Senate Hearing, 107TH Congress - Nominations Of: Harvey J. Goldschmid Paul S. Atkins, Donald L. Kohn Ben S. Bernanke, and Philip Merrill

S. HRG.
107865
NOMINATIONS OF: HARVEY J. GOLDSCHMID

PAUL S. ATKINS, DONALD L. KOHN
BEN S. BERNANKE, AND PHILIP MERRILL
HEARINGS
BEFORE THE
COMMITTEE ON
BANKING, HOUSING, AND URBAN AFFAIRS
UNITED STATES SENATE
ONE HUNDRED SEVENTH CONGRESS
SECOND SESSION
ON
NOMINATIONS OF:
HARVEY J. GOLDSCHMID, OF NEW YORK, TO BE A MEMBER OF
THE U.S. SECURITIES AND EXCHANGE COMMISSION
PAUL S. ATKINS, OF VIRGINIA, TO BE A MEMBER OF
THE U.S. SECURITIES AND EXCHANGE COMMISSION
DONALD L. KOHN, OF VIRGINIA, TO BE A MEMBER OF THE BOARD
OF GOVERNORS OF THE FEDERAL REVERSE SYSTEM
BEN S. BERNANKE, OF NEW JERSEY, TO BE A MEMBER OF THE BOARD
OF GOVERNORS OF THE FEDERAL RESERVE SYSTEM
PHILIP MERRILL, OF MARYLAND, TO BE THE PRESIDENT AND CHAIRMAN
OF THE EXPORTIMPORT BANK OF THE UNITED STATES
JULY 18, 30, AND OCTOBER 4, 2002
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COMMITTEE ON BANKING, HOUSING, AND URBAN AFFAIRS
PAUL S. SARBANES, Maryland, Chairman
CHRISTOPHER J. DODD, Connecticut PHIL GRAMM, Texas
TIM JOHNSON, South Dakota RICHARD C. SHELBY, Alabama
JACK REED, Rhode Island ROBERT F. BENNETT, Utah
CHARLES E. SCHUMER, New York WAYNE ALLARD, Colorado
EVAN BAYH, Indiana MICHAEL B. ENZI, Wyoming
ZELL MILLER, Georgia CHUCK HAGEL, Nebraska
THOMAS R. CARPER, Delaware RICK SANTORUM, Pennsylvania
DEBBIE STABENOW, Michigan JIM BUNNING, Kentucky
JON S. CORZINE, New Jersey MIKE CRAPO, Idaho
DANIEL K. AKAKA, Hawaii JOHN ENSIGN, Nevada
STEVEN B. HARRIS, Staff Director and Chief Counsel
WAYNE A. ABERNATHY, Republican Staff Director
MARTIN J. GRUENBERG, Senior Counsel
DEAN SHAHINIAN, Counsel
THOMAS READMOND, Republican Professional Staff Member
JOSPEH R. KOLINSKI, Chief Clerk and Computer Systems Administrator
GEORGE E. WHITTLE, Editor
(II)
C O N T E N T S
THURSDAY, JULY 18, 2002

Page
Opening comments of Chairman Sarbanes ........................................................... 1
Opening statements, comments, or prepared statements of:
Senator Gramm ................................................................................................ 4
Senator Dodd .................................................................................................... 5
Senator Allard ................................................................................................... 6
Senator Corzine ................................................................................................ 6
Prepared statement ................................................................................... 24
Senator Enzi ..................................................................................................... 7
Senator Miller ................................................................................................... 13
Senator Carper ................................................................................................. 15
WITNESSES
John Warner, a U.S. Senator from the State of Virginia ..................................... 1
George Allen, a U.S. Senator from the State of Virginia ..................................... 2
NOMINEES
Harvey J. Goldschmid, of New York, to be a Member of the U.S. Securities
and Exchange Commission .................................................................................. 8
Prepared statement .......................................................................................... 25
Biographical sketch of nominee ....................................................................... 27
Response to written questions of:
Senator Bunning ....................................................................................... 71
Senator Akaka ........................................................................................... 71
Paul S. Atkins, of Virginia, to be a Member of the U.S. Securities and
Exchange Commission ......................................................................................... 9
Response to written questions of:
Senator Bunning ....................................................................................... 72
Senator Akaka ........................................................................................... 72
ADDITIONAL MATERIALS SUPPLIED FOR THE RECORD

News article by Robert Novak, dated July 18, 2002 ............................................. 74
TUESDAY, JULY 30, 2002

Opening statement of Chairman Sarbanes ........................................................... 77
Opening statements, comments, or prepared statements of:
Senator Bunning ............................................................................................... 84
Senator Gramm ................................................................................................ 87
Senator Reed ..................................................................................................... 87
Senator Corzine ................................................................................................ 90
Senator Miller ................................................................................................... 92
(III)
IV
Page
NOMINEES
Donald L. Kohn, of Virginia, to be a Member of the Board of Governors
of the Federal Reserve System ............................................................................ 79
Ben S. Bernanke, of New Jersey, to be a Member of the Board of Governors
of the Federal Reserve System ............................................................................ 81
FRIDAY, OCTOBER 4, 2002

Opening statement of Chairman Sarbanes ........................................................... 119
WITNESSES
Barbara Mikulski, a U.S. Senator from the State of Maryland ........................... 119
John Warner, a U.S. Senator from the State of Virginia ..................................... 121
NOMINEE
Philip Merrill, of Maryland, to be President and Chairman of the
Export-Import Bank of the United States .......................................................... 124
Response to written questions of: ....................................................................
Senator Miller ............................................................................................ 144
Senator Santorum ..................................................................................... 144
ADDITIONAL MATERIALS SUPPLIED FOR THE RECORD

Letter submitted by Congressman Steny H. Hoyer, of Maryland, dated
October 3, 2002 ..................................................................................................... 145
Letter submitted by Edmund B. Rice, dated October 3, 2002 ............................. 146
NOMINATIONS OF:
HARVEY J. GOLDSCHMID, OF NEW YORK
AND
PAUL S. ATKINS, OF VIRGINIA
TO BE MEMBERS OF THE
U.S SECURITIES AND EXCHANGE
COMMISSION
THURSDAY, JULY 18, 2002
U.S. SENATE,
COMMITTEE ON BANKING, HOUSING,
URBAN AFFAIRS, AND
Washington, DC.
The Committee met at 10:05 a.m. in room SD538 of the Dirksen
Senate Office Building, Senator Paul S. Sarbanes (Chairman of the
Committee) presiding.
OPENING COMMENTS OF CHAIRMAN PAUL S. SARBANES
Chairman SARBANES. The hearing will come to order.
The Committee on Banking, Housing, and Urban Affairs con-
venes today to hold a hearing on two nominees to serve on the Se-
curities and Exchange CommissionProfessor Harvey Goldschmid
and Paul Atkins. I am going to defer the balance of my opening
statement because we have two of our colleagues here to present
one of the nominees, and I know they have other pressing demands
on their time.
Senator Warner, why dont we hear from you and then we will
go to Senator Allen.
STATEMENT OF JOHN WARNER
A U.S. SENATOR FROM THE STATE OF VIRGINIA
Senator WARNER. Thank you very much, Mr. Chairman, Senator
Gramm, Senator Dodd, Senator Enzi, colleagues. It is a privilege
for me to be here today to introduce to this Committee, under the
advise and consent procedure of the U.S. Senate, the Presidents
nominee for the Securities and Exchange Commission.
Mr. Atkins has a vast and distinguished career in the private
sector and several years of service at the Securities and Exchange
Commission. Consequently, I and others strongly believe that he is
eminently qualified to take on these important responsibilities, par-
ticularly at this critical time in the history of corporate America.
His background at the SEC and in the private sector enables Mr.
Atkins to take a balanced approach, in my judgment, on reform
(1)
2
and accountability issues, working in the best interests of the pri-

vate sector and the consumers alike.
At the height of the Congressional inquiry calling for increased
corporate responsibility and reform on accounting standards, it is
critical we confirm those individuals who will fill the existing va-
cancies in the Commission and do so in a balanced manner.
In the coming months, the Commission will be tasked with mak-
ing important regulatory decisions. Consequently, I will put the
balance of my statement in the record. I thank the distinguished
Chairman and the Members of the Committee.
Chairman SARBANES. Good. We appreciate that very much, Sen-
ator Warner.
Senator Allen.
STATEMENT OF GEORGE ALLEN
Senator ALLEN. Thank you, Mr. Chairman. Thank you for your
leadership on this Committee and for holding this hearing. It is
good to see Senators Gramm, Dodd, Allard, and Enzi here as well.
I am before you this morning to offer my strong support for the
confirmation of Paul Atkins, one of President Bushs nominees to
be a member of the Securities and Exchange Commission.
I will discuss Mr. Atkins strong qualifications in a moment. But
Paul has his family here with him, his wife Sarah, two of his three
sons, Peter and Stewart, and other members who are in the Wash-
ington area for a wedding this weekend. I am sure that will be a
wonderful discussion at the wedding reception.
Mr. Chairman, Mr. Atkins is one of my constituents, a resident
of Arlington, with a wonderful family. He has been nominated to
the SEC at an important time. It is a hot time now, but it is going
to be hotter on the SEC. You are jumping into a frying pan with
the scandals this Committee has been addressing, trying to restore
confidence and accurate accounting, accurate portrayals of the fi-
nancial condition of a company, as well as corporate governance.
Mr. Atkins is the right person at the right time to bring that expe-
rience, that knowledge, and especially bring the character that peo-
ple want to see in making determinations on the SEC.
He is certainly coming in at a challenging time. But he has
worked since leaving education on financial markets. He has
worked in the private sector with the SEC to protect investors, as
well as make sure that the private sector companies comply with
SEC regulations. He has also worked at the SEC under two of its
distinguished chairmen, Richard Breeden and Arthur Levitt. Dur-
ing his tenure on the Commission, he spearheaded a variety of ini-
tiatives that are truly relevant in todays market environment,
focusing on investor communication, investor education, and efforts
to improve corporate governance.
This is an important time for the SEC and I think that the SEC
is one of the key players in making sure that confidence and proper
governance are restored. And I think that this gentleman, Mr. At-
kins, has all the qualifications one would want including experi-
ence and character to serve on the SEC and to serve our market
system. I hope you will move very favorably, and he has my full
support.
3
Thank you, Mr. Chairman.

