas.

Q.2. Beginning to restructure the financial services' 
regulatory structure is a complicated undertaking, and one that 
this Committee will spend much time addressing. What do each of 
you believe is the starting point for restructuring? What is 
the number one structural regulatory deficiency, in your 
opinion, that needs to be corrected by Congress?

A.2. The key starting point for restructuring the regulatory 
structure is to recognize that any institution that acts like a 
bank, exposes the economy to systemic risk, and explicitly or 
implicitly has the ability to borrow from the Federal Reserve 
or otherwise draw on taxpayer resources in times of stress, 
needs to be regulated in the same way that we regulate banks. 
The deregulatory actions taken in recent decades allowed 
investment banks and other institutions to take on quasi-
banking activities without being subject to the same capital, 
monitoring, and oversight requirements we have for banks. The 
result was the creation of highly leveraged institutions that 
were so large and so central to the financial markets that 
their failure would bring down otherwise solvent financial 
institutions and lead to a catastrophic decline in financial 
services, particularly lending. We must begin our regulatory 
reform by ensuring that this wide range of financial 
institutions adhere to sensible and prudent regulations.

Q.3. Much of your academic work has focused on economic 
recovery, specifically after the Great Depression and World War 
II. What is similar in today's environment to those periods of 
recovery? What is different?

A.3. A key similarity between the current situation and the 
Great Depression of the 1930s is the central role of financial 
crises in causing unemployment and economic contraction. In 
both episodes, the decline in lending caused by turmoil in 
financial markets led to devastating contractions in consumer 
spending and investment. Thus, the kinds of actions that need 
to be taken are fundamentally similar. We need to reform and 
revitalize the financial sector so that it can lend again. And, 
we need to stimulate the overall economy so that we can 
directly counter some of the declining output and rising 
unemployment caused by reduced spending.
    A crucial difference in the two episodes involves the level 
of economic understanding. Perhaps the most important reason 
that the Federal Reserve and other policymakers did so little 
as the economy spiraled downward in the early 1930s was that 
this was the prevailing economic orthodoxy of the time. In the 
last 80 years, economists and policymakers have learned 
dramatically more about the operation of the economy and steps 
that can be taken to counteract macroeconomic shocks. That 
improved level of economic understanding should enable 
policymakers to devise effective policies.
    The role of financial crises in the current downturn points 
out a crucial difference from other postwar recessions. Most 
recessions since World War II have been caused by tight 
monetary policy aimed at reducing inflation. In these 
situations, it was relatively straightforward to end the 
recessions: monetary policy needed to switch from 
contractionary to expansionary. In the current episode, 
interest rates were already fairly low when the downturn began. 
As a result, monetary policy had less ability to respond 
aggressively. This difference makes a balanced approach, 
including timely fiscal expansion, crucially important.

Q.4. What kind of policies do you think are our best shot at 
economic recovery? What role do you believe fiscal policy will 
play in our recovery?

A.4. The problems facing our economy are sufficiently severe 
that, in my judgment, it is essential that we use a wide range 
of policies to bring about recovery. While monetary policy, the 
recapitalization of financial institutions, and dealing with 
troubled assets are important, fiscal policy must play a 
central role. Fiscal policy provides the most direct stimulus, 
which our economy sorely needs. Because the weakness of our 
economy is broad and is expected to last a substantial time, it 
is important to have a broad fiscal program. Different types of 
fiscal policy help recovery in different ways. Tax cuts to 
individuals and families and funds to cushion the most 
vulnerable provide immediate relief and relatively rapid 
stimulus. Likewise, fiscal relief to the states will help in 
the near term to mitigate reductions in spending on valuable 
programs and to prevent potentially counterproductive tax 
increases mandated by balanced-budget requirements. Business 
investment incentives also work relatively quickly, and will 
spur investments that will increase our productive capacity. 
Programs of direct government spending appear to have the 
largest ``bang for the buck'' in terms of economic stimulus and 
job creation, and can fund investments that will strengthen our 
economy in the long term. Because such direct spending can take 
somewhat longer to initiate, this type of stimulus will be most 
helpful in creating jobs later in the year and throughout 2010. 
Finally, in thinking about direct spending, it is important 
that it be spread broadly: there are many areas where 
government investment would be valuable, and there are many 
areas of weakness in the economy.