Chairman SARBANES. Thank you, Senator Allen. And we thank
both of our colleagues. I know you have other engagements and if
you wish to excuse yourselves, please do so.
Senator WARNER. Mr. Chairman, could the nominee introduce his
family at this time to the Committee? Would that be appropriate,
Mr. Chairman?
Chairman SARBANES. Well, we were going to do that later.
Senator WARNER. All right.
Chairman SARBANES. No, no, no. Since you have raised the issue,
why dont we go ahead and do it now?
Go ahead.
Mr. ATKINS. Okay. Thank you, Mr. Chairman.
With me here is my wife, Sarah, two of my sons, Stewart and
Peter. For the sake of decorum, we left our 2 year old, Henry, at
home.
[Laughter.]
My mother, Carla Atkins. My mother-in-law, Ethelmae Hum-
phreys from Missouri. My brother Harold and his fiancee, Tracey
Wyatt, who is from the great city of Baltimore. They are getting
married this weekend, which is the reason why everyone is in
town. My uncle and aunt, Burhard and Ute Gusovius.
Chairman SARBANES. Very good. Very impressive.
Senator GRAMM. A man whose mother-in-law is for him is all
right.
[Laughter.]
Senator WARNER. I am out of here.
[Laughter.]
You are on your own.
Mr. ATKINS. Thank you.
[Laughter.]
Chairman SARBANES. Behind every successful man stands a sur-
prised mother-in-law. Is that it?
Senator GRAMM. That is right.
[Laughter.]
Chairman SARBANES. Professor Goldschmid, do you want to in-
troduce your family now here at the outset?
Mr. GOLDSCHMID. I would be delighted. My wife Mary is right
here. With Mary are our two sons, Paul and Joey. I will mention
my third son, Charlie, in the opening statement.
Chairman SARBANES. Very good. I will finish my statement, then
yield to my colleagues who are with us.
The SEC, as Senator Allen just observed, plays a critical role in
protecting investors, ensuring the integrity and efficiency of the se-
curities markets. In recent months, the securities markets have ex-
perienced a severe erosion in public confidence. Investors have seen
too many instances of faulty accounting, misleading stock rec-
ommendations, unreliable auditor certifications, and inadequate
issuer disclosures, all of this at a time when the value of stocks has
fallen significantly.
We are making an effort here in the Congress to address these
problems. Just 3 days ago, the Senate passed the Public Company
Accountability Reform and Investor Protection Act of 2002, which
came out of this Committee, by a vote of 97 to 0 and we are now
4
going to conference with the House. The conferees were appointed

yesterday.
I welcome the two nominees that are before us this morning. Pro-
fessor Goldschmid is Dwight Professor of Law at Columbia Law
School. He received both his BA and his JD degrees from Colum-
bia. He has really never managed to get out of the confines of Co-
lumbia University.
[Laughter.]
He clerked for Judge Paul Hays of the Second Circuit Court of
Appeals, practiced law with the firm of Debevoise & Plimpton. In
1970, he joined the Columbia Law School faculty and has continued
teaching there ever since. In 1998 and 1999, he took a leave of ab-
sence from Columbia to serve as the General Counsel of the Securi-
ties and Exchange Commission. Professor Goldschmid has held nu-
merous positions in legal associations, served on numerous legal
panels, coauthored books on trade regulation, written many articles
on securities law, antitrust, corporate law, and legal education.
Mr. Paul Atkins is a graduate of Wofford College and from Van-
derbilt University School of Law, where he was on the Vanderbilt
Law Review. He then went on to work with Davis Polk & Wardwell
in New York and in Paris. From there, he went to work at the
SEC, on the staff of the SEC, and eventually was Executive Assist-
ant to Chairman Richard Breeden and then Counselor to Chairman
Arthur Levitt. In 1994, he joined Coopers & Lybrand, which later
became PricewaterhouseCoopers. And currently, he is the Principal
of the Financial Services Regulatory Advisory Group at PWC. Mr.
Atkins has published articles on the role of the compliance officer.
He is coauthor of a book, Generally Accepted Risk Principles. And
I am looking forward this morning to hearing the testimony of both
of our nominees.
And I yield to Senator Gramm.
COMMENTS OF SENATOR PHIL GRAMM

Senator GRAMM. Well, Mr. Chairman, thank you very much.
Let me begin by thanking our nominees for their willingness to
serve. This will be a very difficult time to be at the SEC. I have
had the great privilege in my period of service on this Committee
as a Member and Chairman and Ranking Member, to work with
many great commissioners. I have had an extraordinarily high
opinion of our last two chairmen. I sat on this Committee and lis-
tened as everyone lavished praise on Harvey Goldschmid for all the
knowledge and experience he had. And now, you can hardly open
a paper without criticism being madewho did I say?
Chairman SARBANES. Harvey Goldschmid.
Senator GRAMM. We are going to hear it for Harvey Goldschmid
today. I mean Harvey Pitt.
Chairman SARBANES. Yes.
Senator GRAMM. And now, you can hardly open a paper without
someone saying that the fact that Harvey Pitt did not just come in
off the turnip truck, that he actually was engaged in representing
various interests before the SEC. And of course, he was one of the
most active general counsels and the youngest general counsel in
the history of the SEC. Now all those things are a source of criti-
5
cism. Well, this is the same Harvey Pitt that was here. He, like his
predecessor, Arthur Levitt, is doing an excellent job, in my opinion.
So that is the criticism that comes with public service. I just
want to say that I appreciate peoples willingness to serve the
greatest country in the history of the world, and we appreciate it.
I look forward to working with both of you in your capacity when
you are confirmed.
Chairman SARBANES. Very good.
Senator Dodd.
STATEMENT OF SENATOR CHRISTOPHER J. DODD

Senator DODD. Thank you, Mr. Chairman. And let me extend my
best wishes to both of you as well, and to welcome your families
here, and these young men here. This is a very important moment
to watch their father in a confirmation hearing.
I want to underscore the comments of both my Chairman and the
Ranking Member in terms of the obligation to do whatever is pos-
sible to restore confidence in the marketplace in this country.
It will be a challenging time. Candidly, I cannot think of a more
exciting time to be at the SEC. You are coming on when the expec-
tations are going to be high, and rightfully so, that we do every-
thing we can to rebuild what has been historically the great selling
point, I have always said, of our markets.
We do not always offer the most attractive deals in the world.
There are other countries that race to the bottom, to use Arthur
Burns line, when it comes to the regulatory process.
We have resisted that over the years, although some have tried
to move us in that direction. And the fact that we have not has
been an attractive quality about why foreign capital seeks to come
to these markets historically. And it is why I am worried today
that they are not because they, for the first time in years, feel as
though our structures may not be what we have always claimed
them to be. Everyone involved in this, the private sector, the Presi-
dent, the Congress, but principally the SEC will bear responsibility
for helping us rebuild that sense of confidence.
I also agree with Senator Gramm. I did not know Harvey Pitt at
all. I never really met him. I knew nothing about him, really. I
heard his name mentioned. But, in my view, he hardly has been
on the job. I think he came on the job in September. Enron broke
in October. We focus our attention on personalities rather than
what needs to be done to get us back on track. There may come
a time when Harvey Pitt may be the wrong person for the job, but
it is terribly premature and distracting for us to be talking about
personalities rather than what needs to be done within the regu-
latory and legal schemes in order to rebuild the confidence nec-
essary for us to attract capital to our markets again. So I am not
going to join the chorus on the Harvey Pitt discussion. I would
rather we focus our attention on what needs to be done as public
policy people to straighten things out here, rather than to try and
engage in the attacks on individuals.
Finally, let me just say to both of you here, and I think you both
worked at the SEC so you have a good understanding. You are not
coming in as complete outsiders here. In fact, you and I talked
6
about this yesterday, Mr. Goldschmid. And that is that you have
been chosen by the President. That is a high honor.
But unlike a Cabinet officer, in my view, the SEC is in a special
category. It is not unlike the Secretary of State or the Secretary of
Defense, for different reasons. Here, the temptation of every White
House is to have people get in line and support their policies. How-
ever, it is critically important at the SEC that you refrain from get-
ting caught up in the day-to-day machinations or agendas that are
set, both here in Congress and at the White House.
I would urge you to resist that, regardless of the Administration
that is in office. The SEC is the organization that we really count
on to provide that confidence. And if there is a sense that decisions
are being made for a short-term political advantage rather than the
long-term financial interests of our country, then the SEC is dam-
aged. And if it is damaged and its credibility is in question, then
everything else will be as well. So it is going to be critically impor-
tant, if confirmed by the Senate, that you be pillars of the institu-
tion you have once worked for in terms of restoring the sense of
confidence that this institution can do the job it has been asked to
do historically.
With that, I welcome you. Thank you both for being willing to
serve as well.
Chairman SARBANES. Good. Senator Allard.
COMMENTS OF SENATOR WAYNE ALLARD
Senator ALLARD. Thank you, Mr. Chairman. I would like to join
my colleagues in congratulating you on your appointment by the
President.
You do have a huge challenge in front of you. You are going to
be under a microscope in every little thing that you do, not only
your personal lives, but all your decisions on the Securities and Ex-
change Commission are going to be under a microscope. You are
going to find yourself under a lot of pressure.
I am one who has felt that we need to have reform in the SEC.
You are going to hear a lot of good ideas about what makes up
good, reasonable reform. And so, you are going to have to put aside
the chaff, look for the facts, act on behalf of what is best to restore
the confidence in our markets. I think that is the real challenge.
And the sooner we can get that confidence restored, the better.
I want to wish you both luck in carrying on your responsibilities
and thank you for being willing to serve.
Senator Corzine.
COMMENTS OF SENATOR JON S. CORZINE
Senator CORZINE. Thank you, Mr. Chairman. I appreciate your
holding this hearing and going forward. We need some new blood,
not because the people there are not doing a good job, but in my
opinion, we just need to make sure we have an SEC that is fully
staffed and attentive. It is an extraordinary institution. I have had
plenty of personal experience and have great respect for it.
I am sure you all will be positive and worthy contributors. But
I think there is an extraordinary need to do some of the kinds of
things that Senator Dodd was talking about, bringing objectivity
7
and a fairness to this process that make our markets healthy and
consistent with the principles of a Nation that people are innocent
till proven guilty, as well as making sure there is a real check and
balance to what goes on.
I hope that you will also be strong advocates to make sure that
the SEC has the resources to be able to do the job that it is ex-
pected to do. Sometimes regulation and regulators who are pre-
sumed to have the ability to do something and then do not have
the resources to really do it, set up a false sense of security that
ends up undermining the quality of our financial markets.
So, I am pleased you all are here. I look forward to hearing your
testimony and believe very much in the institution and think now,
more than ever, the SEC has an extraordinary role to play in our
society.
Thank you.
Chairman SARBANES. Thank you, Senator Corzine.
Senator Enzi.
COMMENTS OF SENATOR MICHAEL B. ENZI
Senator ENZI. Thank you, Mr. Chairman.
I am very pleased that we are beginning to move the nominees
for the Commission forward. I believe that it is important for us
to get all the Commissioners there to work on enacting the impor-
tant legislation that we have been working on.
I would also say that both of our nominees have very accom-
plished records, and I am pleased both of them hold the Commis-
sion in high enough regard that they are willing to return to Gov-
ernment service. We thank you for that. You have had a taste of
the outside and I know the sacrifices that are entailed in coming
back into Government.
The issues facing the Commission will require a major under-
taking. Reforms about the methods by which we review and dis-
cipline publicly traded companies, executives, and others associated
with the formation of the capital markets are underway. And it is
important that we have quality individuals with utmost integrity
to fill these positions.
I want to join Senator Gramm in a few comments in support of
Chairman Pitt. I have looked at some of the numbers of the work
that he has generated already. He appears to have exceeded all
previous years. Part of that is because we are in a bit more of a
crisis now than we have been in previous years. But the activities
that are going on now did not start now. They started earlier. And
I am glad he is deeply involved in solving some of those problems.
I would ask that my complete statement be a part of the record.
And I would also ask that a column by Bob Novak that appeared
in todays Chicago Sun-Times also be a part of the record.
Chairman SARBANES. Without objection, so ordered.
Gentlemen, it is the practice of this Committee to place nominees
under oath at their nomination hearing.
So I would ask both of you to stand now. Do you swear or affirm
that the testimony that you are about to give is the truth, the
whole truth, and nothing but the truth, so help you God?
Mr. ATKINS. I do.
Mr. GOLDSCHMID. I do.
8
Chairman SARBANES. Do you agree to appear and testify before

any duly-constituted committee of the U.S. Senate?
Mr. GOLDSCHMID. I do.
Mr. ATKINS. I do.
Chairman SARBANES. Thank you very much.
We would be happy to hear your opening statements. Professor
Goldschmid, why dont we start with you and then we will go to
Paul Atkins.
STATEMENT OF HARVEY J. GOLDSCHMID, OF NEW YORK

TO BE A MEMBER OF THE
U.S. SECURITIES AND EXCHANGE COMMISSION
Mr. GOLDSCHMID. Chairman Sarbanes, Senator Gramm, distin-
guished Members of the Committee, it is with great respect and
pleasure that I appear before you today. I am honored to have been
nominated to serve on the Securities and Exchange Commission.
I have introduced my wife Mary. She is on my right. She has
been an extraordinary partner all through life. She may look a bit
tired today. Normally she is radiant.
Chairman SARBANES. She is radiant today as well, I hasten to
add.
[Laughter.]
Mr. GOLDSCHMID. She spent all day yesterday in the hospital
with our oldest child Charlie, who we had hoped would be here. He
had a back injury. It looked very dangerous for a while.
Thank God it turned out to be okay.
Chairman SARBANES. Good. We are relieved to hear that.
Mr. GOLDSCHMID. My other two children are here and are won-
derful, too.
I come from a working class background. My father was a furrier
and a postal worker. My parents believed in our financial markets,
and, because of Social Security and their investments, retired to a
relatively comfortable life in Florida. Our Nation, as this Com-
mittee has indicated, is now witnessing the most dramatic business
scandals that have occurred during my professional life. On a very
personal level, I feel the pain of the retirees and the investors
whose futures have been jeopardized. If I am confirmed, I promise
to do all I can to punish corporate wrongdoers, and to rebuild faith
in the fairness and integrity of our markets.
The SEC is a great institution. In January 2000, after I left as
General Counsel and returned to Columbia, I spoke with great
pride of the decency, dedication, professionalism, and common com-
mitment to doing the right thing of the SEC staff from top to bot-
tom. I welcome the opportunity to return to the Commission. If the
Senate confirms me, I will draw my inspiration from two great
former chairmen of the SEC, William L. Cary and Arthur Levitt.
Bill Cary, my treasured teacher and colleague at Columbia, was
chairman during the Kennedy Administration. With independence
and nonpartisanship, he reinvigorated the agency and initiated a
process of reform that changed securities laws and financial mar-
kets enormously for the better. Arthur Levitt, my dear friend, you
all know. As chairman, he was outspoken, courageous, uncommonly
wise, and as he often put it, passionate about protecting investors.
9
Day by day, in his remarkably successful 8 year term, Arthur acted

on his beliefs and in the public interest.
The Senate this week took a bold, balanced, and important step
toward restoring investor confidence. I want you to know how
much I appreciate the critical role that you, Chairman Sarbanes,
and this Committee have played with respect to the Public Com-
pany Accounting Reform and Investor Protection Act of 2002. The
Nation is very much in your debt for this piece of legislation, and
for the oversight that you have provided for our financial regu-
latory system. I very much look forward to working with you, Mr.
Chairman Senator Gramm, this Committee, and with Chairman
Pitt and Paul Atkins, and my other new colleagues on the Commis-
sion. I feel confident that all of us working together can more than
meet the current challenges.
Thank you, Mr. Chairman, Senator Gramm, Members of the
Committee, for this opportunity to appear today. I would be happy,
of course, to answer questions.
Chairman SARBANES. Thank you, Professor Goldschmid.
Mr. Atkins.
STATEMENT OF PAUL S. ATKINS, OF VIRGINIA
TO BE A MEMBER OF THE
U.S. SECURITIES AND EXCHANGE COMMISSION
Mr. ATKINS. Thank you, Chairman Sarbanes, Senator Gramm,
and distinguished Members of the Committee, It is a very great
honor for me to appear before this Committee today. I am deeply
grateful for the confidence that the President has shown in me by
nominating me to be a Commissioner, and I appreciate your cour-
tesy in calling me before you today. And also in allowing me to in-
troduce my family and relatives. I also want to thank in particular
Senators Warner and Allen for their kind remarks on my behalf.
Thank you very much. I appreciate their support.
I have always regarded the Securities and Exchange Commission
as one of the finest agencies of the U.S. Government. My 20 year
career has centered on the financial markets and the SECs over-
sight of them. I have reviewed the practices of companies that the
Commission regulates, advised firms on complying with its regula-
tions, and worked with the SEC to investigate and rectify situa-
tions where investors have been harmed. In fact, I had the privi-
lege of serving as a Staff Member of the Commission for 4 years
under two of the ablest chairmen that the SEC has had: Richard
C. Breeden and Arthur Levitt. It is a personally meaningful coinci-
dence that the actual term that I have been nominated to fill is the
same one that both Chairman Levitt and Chairman Breeden held.
If confirmed, I would be proud to continue their first-rate efforts to
fight fraud through a vigorous enforcement program.
While at the SEC, I helped pursue policy initiatives that fore-
shadowed many of the issues affecting the markets today. Under
Chairman Breeden, my primary responsibilities were managing his
effort to improve corporate governance, shareholder communica-
tions, and strengthen management accountability through proxy
reform. Under Chairman Levitt, I organized his outreach to indi-
vidual investors through a series of investor town hall meetings,
10
consumer affairs advisory committee, and other investor education