                          D. GOOLSBEE

Q.1. Members of the CEA provide the President advice and 
analysis concerning the state of the economy. What will be your 
first piece of economic advice for our new President as a 
member of the CEA?

A.1. My first piece of advice to the President will be that he 
should release a significant foreclosure prevention plan to 
ease the drag on the wider economy and the financial system.

Q.2. Beginning to restructure the financial services' 
regulatory structure is a complicated undertaking, and one that 
this Committee will spend much time addressing. What do each of 
you believe is the starting point for restructuring? What is 
the number one structural regulatory deficiency, in your 
opinion, that needs to be corrected by Congress?

A.2. The starting point for restructuring should be the 
realization that getting rid of the rules of the road did not 
make the free market work better. It made it worse. It 
contributed to the lack of public trust in the financial system 
a fear of keeping money in the financial institutions. We need 
sensible oversight for the market to succeed.
    To me, the number one structural deficiency in our 
regulatory system is that we have designed a system where a 
series of institutions are regulated by who they are rather 
than by what they do. In subprime lending, for example, two 
thirds of the loans were made by non-banks. So the Federal 
Reserve was regulating banks one way and non-banks did not have 
to follow the regulations despite being in exactly the same 
business. That is a recipe for a creating a financial crisis.

Q.3. Some of your academic research focuses on the Internet, 
telecom, and other technology industries. What role do you see 
the technology industries playing in our Nation's economic 

A.3. I certainly hope it will be a large role. Technology 
industries and the information economy give this country an 
important area that we can continue to lead in the coming years 
and where the demand for the product has, historically, been 
less cyclical than the demand for other goods. These technology 
industries are also particularly open to contribution from 
entrepreneurs and start-ups which will be an important outlet 
for the economy in a period where major employers are 

                            E. ROUSE

Q.1. What will be my first piece of economic advice for our new 
President as a member of the CEA?

A.1. I take seriously the role of the CEA as providing expert 
advice to the President based on solid empirical and 
theoretical economic analysis. The economic crisis in which we 
find ourselves is truly extraordinary, and we must continue to 
move quickly and boldly to pull ourselves out of it. After 
that, however, my advice to the new President would be to turn 
as quickly as possible to developing policies and strategies 
for long-term investment that will ensure continued growth and 
help our firms and workers to remain competitive and nimble in 
our increasingly global economy going forward. While clearly 
this task will require innovation in a variety of areas, should 
I be confirmed, I would particularly look forward to working 
with you and the new President to strengthen investments in our 
``human capital'' through the education and training system.

Q.2. What do I believe is the starting point for restructuring 
of the financial services' regulatory structure? What is the 
number one structural regulatory deficiency, in my opinion, 
that needs to be corrected by Congress?

A.2. A good starting point for restructuring the financial 
services' regulatory structure is to build in more 
accountability and transparency that reflects the financial 
sector of the 21st century. A key structural deficiency that 
must be corrected by Congress is to streamline the regulatory 
agencies. Not only is the current system of overlapping and 
sometimes competing agencies inefficient, it makes it difficult 
for regulators to provide adequate oversight of this important 
sector of our economy.

Q.3. As an economist whose primary research and teaching 
interests are in labor economics with a focus on the economics 
of education, what issue do you see as most pressing in your 
area of expertise? How will you advise the President-elect to 
address this issue?

A.3. There are many pressing issues in education. Investing in 
our youngest children is key, and we must strengthen our 
primary and secondary schools--especially our secondary 
schools. However, an area that is of primary concern to me is 
our system of higher education. The United States has always 
been a global leader in higher education, and yet in recent 
years we have slipped behind in the rate at which our students 
actually complete their studies. This is particularly true in 
our community colleges. And yet, a college education is 
increasingly important in today's economy. Should I be 
confirmed, I would advise the President-elect to help our 
institutions of higher education to focus on the needs of 
students as well as ensure that those who would like to go to 
college have the resources to do so.


Q.1. Mr. Tarullo, you have testified before this Committee 
about the shortcomings of banking regulation well before the 
subprime crisis erupted. As you assess what has happened since 
then, what principles will guide your thinking about what the 
Congress, the Federal Reserve, and other bank regulators should 
make to modernize our financial regulatory system?