efforts, including brochures and other things.
Since leaving the SEC, I have continued my work in investor pro-
tection by promoting meaningful internal safeguards in the private
sector. I have helped financial services firms improve their compli-
ance efforts and have undertaken investigations into corporate
fraud, at times in conjunction with the SEC and the Justice De-
partment. In the course of this work, I have spoken directly with
hundreds of defrauded investors and learned a valuable lesson in
the processthat the impact of fraud and corporate misconduct is
felt far beyond the headlines. For example, I have heard the Syra-
cuse, New York, electrical union member tell me how he lost the
downpayment on his house through a complex Ponzi scheme. And
I have listened while a respected doctor broke down in tears when
he described how his staffs pension fund lost thousands of dollars
through the purchase of fraudulent securities.
Abstract commentaries about the evils of fraud in our financial
markets pale in comparison to the direct, personal impact of these
stories. I have no doubt that many Members of this Committee
have experienced similar tragedies from constituents back home.
We need to remember that these people had their property stolen
from them, just as surely as they had been robbed on the street.
It is professionally and personally gratifying to me that I had an
opportunity to recoup even a small part of their stolen savings,
pensions, and dreams.
If confirmed, I will bring to the SEC this important real-world
perspective of how enhanced compliance, rigorous examinations,
and thorough investigations can make a real difference for investor
confidence that ultimately forms the foundation of our markets.
Moreover, I believe I can make an important contribution to the
Commissions ongoing efforts to improve its own programs and en-
forcement. The SEC is about to receive greatly enhanced resources
as a result of the Presidents increased budget request and the
work of many of you here in Congress. We must ensure that these
resources are used wisely to protect investors to the maximum ex-
tent possible.
I know you have a vote coming up, so if I may just submit the
rest of my remarks
Chairman SARBANES. No, no. If you wish to complete it, go
ahead.
Mr. ATKINS. Okay. Sorry. For many Americans, the SEC has long
been just another Federal agency in Washington with an alphabet
soup acronym. Today, however, the SEC is at the center of a crisis
of trust in the markets that has dealt a serious blow to investor
confidence. In recent months, those markets have been rocked by
one corporate scandal after another, causing millions of investors
to question the integrity of capital markets.
Investors need to believe that the auditors of public companies
are unconflicted, ethical, and acting in the best interests of the
shareholders. Investors also need to believe that corporate officers
are honest and have the best interests of the companies and stock-
holders in mind, not just what is good for their wallets. They need
to know that their representatives on corporate boards are actively
guarding their interests. And, most of all, investors should be able
11
to rely on the financial reports issued by public companies to

present a clear and accurate picture of the financial health of those
companies.
Those beliefs have been shaken in recent months. The SECs top
priority is to work to restore those bedrock principles and the in-
vestor confidence that keeps our economy strong. With more than
half of all Americans invested in the stock market, the SEC is en-
trusted with an enormous responsibility.
The President has issued a powerful call to reinforce the ethic of
corporate responsibility. This Committee and the full Senate have
taken important steps to restore investor confidence, as have the
House and the SEC. Each of these important actors in this process
must remain committed to work together to restore confidence in
our capital markets by rebuilding a mutual trust among market
participants, including investors, corporate executives, and audi-
tors. If confirmed, I will dedicate my energy, experience, integrity,
and independent judgment to achieving that goal. I believe strongly
that the SEC is a vital line of defense in protecting individual in-
vestors, and I look forward to the opportunity to return that insti-
tution to serve that cause with Chairman Pitt and my fellow com-
missioners.
I look forward to working with you and thank you very much.
Chairman SARBANES. Thank you both for very fine statements.
We have a vote scheduled at of 10:45 a.m. Senator Gramm has
indicated to me that he is not going to be able to return. So I am
going to yield to him right in the beginning, and then I will be
quite prepared to do that with other colleagues who may find them-
selves in a similar situation.
As Chairman, you have to be there at the beginning and you
have to be there at the end.
[Laughter.]
So I am going to ask my questions a little later.
Senator Gramm.
Senator GRAMM. Well, Mr. Chairman, thank you very much for
your kindness.
Harvey, you served on the Professional Ethics Executive Com-
mittee for the American Institute for Certified Public Accountants.
Is that right?
Mr. GOLDSCHMID. That is correct, Senator.
Senator GRAMM. And in that capacity, you were paid by the ac-
countants. Is that right?
Mr. GOLDSCHMID. I was paid by the AICPA, yes.
Senator GRAMM. Did you feel that that in any way compromised
your integrity?
Mr. GOLDSCHMID. No, sir.
Senator GRAMM. You have done work for Merrill Lynch, for Leh-
man Brothers, for the National Association of Security Dealers, for
the Nasdaq Stock Exchange, for the American Stock Exchange. Do
you believe that corrupts your judgment or infringes on your inde-
pendence in this job?
Mr. GOLDSCHMID. No, Senator, I do not. The Commission has a
sensible prophylactic rule that says there will be a 1 year recusal
for former clients. But I do not believe the work I did for former
clients will affect my judgment.
12
Senator GRAMM. Well, let me say on this recusal thing, if I

might, I believe people overdo this recusal business. I think that,
at least it has been my experience in watching the process, that,
if anything, people go too far. Clearly, if you are in some way tied
economically to an interest in the present, that that represents a
conflict of interest. If you are affected personally now, that reflects
a conflict of interest.
But I am concerned about this view that the fact that you have
ever been involved in an industry forever or for any extended pe-
riod of time affects your judgment, I think that is a bad view.
I would just like to say for the record, that while I am sure there
is some group somewhere that looks at your long association in this
industry and says, they are getting ready to put someone on the
Commission who has worked for all these companies that are doing
business before the Commission and that is a bad thing, I want to
tell you that I find it reassuring.
Mr. GOLDSCHMID. Well, thank you, Senator.
I think it is true that anyone who should be nominated for a
commissionership at the SEC will have some potential conflict by
way of his or her past career. One has to have had that experience.
My experience with the AICPA, of course, was as a public mem-
ber of the oversight group, and that was serving basically in a pub-
lic capacity, as I understood it. But we do have to be careful. It is
critically important in Washington that we worry about conflict of
interest and appearance. I do think the SECs 1 year recusal period
is a wise rule.
Senator GRAMM. Paul, you of course were with Coopers &
Lybrand. You have been involved with two different accounting
firms. We are in the process of changing legislation as it relates to
those accounting firms. Again, I would just like to say that I think
that is valuable experience. If you are confirmed, you are going to
be working for the Securities and Exchange Commission and not
those accounting firms.
Let me ask both of you, in terms of the SEC and working with
this accounting board, I would like as my final question to ask both
of you when the board is established it is going to be guided by the
law we pass.
But as two people who I believe will be Members of the Securi-
ties and Exchange Commission, how do you see the Commission
working with this board? And Harvey, let me start with you.
Mr. GOLDSCHMID. I hope closely and cooperatively. The SEC is
a Government agency. It must take ultimate responsibility. And as
I understand the bill, the Commission will be in a position to take
ultimate responsibility for all that is done. The model is the
NASDRthe National Association of Securities Dealers Regulation
System. I think it will work very well. The trick is to make sure
the members of the new board have the integrity, the decency, and
the experience we need. But it is a very workable system.
Mr. ATKINS. Senator Gramm, I agree with Professor Goldschmid.
I think you all crafted a very good solution, very easy solution, by
piggybacking on Section 19. So, I do anticipate it being something
like the way the SEC reacts with the NASD, interacts with that.
Senator GRAMM. Thank you, Mr. Chairman.
Chairman SARBANES. Thank you, Senator Gramm.
13
Is there any other colleague who has a time situation, because

I would be happy to yield to them now before the vote starts.
Senator Miller.
COMMENTS OF SENATOR ZELL MILLER

Senator MILLER. I do not have any questions. I would just like
to thank both these gentlemen for your willingness to serve, espe-
cially at this particular time. And I wish you well.
Mr. GOLDSCHMID. Thank you, Senator.
Mr. ATKINS. Thank you, Senator.
Chairman SARBANES. Senator Corzine.
Senator CORZINE. Yes. A follow up to Senator Gramms question.
Are you troubled at all that some disciplinary powers are housed
in the oversight board?
Mr. GOLDSCHMID. Not at all, Senator. That is the way we do
things with broker-dealers. Disciplinary matters go to the NASDR,
and there are appeals to the Commission. That system has worked
quite well. And I am not troubled at all as long as the Commission
has the final say. There is an appeal process.
Senator CORZINE. Since I will not be returning, I want to beat
the drum on one other thing. I presume you both are in support
of pay parity for people at the SEC.
Mr. GOLDSCHMID. The words are absolutely yes.
Senator GRAMM. Well, now we are getting into an area of conflict
of interest.
[Laughter.]
Mr. GOLDSCHMID. Senator Gramm, I remember kidding you at
one point on that. Pay parity, which I know you have supported all
through, will not cover commissioners, as I understand it.
Chairman SARBANES. Well, you certainly endeared yourselves at
this moment to the people down at the SEC.
Senator Enzi.
Senator ENZI. Mr. Chairman, I am not sure what my situation
will be after the vote. It depends on what the floor debate is. I am
on the health committee as well.
Chairman SARBANES. So why dont you go ahead now.
Jon, did you want to continue?
Senator CORZINE. I just had one final question. I would be remiss
if I did not ask how you felt about expensing of options.
Mr. GOLDSCHMID. Paul, do you want to take that?
[Laughter.]
Let me step back on that. Clearly, there should be a shareholder
vote on options. It is a common ground today and developing. I
agree with Chairman Greenspan that, economically, options should
be expensed. There are complicated issues as to valuation. And my
view is that this is an issue that should go to FASB to look at. But
FASB should look at the expensing issue with the independent
funding that your bill contemplates; FASB must have the ability to
stand back and reach the right result.
Mr. ATKINS. I basically agree with that as well. I think this issue
has been floating around since when I was at the SEC back in the
early 1990s. The pros and cons of it have been debated. And I
think it is best to leave it to FASB.
14
Chairman SARBANES. We want to strengthen the integrity of the

decisionmaking process on these issues. And we think what the bill
does by providing the independent funding for FASB, is a very sig-
nificant and important step in helping to achieve that. That is one
of the objectives of the legislation.
Senator Enzi.
Senator ENZI. Thank you, Mr. Chairman. And I want to thank
both of the nominees for meeting with me individually and answer-
ing a series of questions I had in regard to the legislation. I appre-
ciate the answers you gave and the insights that you offered.
On a little different issue, I would be interested in knowing what
your position is in regard to setting stock exchange listing stand-
ards in the statute.
Mr. GOLDSCHMID. Well, I guess again stepping back, I thought
the report and the proposal by the New York Stock Exchange was
a very good one. It seems to me that the statute works fairly well,
at least if I understand it, in giving the SEC power to make sug-
gestions and recommendations to the exchange.
Listing standards are a basic method of working through cor-
porate governance today in the United States. We used the listing
standards approach when I was General Counsel in terms of audit
committees. I think the bill provisions should work well.
Mr. ATKINS. I basically agree again. I think that, ultimately, you
want to leave the discretion with exchanges. That helps with com-
petition among the exchanges. But I think that you all have come
up with a good balance.
Senator ENZI. Thank you. Senator Dodd and I are on the Sub-
committee that deals with the securities laws. We have been con-
templating doing a review of those laws. I wonder whether you
would encourage or discourage us from doing that.
Mr. GOLDSCHMID. An academic can never say, dont review.
[Laughter.]
The securities laws have, however, served us remarkably well.
The 1933, 1934, and 1940 Acts were enacted in a very different
time. But they have served the Nation very well. And they have
been modernized continually by the broad rulemaking power that
the SEC has, and then by various amendments over the years.
A review makes sense. These are older laws, last century laws.
But the conservative in me says, be cautious. These laws have been
an enormous advantage for the Nation in terms of the discipline,
the accountability, and the quality of disclosure they have gen-
erally produced.
Mr. ATKINS. I agree with that. But I definitely think that it is
time to look at these 70 year old laws which you have been speak-
ing about.
The one thing to keep in mind, when you look at the petitions
and the exemptive applications that come to the SEC, particularly
with respect to laws that are both very broad and prescriptive,
such as the Investment Company Act of 1940. Because of the SECs
broad rulemaking authority, it has been able to adapt the law over
time. But it shows that the law itself does not necessarily apply to
current conditions. So I think that speaks that it is a good time to
review.
Senator ENZI. Thank you, Mr. Chairman.
15
Chairman SARBANES. Presumably, though, you both would agree

with the observation that given the current turmoil that we are
confronting, the fact that we are about to pass a significant piece
of new legislation, which will have to be integrated into the system,
that a thorough-going review of the securities laws probably should
at least await a calming down of the current market and regulatory
situation.
Otherwise, it seems to me, even if you have the very best of in-
tentions, you are stirring up the pot at a time when we want it to
settle, if possible. Do you have any reaction to that observation?
Mr. ATKINS. I agree completely with that. I think you can only
allocate your resources so much. And so, take one thing at a time.
Mr. GOLDSCHMID. I agree with that, too. Clearly, there are prior-
ities right now. And giving confidence to the markets by dealing
with the present issues and implementing your bill is critical; these
are the high priorities.
Bill Cary, when he was Chairman, set up a special study. And
thinking about the markets in the future makes sense; it is an in-
credible time in terms of technology and globalization. But those
are backburner issues compared to what is before us right now.
Senator Carper.
STATEMENT OF SENATOR THOMAS R. CARPER

Senator CARPER. Thank you, Mr. Chairman. Thank you both for
being here and your willingness to serve.
I missed the introduction of the family members, but we welcome
all of you, too. And we want to thank each of you for your willing-
ness to share these two men with the rest of us.
The first question I would ask of you is why you are willing to
do this? You all have, I am sure, full plates. Why are you willing
to do this?
Mr. GOLDSCHMID. I have asked myself that question.
[Laughter.]
Senator CARPER. You will probably ask yourself again in a few
years from now.
Mr. GOLDSCHMID. I think that is absolutely right.
[Laughter.]
For me, it is not a good time for the family. Joey, our youngest,
is in high school and it is inconvenient to come. Financially, we will
not even talk about the consequences.
But I have been lucky in life. I have been fortunate. The family
has done well. There is in me a give-back sense. This is a critically
important time for the SEC and the national markets. In the end,
I just felt that I could not say no.
Senator CARPER. All right.
Mr. ATKINS. Similarly, for me, since I have been at the SEC be-
fore, the opportunity to come back and use my experience both
there and in what I have done since, especially at this important
time, is really very important to me.
Senator CARPER. Good. Now I realize you do not want to be im-
modest in front of your families or us, or a national television audi-
ence, but why are you the right person for these posts at this time?
16
Mr. GOLDSCHMID. Well, I began teaching at Columbia in 1970.

This has always been my area of studycorporate governance, se-
curities, corporate law; I have been concerned with what to do,
where the Nation should go, what makes sense.
I have been dealing with these issues all of my professional life.
And then, of course, I spent time as General Counsel of the SEC
in 19981999, as well as consulting at various other periods.
Senator CARPER. All right.
Mr. ATKINS. My experience is not as long-lived as Harveys is,
but similarly, for 20 years basically this has been my life, the secu-
rities markets and trying to help firms comply with the regulations
and to protect investors through that.
And so, to be able to give back some of that experience and to
help make things more effective, both inside the agency and out-
side, is what I would really like to do.
Senator CARPER. How would the SEC be different because you
would serve on it?
Mr. GOLDSCHMID. Well, it is always hard to predict I hope the
decisions will be fair, disciplined, important, and wise. We will
push the agency in every way to do its best.
Senator Corzine correctly alluded to the need for greater re-
sources. We, or at least I, will promise, and I am sure Paul will,
too, to use those resources with every bit of effectiveness and wis-
dom that we can bring to it, and give the country the confidence
that it needs.
Mr. ATKINS. Taxpayers and investors deserve the very best, and
to have their resources used efficiently and effectively. That is
what I really hope to accomplish there, to use my experience to
help that.
Senator CARPER. One last question, if I could, Mr. Chairman.
We are now going to conference between the House and the Sen-
ate versions of what I call corporate governance legislation. There
are some provisions in our bill that are different than the provi-
sions in the Senate bill.
If you could just take a moment, each of you, and talk to us
about the provisions that you think must emerge from the final
compromise, or the principles, how they should emerge in the legis-
lation that is the final compromise that goes to the President. What
might some of those be?
Mr. GOLDSCHMID. It is a tough question. It may be a long mo-
ment, but, fundamentally, you must have the Accounting Oversight
Board with the independent funding and staffing that the bill con-
templates. It must have adequate resources. It must be able to do
quality control studies and look at the accounting firms independ-
ently. It must be in a position to discipline effectively, which was
not the case with the AICPAs oversight committee. I was part of
that oversight group for the AICPA for over a year, and I said from
the beginning, and I think people understood, that the disciplinary
system did not work. We tried our best. There were honorable, de-
cent people serving on what was the Professional Ethics Executive
Committee. It did not work. We need a system of discipline and ac-
countability that does work.
And so, those are the basic kinds of components, and you have
them in the bill. Independence is also a critical element. The sepa-
17
ration of a large amount of consulting from the auditing process,