A.1. In thinking about modernization of the financial 
regulatory system, I will be guided by the six principles 
listed below. Some measures needed to apply these principles 
can be made under existing authority of the regulatory 
agencies, while others may require legislative action by the 
    First, successful regulatory modernization must be forward 
looking. While it is important to make changes that would 
prevent practices that led to the subprime crisis, it is 
essential to recognize that financial stress usually does not 
recur in precisely the same way as in a previous episode. We 
need a regulatory system that can identify and respond, as 
necessary, to new risks to financial stability.
    Second, the rules and requirements designed to maintain 
safety and soundness of individual financial institutions must 
be appropriate and enforceable benchmarks that allow effective 
monitoring and, where necessary, prompt correction of capital, 
liquidity, and risk management practices.
    Third, a modern financial regulatory system must have the 
capacity to contain systemic risk, no matter what its source, 
and the authority to achieve this goal. This means ensuring 
regulatory coverage of all systemically important institutions. 
It also means establishing measures to identify, and respond 
to, risks created in interactions among financial actors.
    Fourth, an effective financial regulatory system must 
ensure that the regulatory and supervisory systems that govern 
individual financial institutions are effectively integrated 
with those designed to contain risks specifically arising from 
interactions among financial actors. That is, regulators 
commissioned with overseeing systemic stability must have 
sufficient involvement in the supervision of specific financial 
institutions to determine how the various measures interact.
    Fifth, the organization of, and allocation of functions 
among, our regulatory agencies must be designed so that each 
regulatory mission delegated by the Congress will be vigorously 
pursued with adequate authority and resources to realize that 
mission. Past shortcomings in consumer protection in the area 
of financial services provide one example of a need for renewed 
    And sixth, in attempting to implement these principles--and 
regulatory modernization more generally--it is essential to 
keep in mind that the aim of financial regulation should be to 
establish and maintain a financial system that allocates 
capital efficiently so as to promote sustainable economic 
growth by providing investment opportunities and access to 
credit. The goal is not more or less regulation as such, but 
the right forms of regulation to achieve these ends.

Q.2. Dr. Fred Bergsten, Director of the Peterson Institute for 
International Economics, wrote an op-ed article in The 
Washington Post entitled ``Globalizing the Crisis Response,'' 
in which he makes the following point, and I quote--

        The current crisis originated in the United States but was 
        importantly affected by massive savings surpluses in some 
        countries and the resulting surfeit of liquidity, which drove 
        down interest rates here and encouraged irresponsible lending 
        here. These international imbalances were in turn partly caused 
        by misaligned exchange rates.

    Do you agree with Dr. Bergsten that the current financial 
crisis has roots in the global savings surpluses in China and 
other Asian nations that were accumulated at least in part by 
misaligned exchange rates?

A.2. I agree that an excess of savings over investment in many 
emerging market countries, which raised the availability of 
credit and lowered its cost, contributed to the conditions 
which gave rise to the current crisis. It is difficult, 
however, to distinguish with precision the contribution of 
these savings surpluses from developments in the United States 
and abroad that also encouraged reckless lending and excessive 
risk, such as the deterioration in underwriting standards, 
flaws in the ``originate to distribute'' model, the over-
reliance of financial institutions on short-term credit, and 
inadequate risk management. Similarly, misaligned exchange 
rates were decidedly a factor in some emerging market 
economies' current account surpluses and resultant export of 
capital to the United States and other advanced economies. 
However, a number of other factors also figured prominently in 
these external imbalances, including a protracted slump in 
investment spending in some East Asian economies and soaring 
commodities prices, which boosted the revenues of many 
commodity-exporting countries.

Q.3. Can you share with the Committee your views on the 
separation between banking and commerce? Specifically, what are 
your views on Industrial Loan Companies?

A.3. The question of whether, or to what extent, the mixing of 
banking and commerce should be permitted is an important issue. 
The decision has important ramifications for the structure of 
the American financial system and the economy, particularly 
because any widespread combinations of banking and commerce 
likely would be irreversible. I believe any reversal of the 
Nation's policy concerning the mixing of banking and commerce 
should be made only by Congress itself after legislative 
hearings, public debate, and careful review of the potential 
benefits and costs to taxpayers, the financial system, and the 
    One area in which Congress has permitted the mixing of 
banking and commerce is through the ownership of industrial 
loan companies (ILCs). The exception for ILCs in the Bank 
Holding Company Act (BHC Act) allows any type of company--
including a domestic or foreign commercial firm--to acquire a 
federally insured bank chartered in certain states without 
complying with the limitations on banking and commerce that 
Congress has established for the corporate owners of other 
full-service insured banks. Although the number of exempt ILCs 
recently has declined (primarily through the conversion of 
several financial owners of ILCs to bank holding companies), 
the ILC exception in the BHC Act has the continuing potential 
to undermine the policy that Congress has established on the 
separation of banking and commerce.