with the ability to do that consulting for other nonaudit clients, is
critical right now to making the system work. I also think the gov-
ernance provisions of the bill are very good.
Generally as you can see, I am very high on what you have done.
Senator CARPER. Thank you.
Mr. Atkins.
Mr. ATKINS. I agree with the framework that you have put in for
oversight over the accounting profession. I think it is a very well-
balanced approach. And the funding that you are providing for the
agency to help improve its information technologies program, for
example, in some ways, the enforcement division cannot even com-
ply with some of the requirements of courts in doing its filings be-
cause it does not have the scanning technology available to it.
So there are a lot of things that really need to be updated. And
so, your addressing those issues I think is really timely.
Senator CARPER. Good. Well, I thank you for your responses and
for your willingness to serve. Good luck. Make us proud.
Chairman SARBANES. We are going to have to recess for the vote.
I have a few questions, a couple of such importance that I want to
ask them when I return. So we will take a short break.
I do want to say just before we break up that Senator Carper
asked, why would you want to do this? And I thought your answers
were quite responsive to that.
But I just wanted to observe, this is a magnificent opportunity
to be of service to the country. These are really troubled times and
you both are people of competence and experience. You have both
been in the SEC, which is a definite plus.
And this is a chance to come in and confront these serious prob-
lems that we are now experiencing, and in helping to resolve them,
to make a major contribution to the country. Certainly to its eco-
nomic life, and of course, its economic life impacts all other aspects
of its life.
So, it is a very exciting and challenging time to become an SEC
commissioner. And both of you have manifested in the past, have
a concern about public interest, this is real chance to do something
significant about it.
With that, we will take a short recess and I will return and re-
sume the hearing.
[Recess.]
I want to ask both of you first about funding for the Securities
and Exchange Commission.
In the extended hearings that we did in March that led up to re-
porting out the legislation that is now pending in the Congress, we
heard from witness after witness that the SEC needs additional re-
sources in order to effectively carry out its mission and protect
investors.
John Whitehead, former Cochair at Goldman Sachs, told us, I
think the SEC is underfunded and has been for some years. When
you consider the seriousness to the system of just one Enron, it is
dangerous to fool around with the relatively small increases in
budget that the SEC asks for.
18
David Walker, the Comptroller General of the United States, tes-

tified: The SECs ability to fulfill its mission is becoming increas-
ingly strained due in part to imbalances between the SECs work-
load and staff resources.
Over the last decade, securities markets have experienced un-
precedented growth and change, and at the same time, the SEC
has been faced with an ever-increasing workload and ongoing
human capital challenges. Most notably, high staff turnover and
numerous vacancies.
We asked the GAO to do a study, and they came in with a study,
which, if you have not had a chance to review it, I commend to you,
in March of this year: SEC OperationsIncreased Workload Cre-
ates Challenges. They found that the SECs limited staff resources
have resulted in substantial delays in SEC regulatory and over-
sight processes which hampers competition and reduces market
efficiencies.
In fact, we have heard from people in the securities industries
complaining that the lack of resources at the SEC and the signifi-
cant increase in their workload has lengthened the time period
markedly within which certain clearances or decisions are reached,
and that they find that handicaps their own ability to function. The
GAO also noted that information technology issues needed addi-
tional funding.
Now here is where we are and I want to see how concerned you
are about this problem and how committed you are to trying to do
something about it.
The Senate Appropriations Committee, I think only yesterday,
has reported out a $750 million budget for the SEC. That is a jump
of about $300 million, actually, I think the SEC is terribly under-
funded. I have thought that for many years.
But let me just ask you first, what is your own view of the issue
in terms of the lack of adequate resources at the Commission to do
its current job, let alone additional responsibilities which it will be
called upon to undertake?
Mr. Atkins.
Mr. ATKINS. Mr. Chairman, I think that there is a lot to be done
there in bringing it up to snuff, as you have alluded to.
I am sure if it is appropriated, it can be spent. Chairman Pitt
has started a management review of the agency to try to prioritize
and see where additional resources should be used. Offhand, there
are many: Enforcement andas I referred to earlierIT systems,
that can be upgraded. And I am sure that is what this study is
going to come up with and help prioritize that. So, I agree. I think
more resources are needed.
Mr. GOLDSCHMID. It is critical, Senator. I like your $776 million
figure even better than the $750 million.
But there is no question about the immense need. It is a need
for more lawyers and accountants. It is a need, and this goes to pay
parity, to recruit experienced litigators and experienced people to
help manage divisions. It is hard for people to live in Washington
on what the SEC can now pay, particularly people with young fam-
ilies, particularly at that experienced level. We are losing people.
We have lost them over the years. It is critical we get the money.
19
Technology is another area. That bill, that budgetary provision,

and that action by the Appropriations Committee is absolutely es-
sential to making the system work.
Chairman SARBANES. I am very concerned about the pay parity
issue. We have been holding out that promise to people now for
some period of time and we have not actually delivered on the
promise. And I know there are people down there that are wait-
ingit is coming, it is comingbut it is not there yet. And it seems
to mehow important an issue is the pay parity question?
Mr. GOLDSCHMID. For me, it is absolutely critical. Paul and I
talked to senior staff yesterday, and they did indicate that a num-
ber of employees are holding out, hoping that it will be completely
funded. If we continue to lose those first-rate lawyers of 10, 12, 15
years of service, or we cannot recruit and we need new litigators
for all of these financial fraud cases, it will make the agencys job
almost impossible. It is critical that we get pay parity funded.
Chairman SARBANES. Mr. Atkins.
Mr. ATKINS. I agree, although the SEC has had recently some
means of meeting pay parity out of whatever resources that they
have. That is what I understood yesterday they said, but it is not
a permanent issue by any means. And I think they are taking from
one bucket into another.
Chairman SARBANES. They have done a limited amount of it, but
I do not think they have done any benefits. To the extent they have
done it, it has been only on the salary.
Mr. ATKINS. I think you are right.
Chairman SARBANES. It is only part of the package, and that is
a palliative in the short run, but it is not an answer in the long
run. And we need to keep that in mind.
I also am appreciative of the study that the Chairman has under-
taken. But when the Congress is prepared to give an agency a sig-
nificant boost in its appropriation, for good reason here, I think it
is clearly more than warranted, and when I am convinced in my
own mind that whatever study you do will show the need for re-
sources beyond even what the Congress is thinking of providing,
the agency should go ahead and accept this and not say, well, let
us finish the study first and then we will come and ask you be-
cause, by that time, we may have moved out of the budget cycle.
You will be in the next budget cycle, which would throw it off for
another 12 or 15 months or something. So there is a chance now
to move, and we need to do it. If the commissioners do not advocate
for the budget of the SEC, who is going to do it? You, in effect,
have to be in the forefront. And I certainly hope that you all will
assume that burden, so to speak.
Some of the SEC employees are organized. Therefore, there is a
bargaining process that takes place. We keep hearing complaints
that they do not feel that management is negotiating with them
over contracts in as serious and as fair a fashion as they think is
needed.
This is a source of some concern because you do not want to have
labor/management unrest at the agency. That also would impede
its ability.
I am just curious and I will ask you a general question. How
would you respond to these expressions of concern that we have
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been hearing? And generally, what is your view of the nature of the
relationship that one should have with the employees, and the em-
ployee organizations?
Mr. ATKINS. It is vital to have a good relationship with the staff
people at the SEC because they are the ones who are doing the
work and they need to feel they are part of the process and need
to feel like the management of the agency is responsive to them.
So that is one thing that, personally, I am very committed to as
far as, in my past and working with my staff, whether at the SEC
or in the private sector. And I intend to carry that through to this
new position.
Mr. GOLDSCHMID. Working out the collective bargaining agree-
ment has taken a very long time. In our briefing yesterday, we
were told that they are right at the end of the process. And it is
critical we get there, too.
Morale is now weaker at the SEC. The agency has taken some
pounding. We want our employees to feel good and to be treated
right. It is very important that everyone at the SEC, from top to
bottom, feel fairly treated and energized.
And I understand, Senator Sarbanes, what you said to both of
usthis is a critical, difficult time, but it is also a time of large
opportunities. The Commission is in the position to make a large
difference by doing things right.
Chairman SARBANES. That is right. What we need to do down at
the SEC is we need to get you enough resources so at least you can
really move forward with the needed initiatives, and start oper-
ating in an environment in which you have adequate resources to
do your job, you are not constantly constrained, as Mr. Atkins said,
taking out of one pocket to pay another.
That is no way to run an organization, and anyone will tell you,
if the fiscal constraints on you are that tight, it does not really lead
to efficiency. It leads to inefficiencies. You ought not to have a loose
budget. The budget has to be adequate to the task and people
ought not to be spending a good deal of their time thinking how
can we divert from one place where we need it into another place
where maybe we need it a little more?
The other is to get the labor situation resolved so that everyone
is pointing in the same direction and moving ahead. I am very anx-
ious to accomplish that. We are just receiving the papers on the
final nominee for the vacancy. And it is our intention to try to hold
a further hearing next week on the other two nominees for the re-
maining vacancies.
The Senate will be in session next week and the following week
before the August break. So that would give us an opportunity to
do the hearing, reporting all the nominees and, with some good
luck, get it through the Senate before the Senate leaves at the be-
ginning of August, so that people would be able to move into their
positions. So that is the timetable we are working on. I am hopeful
it can be achieved.
Mr. Atkins, I have a couple of questions that I need to ask to
you. Yesterday, the SEC announced a settled enforcement action
against PricewaterhouseCoopers, and its broker-dealer affiliate,
PricewaterhouseCoopers Securities, for violations of the auditor
independence rules. They found that, because of these independ-
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ence violations, the firm caused 16 public audit clients to file finan-
cial statements with the SEC that did not comply with the report-
ing provisions of the Federal securities laws.
Steve Cutler, who is the able SEC Director of the Division of En-
forcement, said: An auditors objectivity is critical to the financial
reporting process. Impairment of an auditors independence under-
mines that process and erodes public confidence in our capital mar-
kets. He went on to say: This case demonstrates the heightened
risk of an audit failure when an accounting firm assists in and ap-
proves the accounting treatment of its own consulting fees.
And then went on to speak of the loss of objectivity and impar-
tiality that you require of an independent auditor, which is, of
course, an essential piece of the legislation that we have reported
out of this Committee. One title is really devoted to auditor inde-
pendence and so forth. In your duties at PricewaterhouseCoopers,
did you provide any of the audit or consulting services that were
the subject of the SEC action? Were you in any way involved in
any of that?
Mr. ATKINS. No, sir, I was not involved in any of that.
Chairman SARBANES. Did you make any decisions involving how
PricewaterhouseCoopers would conduct these audits or provide
these consulting services at issue?
Mr. ATKINS. No, not at all.
Chairman SARBANES. And in your work, were you aware that
PricewaterhouseCoopers was violating the auditor independence
rules with respect to the clients that were the subject of the SEC
action?
Mr. ATKINS. Not at all.
Chairman SARBANES. You had no knowledge of it and no respon-
sibilities in this area, I take it.
Mr. ATKINS. It is a completely different part of the firm from me.
So, I was not involved at all.
Chairman SARBANES. Actually, let me ask you this question be-
cause you are not an accountant. You are a lawyer.
Mr. ATKINS. Right.
Chairman SARBANES. And I say that benignly because I am a
lawyer as well.
[Laughter.]
Tell me a bit about what it was you went to Pricewaterhouse
well it was Coopers & Lybrand originally.
Mr. ATKINS. At the time.
Chairman SARBANES. What you went there to do when you left
the SEC. Was Richard Breeden the head of the unit at Coopers &
Lybrand?
Mr. ATKINS. Richard Breeden was there and actually, when I
was looking to leave the SEC, he basically called me up and said,
you have to come and talk to us at Coopers & Lybrand.
Chairman SARBANES. Actually, Chairman Breeden gave some
very powerful testimony to this Committee in the hearings that we
held in March. He has been advising and counseling us as we have
moved along here. He has very strong views about sustaining the
integrity of the regulatory system.
But please go on.
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Mr. ATKINS. Yes. And that is part of his record from even when
he was Chairman of the SEC and before that, with respect to ac-
counting issues.
But, anyway, basically, the idea was to do mock examinations of
financial services firms and help with investigations by the SEC
from a platform that the audit firm provides from an independent
standpoint, versus law firms which are viewed more as advocates.
So we can wear the white hats and be even-handed is the idea.
Chairman SARBANES. You actually were trying to enhance their
ability to meet or to comply with the regulatory standards. Is that
essentially what you were doing?
Mr. ATKINS. Exactly. We were trying to come in as independent
examiners, basically, and work with broker-dealers, investment ad-
visers, and investment companies to help them with investor pro-
tection, help them comply with SEC rules.
Chairman SARBANES. Let me ask you this question. And actually,
Senator Gramm asked it in a way and he included Harvey within
its ambit by reference to the consulting work that he had done for
both the Institute of Certified Public Accountants and some of the
investment houses.
But this appearance issue is constantly raised by people and
raised in the press. And essentially, it says, here is someone who
has worked for this large accounting firm, or in your instance, has
consulted extensively. And now they are coming into the SEC and
one of the challenges at the moment is how do we get the account-
ing profession back to being a real profession, if I may say so?
One of the sad things in all of this is that Arthur Andersen,
which was founded by a man who was the model of rectitude in the
profession and advocated these high standards of auditing and ac-
counting behavior, and was succeeded by Leonard Spacek, who
himself was even more a model of that, that this company which
they established fell on such difficult times. It is really, in many
respects, sad because they had built an institution that commanded
great respect and of high quality, and of course, we know what has
happened to it.
So the question then becomes, how can someone who is coming
out of one of these major companies go into the SEC and then rule
fairly and impartially on the matters that are to come before them?
I am the messenger here. I am reflecting things that are said or
questions that are raised. And I am interested in how you would
respond to that.
Mr. GOLDSCHMID. In my own case, Senator, as I indicated to Sen-
ator Gramm, my accounting role was that of a member of the
AICPAs oversight board, the Profession Ethics Executive Com-
mittee. I was one of the first three public members. My job, as I
understood it, was to represent the public in this disciplinary proc-
ess, which, as I say, just did not work, although there were very
decent, honorable people who were trying in all kinds of ways. I do
not see any conflict or disability there.
It is quite possible, and I consult perhaps a day a week, not even
that, it is quite possible to understand your clients, to advocate for
your clients, and then to come to Washington and Government and
step back from it and remember, what is critical to remember, that
the public interest, and the protection of investors is what counts.
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But as I said to Senator Gramm, prudent rules on conflicts, on

appearances, the 1 year time-out, those all make sense, too. We
have to be careful. We have to assure the public that we are going
to do the job right.
Chairman SARBANES. Mr. Atkins.
Mr. ATKINS. Well, when you work at any institution, that does
not necessarily mean that you have bought into whatever the orga-
nization doesall the different part of it.
As for me, when you are in a situation like that, you do see the
good, the bad, and the ugly, as it were. So that can help in going
into an oversight body like the SEC.
I am not an advocate any longer for the firm. I am leaving the
firm. I am disassociating myself and severing my relationship. And
I am now going to be back where I was before, 8 years ago at the
SEC and filling a new role now at the Commission, instead of as
staff to the chairman. So to take off one hat and go to the other,
and having severed that relationship, ensures investors and tax-
payers and you in your oversight role that I will be able to carry
that, should I be confirmed, be able to carry that role forward.
Chairman SARBANES. Well, that is a good answer. We have a sys-
tem where people move from the private sector into the public sec-
tor and then back to the private sector, and back and forth.
The real question is, when you go into the public sector, can you
leave behind you as you have just indicated, leave behind you the
private sector and assume your role as representing the public in-
terest? Incidentally, we are around here to maintain oversight over
that question. I should probably throw that into the mix.
Mr. ATKINS. That is highly appropriate.
Chairman SARBANES. Into the mix as well. Well, gentlemen, we
very much appreciate your coming today.
Chairman SARBANES. I want to say to your families, this was a
relatively easy hearing. It is not always like this. You both bring
a great deal of competency to this assignment. It is important that
we try to get the commissioners in place, and now that we have
the full slate here from the Administration, we are moving forward
as expeditiously as we can.
Thank you very much for coming.
Mr. GOLDSCHMID. Thank you, Senator.
Chairman SARBANES. The hearing is adjourned.
[Whereupon, at 11:35 a.m., the hearing was adjourned.]
[Prepared statements, biographical sketches of the nominees, re-
sponse to written questions, and additional material supplied for
the record follow:]
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PREPARED STATEMENT OF SENATOR JON S. CORZINE
Mr. Chairman, I commend you for holding this timely hearing this morning. I
want to start my remarks by congratulating Mr. Atkins and Mr. Goldschmid on
their nominations and thank them for their willingness to serveparticularly dur-
ing this turbulent period.
Mr. Chairman, enough has already been said about the crisis of confidence that
has taken hold of our financial markets, bred skepticism about corporate governance
practices, and created questions about integrity and transparency of corporate finan-
cial statements.
As we deal with these issues, I think its important for us all to understand that
restoring the lost investor confidence cannot be accomplished solely through the en-
actment of new laws. Particularly if new and existing laws are not enforced. The
responsibility of overseeing our markets and enforcing our securities laws lies
squarely at the feet of the SEC.
The first paragraph of the SECs mission outlines the fundamental purpose of the
agency. It states:
The primary mission of the U.S. Securities and Exchange Commission (SEC) is
to protect investors and maintain the integrity of the securities markets. As more
and more first-time investors turn to the markets to help secure their futures, pay
for homes, and send children to college, these goals are more compelling than ever.
That statement has become even more poignant in these times. Many first-time
investors have returned to stashing their money away under their mattresses, thou-
sands of workers have witnessed their 401(k)s savingsand their dreams of retire-
mentevaporate seemingly overnight, and millions of parents now wonder whether
it is wise to gamble on their childs college education by investing in our markets.
Mr. Chairman, now more than ever, the public will be closely scrutinizing the in-
tegrity of those who not only run our public companies, but those who lead the
agencies charged with their oversight. And while many have been critical of the
SECs leadership in taken on the myriad of challenges facing our markets, I think
it is fair to say that the agency has been operating behind the eight-ball due to in-
sufficient financial and personnel resources, and also because it has been operating
without full membership of its Board.
Mr. Chairman, this hearing will allow us to learn more about the character of
these nominees, who both come before the Committee with strong credentials. I look
forward to Mr. Atkins and Mr. Goldschmids testimony, and to their response from
questions of this Committees Members. Thank you, Mr. Chairman.
PREPARED STATEMENT OF SENATOR MICHAEL B. ENZI