Q.4. Do you believe in the Fed's dual mandate for maximum 
employment and price stability? Are there approximate figures 
for the Nation's unemployment rate and inflation rate that 
match what you believe to be maximum employment and price 
stability? If so, can you share what those are?

A.4. I fully endorse the monetary policy mandate that Congress 
has set out for the Federal Reserve of pursuing maximum 
employment and price stability. These policy goals have served 
our economy well.
    It is difficult to provide specific figures for the 
unemployment rate and inflation rate that would best satisfy 
the Congressional mandate. With regard to inflation, there are 
a number of different measures of inflation, each with its own 
strengths, weaknesses, and biases. As for employment, a fixed 
measure of ``maximum employment'' is not compatible with the 
fact that our economy develops and changes over time in 
response to changes in technology and other factors.

Q.5. Can you inform the Committee of any periods in American 
history where you believe that maximum employment was not being 
reached or that price stability was not achieved? During those 
periods, what actions do you believe the Fed should have 
undertaken to achieve its mandate?

A.5. The economy is subject to a variety of demand or supply 
shocks that can pose a threat to the achievement of maximum 
employment and price stability. It is of course important for 
monetary policy to respond appropriately to these developments. 
At some times in the past, though, adherence to a particular 
monetary policy response well after a reduction in the risks 
associated with the shock has itself contributed to an increase 
in other risks to achieving these goals. For example, during 
the 1970s, increases in the prices of oil and other 
commodities, along with a slowdown in the rate of underlying 
productivity growth, contributed to a substantial rise in 
inflation, which reached double-digit levels by the end of the 
decade. Over time, high inflation became built into 
expectations and distorted the decisions of businesses and 
households with adverse results for economic performance. A 
tighter policy stance would have been appropriate to limit the 
rise in inflation. Had such a policy been pursued earlier, it 
might well have avoided some of the negative effects on 
employment that ensued from the very tight monetary policy that 
was adopted in the early 1980s to bring inflation back down to 
lower levels.
    As a result of the recession and the crisis in our 
financial markets, the Federal Reserve has lowered its short 
term interest rate target to an effective rate of zero. The Fed 
has also exercised authority under the Federal Reserve Act to 
make a series of loans to provide liquidity and that have had 
the effect of expanding the Fed's balance sheet. As a result, 
we find ourselves in an unprecedented period in which 
traditional monetary policy tools have been exhausted and the 
Fed is using new methods to implement monetary policy.

Q.6. Do you believe that it is important that as the Federal 
Reserve begins to conduct monetary policy through non-
traditional means that it ensures that those actions are highly 

A.6. I strongly believe that it is important for the Federal 
Reserve to conduct its monetary policy actions in as 
transparent a manner as is consistent with the effective 
achievement of its monetary policy goals, both in routine 
circumstances and in periods such as the present when it must 
conduct policy using nontraditional tools.

Q.7. What are the advantages to conducting these operations in 
a transparent manner?

A.7. Conducting such operations in a transparent manner 
supports the overall accountability of the Federal Reserve to 
the Congress and the public. Such accountability is always 
important, but it is especially critical when nontraditional 
policy tools--which are less familiar to the public, and entail 
somewhat greater risks, than traditional policy tools--are 
being employed. In addition, by improving market understanding 
of these operations, such transparency helps support public 
confidence that the Federal Reserve and the rest of the 
government are implementing measures that will be effective in 
strengthening financial markets and institutions and thus 
encouraging a resumption of sustainable economic growth.

Q.8. What are the costs associated with a lack of transparency 
in the conduct of both traditional and non-traditional monetary 

A.8. Lack of transparency in the conduct of traditional and 
non-traditional monetary policy would tend to undercut the 
effectiveness of policy actions. In the case of traditional 
monetary policy, lack of transparency would create greater 
uncertainty about the Federal Reserve's policy objectives as 
well as likely actions in response to various economic 
developments. Such uncertainty would tend to boost risk 
premiums and thus interest rates and depress spending and 
economic activity. In addition, a major benefit of transparency 
stems from the ability of market participants to anticipate 
future policy actions. If market participants can anticipate 
future policy actions, those expectations will be priced into 
longer-term interest rates and other asset prices immediately, 
thus amplifying the power of monetary policy to affect overall 
financial conditions and the economy. Lack of transparency 
would undercut this important role of expectations.
    Lack of transparency regarding the purposes, terms, and 
conditions of the Federal Reserve's liquidity programs, would 
similarly undercut their effectiveness. For such programs to be 
effective, market participants and the general public must 
understand the rationale and the terms and conditions for all 
such programs. As with interest rate policies, the ability of 
investors and others to anticipate how such programs will 
operate is extremely important.

Q.9. Foreign government-controlled funds known as sovereign 
wealth funds have invested significant resources in U.S. 
financial institutions struggling to recover from losses during 
the current recession.
    Do you believe that the procedures in place at the Federal 
Reserve to review and monitor the effects of these transactions 
on bank holding companies are adequate to ensure the safety and 
soundness of the affiliated depository institutions?

A.9. I believe that the Federal Reserve has adequate authority 
under existing legislation to review and monitor investments of 
sovereign wealth funds in banks and bank holding companies and, 
if necessary, to take action to ensure the safety and soundness 
of those institutions. The Bank Holding Company Act (BHCA) and 
the Change in Bank Control Act (CIBCA) require any company, 
including a company owned or controlled by a foreign 
government, to obtain the approval of the Federal Reserve or 
other Federal banking agency before making a direct or indirect 
investment in a bank or bank holding company if the investment 
meets certain thresholds or conditions. The BHCA requires 
regular reporting on matters such as risk management and 
financial conditions, subjects bank holding companies to 
regular examination, and gives the Federal Reserve broad, 
ongoing authority to prevent bank holding companies from 
engaging in unsafe or unsound practices.
    To date, sovereign wealth funds have structured their 
investments so as not to trigger the thresholds and conditions 
for review under the BHCA and CIBCA. Even below these threshold 
levels, however, the investments must not allow the sovereign 
wealth fund to exercise a controlling influence over the 
management or policies of the banking organization. Of course, 
even under these circumstances, the Federal Reserve has broad 
supervisory authority over the bank holding company, including 
authority to ensure compliance with applicable limitations on 
connections or relationships between a supposed passive 
investor and the banking organization.
    Based on publicly available information, I am not aware of 
any inadequacy in the Federal Reserve's procedures to ensure 
compliance with these requirements. However, if and as 
circumstances change, it would be important for the Federal 
Reserve to adapt its monitoring and enforcement procedures to 
ensure the safety and soundness of U.S. banking organizations.

Q.10. Do you believe that the Federal Reserve Board has 
sufficient information to monitor the influence these foreign 
government investments may have on the U.S. banking system?

A.10. Based on publicly available information, I have no reason 
to believe that information available to the Federal Reserve 
pertaining to foreign government investments in U.S. banking 
organizations is insufficient to protect safety and soundness 
and otherwise monitor their impact on the U.S. banking system. 
As Member of the Board of Governors of the Federal Reserve 
System, I would seek to ensure that Federal Reserve staff 
develop and maintain sources of information sufficient for 
effective monitoring of the relationships between investors and 
U.S. banking organizations.

                           K. TARULLO

Q.1. The Federal Reserve has used many tools in its tool box 
this year to prevent economic meltdown. What other monetary 
policy tools do you believe be utilized to restore confidence 
in our markets and encourage economic recovery?

A.1. Although the Federal Reserve has reduced the federal funds 
rate close to zero, it has a number of policy tools that it can 
use to ease conditions in credit markets and thereby support 
economic recovery. First, it can provide short-term liquidity 
to assure that sound financial institutions have sufficient 
credit to conduct their normal activities. Second, it can 
purchase specific types of longer-term securities than it does 
in its usual open market operations, with the aim of reducing 
the longer-term interest rates that are critical to mortgage 
rates and investment decisions more broadly. Third, it can 
inject liquidity directly into important credit markets by 
purchasing, or lending against, securities associated with 
those markets. The terms of such efforts should vary with the 
specifics of the credit markets in question. However, if 
judiciously configured, these non-conventional policy actions 
can play an important role in easing credit conditions in 
markets that have remained significantly impaired despite the 
low federal funds rate. Going forward, the Federal Reserve 
should, consistent with its dual mandate to promote maximum 
employment and stable prices, be prepared to utilize all three 
policy tools as necessary.

Q.2. Beginning to restructure the financial services' 
regulatory structure is a complicated undertaking, and one that 
this Committee will spend much time addressing. As a bank 
regulator, what do you believe is the starting point for 
restructuring at the Fed? What is the number one structural 
regulatory deficiency that needs to be corrected by Congress?

A.2. In revamping our system of financial regulation, agencies 
must first ensure that regulatory capital rules provide an 
adequate buffer against the risks of loss associated with the 
activities of financial institutions. Just as importantly, the 
agencies must have the capacity to monitor compliance with 
these rules and the resolve to enforce them. A second task is 
to assess past shortcomings in examination and monitoring of 
the internal risk management systems of financial institutions, 
and to implement needed improvements. The broader agenda for 
Congress and the regulatory agencies is to address sources of 
significant potential risk to the financial system that are not 
currently subject to adequate oversight. Among other things, 
this agenda should include regulatory coverage of all 
systemically important institutions and measures to identify, 
and respond, to the risks created in interactions among 
financial actors.

Q.3. Countries around the world are currently working on 
``stimulus'' packages to help their economies recover. What 
should the United States do in coordinating international 
economic policies with these nations to achieve the best 
recovery results?

A.3. In general, prospects for recovery of the global economy 
will be strengthened if each country in the coming months takes 
measures appropriate to its circumstances to stabilize its 
financial system, promote adequate credit flows, and support 
domestic economic activity. In some circumstances, as evidenced 
by the rate cuts by a number of central banks (including the 
Federal Reserve) last fall, explicitly coordinated actions can 
send an important signal to markets of a shared resolve among 
government authorities to respond vigorously to serious risks 
to growth. Even where precise synchronization of specific 
policies is not feasible or necessary, international 
consultation and cooperation will be helpful in encouraging 
countries to pursue measures that strengthen domestic demand 
and contribute to global economic recovery. Over the longer 
term, it is important that countries adopt policies that are 
consistent with balanced, sustainable global growth.
    Mr. Chairman, It is an honor and pleasure to introduce and 
recommend that my fellow Californian, Dr. Christina Romer, be confirmed 
as Chairman of the Council of Economic Advisors. Dr. Romer is a 
distinguished economist and innovative thinker.
    She received her Bachelor of Arts in Economics from the College of 
William and Mary in 1981. After obtaining her doctorate in economics 
from the Massachusetts Institute of Technology in 1985, Dr. Romer 
became a professor of economics at Princeton University. She joined the 
faculty at the University of California, Berkeley, in 1988 and was 
promoted to full professor in 1993. She was awarded the Distinguished 
Teaching Award the following year. Currently, she is the Class of 1957 
Garff B. Wilson Professor of Economics.
    During her tenure at the University of California, Berkeley, Dr. 
Romer also has served as vice-president of the American Economic 
Association, as the Visiting Scholar at the Board of Governors of the 
Federal Reserve System, and she currently serves as the Co-Director for 
the Program in Monetary Economics at the National Bureau of Economic 
    Dr. Romer is widely published, and since her first publication in 
1986, she has published 28 articles in journals such as the American 
Economic Review, the Journal of Economic History, and the Journal of 
Monetary Economics. In addition, she has authored 11 other reviews and 
commentaries. In 1997, the volume she co-edited with her husband, 
Reducing Inflation: Motivation and Strategy, was released.
    She has written widely on the subjects of the Great Depression and 
recessions, making her especially well-suited to advise the President 
during these challenging times. Dr. Romer understands the gravity of 
the current economic crisis and the importance of prudent and well-
targeted government action to promote recovery.
    In addition to teaching and research, Dr. Romer is a fellow of the 
American Academy of Arts and Sciences and is the recipient of a 
National Science Foundation research grant. Previously, she has 
received other awards and grants from the National Science Foundation, 
including the Faculty Award for Women Scientists and Engineers from 
1991 to 1996. Her previous fellowships include the John Simon 
Guggenheim Memorial Foundation Fellowship and the National Bureau of 
Economic Research Olin Fellowship.
    Dr. Romer is clearly one of the best minds in her field. At a time 
when so many families are struggling, it is essential that the 
President-elect has solid advice to positively change our Nation's 
economic course.
    With that in mind I am happy to introduce Dr. Romer to this 
    Thank you, Mr. Chairman, Senator Shelby, and Members of the