Thank you, Mr. Chairman, first of all, let me tell you that I am very pleased we
are beginning to move the nominees for the Commission. I believe that we must get
all of the Commissioners there to begin enacting some of these important reforms
being legislated.
I would also say that both of our nominees have very accomplished records and
I am pleased that both of them hold the Commission in high enough regard that
they are willing to return to Government service.
The issues facing the Commission will require a major undertaking. Reforms
about the methods by which we review and discipline publicly traded companies, ex-
ecutives, and others associated with the formation of the capital markets are under-
way. It is important that we find quality individuals with the utmost integrity to
fill these positions.
I would like to say just a few words about Chairman Pitt. I have to say that
Chairman Pitt and I may not always agree, but I believe the recent attacks on him
to be unwarranted. Mr. Pitt has come under fire for having represented some of the
accounting firms who have been criticized in recent restatements. But I believe
Chairman Pitts work in the private sector is a great asset to investors. We need
individuals who are willing to work in Government who know and understand the
industries they regulate. I do not want lifelong Government bureaucrats monitoring
these companies.
These restatements did not all of a sudden appear when Chairman Pitt was con-
firmed. In most cases, they began during the late 1990s when companies became
intent on not seeing the Internet bubble burst. I have to ask what was going on
at the SEC while these companies were filing all of these false financial statements?
What I imagine happened was that the companies, who are very familiar with who
25
is at the Commission and where the resources are being devoted, thought they could
take advantage of the situation because no one was paying attention.
Just look at what has happened since Chairman Pitt has taken office. He has
opened a record number of investigations of restatements filed by public companies.
He has taken steps to break the relationship between research analysts and invest-
ment bankers. He has supported legislation that will increase penalties on corporate
executives engaged in fraudulent behavior. And, he has indicated his support of this
legislation, which by the way, I anticipate to be supported by the majority of the
Senate later today.
The numbers are very clear. In Chairman Levitts last year as Chairman, 503
total enforcement actions were filed. Already this year, Chairman Pitt has filed 415.
Officer and Director Bars for 2000 were 38this year so far 71. Subpoenaed en-
forcement proceedings in 2000 were 9this year 18. The numbers go on and on.
My point is that Chairman Pitt seems to be left cleaning up the mess his prede-
cessor left in corporate America.
So, I offer my support for these actions taken by Chairman Pitt. Instead of attack-
ing him, I am more concerned about what was happening at the SEC that bred this
climate where executives felt compelled to engage in this unethical behavior. Why
werent some of these actions taken 3 or 4 years ago? Did the SEC Chairman not
see the potential conflicts that could arise out of research analysts getting com-
pensation based on investment banking business?
Therefore, I would say that I commend Chairman Pitt for the work he is doing.
From what I understand, the actions he is taking at the SEC have struck fear
throughout the corporate community that they had better get their act together.
I have a number of issues that I think the Commission needs to address in the
near future. Not the least of which is implementing the accounting reform bill. In
addition, the securities laws need a serious review. The National Market Structure
must be evaluated and revamped. With technological advances that have been
made, we cannot expect the markets to continue to operate on rules and laws that
were developed 25 or 30 years ago. Also, the time seems to have passed the effec-
tiveness of the current rules under which the Intermarket Trading System operates.
I am looking forward to working with the Commission to address these and other
problems.
Again, Mr. Chairman, thank you for moving the nominees along, and I look for-
ward to working with you and the other Members of the Committee on issues affect-
ing the securities industry.
PREPARED STATEMENT OF HARVEY J. GOLDSCHMID

MEMBER-DESIGNATE OF THE U.S. SECURITIES AND EXCHANGE COMMISSION
JULY 18, 2002
Chairman Sarbanes, Senator Gramm, Distinguished Members of this Committee,
it is with great respect and pleasure that I appear before you today. I am honored
to have been nominated to serve on the Securities and Exchange Commission.
Please allow me to introduce to you my wife Mary. She has more than supported
and encouraged me; she has been an extraordinary partner in every aspect of my
life. With Mary are our three sons, Charlie, Paul, and Joey, of whom we are very
proud.
I come from a working class background. My father was a furrier and then went
on to become a postal worker. My parents believed in our financial markets, and,
because of Social Security and their investments, retired to a relatively comfortable
life in Florida. Our Nation is now witnessing the most dramatic business scandals
that have occurred during my professional life. On a very personal level, I feel the
pain of the retirees and investors whose futures have been jeopardized. If I am con-
firmed, I promise to do all that I can to punish corporate wrongdoers, and to rebuild
faith in the fairness and integrity of our financial markets.
The SEC is a great institution. In January 2000, soon after I left as General
Counsel to resume my teaching duties at Columbia, I spoke with enormous pride
of the decency, dedication, professionalism, and common commitment to doing the
right thing that motivated the SECs staff from top to bottom. I welcome the op-
portunity to return to the SEC at this critical time for investors and our markets.
If the Senate confirms me, I will draw my inspiration from the performances of two
great past chairmen of the SEC, William L. Cary and Arthur Levitt. Bill Cary, my
treasured teacher and colleague at Columbia, was Chairman during the Kennedy
Administration from 19611964. He reinvigorated the agency and initiated a process
26
of reform that changed securities law and financial markets enormously for the bet-
ter. Arthur Levitt, my dear friend, you all know. As Chairman, he was outspoken,
courageous, uncommonly wise, and as he often put it, passionate about protecting
investors. Day by day in his remarkably successful 8 year chairmanship, Arthur
acted on his beliefs and in the public interest.
The Senate this week took a bold, balanced, and important step toward restoring
investor confidence. I want you to know how much I appreciate the critical role that
you, Chairman Sarbanes and this Committee have played with respect, to the Public
Company Accounting Reform and Investor Protection Act of 2002. The Nation is
very much in your debt for this piece of legislation, and for the oversight you have
provided for our financial regulatory process. I very much look forward to working
with you Mr. Chairman, Senator Gramm, and this Committee, and with Chairman
Pitt and my other new colleagues on the Commission. I feel confident that all of
us working together can more than meet the current challenges.
Thank you, Mr. Chairman, Senator Gramm, and Members of the Committee, for
this opportunity to appear before you today. I would be pleased to try to answer
any questions you may have.
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PREPARED STATEMENT OF PAUL S. ATKINS
MEMBER-DESIGNATE OF THE U.S. SECURITIES AND EXCHANGE COMMISSION
JULY 18, 2003
Mr. Chairman, Senator Gramm, Members of the Committee, it is a very great
honor for me to appear before this Committee today. I am deeply grateful for the
confidence that the President has shown in me by nominating me to be a Commis-
sioner. I appreciate your courtesy in calling me before you today.
I have always regarded the Securities and Exchange Commission as one of the
finest agencies of the U.S. Government. My 20 year career has centered on the fi-
nancial markets and the SECs oversight of them. I have reviewed the practices of
companies that the Commission regulates, advised firms on complying with its regu-
lations, and worked with the SEC to investigate and rectify situations where inves-
tors have been harmed. In fact, I had the privilege of serving as a Staff Member
of the Commission for 4 years under two of the ablest chairmen that the SEC has
had: Richard C. Breeden and Arthur Levitt. It is a personally meaningful coinci-
dence that the actual term that I have been nominated to fill is the same one that
both Chairman Levitt and Chairman Breeden held. If confirmed as Commissioner,
I would be proud to continue their first-rate efforts to fight fraud through a vigorous
enforcement program.
While at the SEC, I helped pursue policy initiatives that foreshadowed many of
the issues affecting the markets today. Under Chairman Breeden, one of my pri-
mary responsibilities was managing his effort to improve corporate governance, en-
hance shareholder communications, and strengthen management accountability
through proxy reform. Under Chairman Levitt, I organized his outreach to indi-
vidual investors through an investor town hall program, a consumer affairs advisory
committee, and investor education efforts.
Since leaving the SEC, I have continued my work in investor protection by pro-
moting meaningful internal safeguards in the private sector. I have helped financial
services firms improve their compliance efforts and have undertaken investigations
into corporate fraud, at times in conjunction with the SEC and the Justice Depart-
ment. In the course of this work, I have spoken directly with hundreds of defrauded
investors and learned a valuable lesson in the processthat the impact of fraud and
corporate misconduct is felt far beyond the headlines. I have heard a Syracuse, New
York electrical union member tell me how he lost the down payment on his house
through a Ponzi scheme. And, I have listened while a respected doctor broke down
in tears when he described thousands of dollars of the pension fund for his staff
(some of whom had been with him for more than 20 years) that were lost through
the purchase of fraudulent securities.
Abstract commentaries about the evils of fraud in our financial markets pale in
comparison to the direct, personal impact of these stories. I have no doubt that
many Members of this Committee have experienced similar tragedies from constitu-
ents back home. We need to remember that these people had their property stolen
from them, as surely as if they had been robbed on the street. It is professionally
and personally gratifying to have had the opportunity to help recoup even a small
part of their stolen savings and pensions.
If confirmed, I will bring to the SEC this important real-world perspective of how
enhanced compliance, rigorous examinations and thorough investigations can make
a real difference for investor confidence that ultimately forms the foundation of our
markets. Moreover, I believe I can make an important contribution to the Commis-
sions ongoing efforts to improve its own programs and enforcement. The SEC is
about to receive greatly enhanced resources as a result of the Presidents increased
budget request and the work of many here in Congress. We must ensure that these
resources are used wisely to protect investors to the maximum extent possible, and
I look forward to the opportunity to help achieve that if I am confirmed.
For many Americans, the SEC has long been just another Federal agency in
Washington with an alphabet-soup acronym. Today, however, the SEC is at the cen-
ter of a crisis of trust that has dealt a serious blow to confidence in our financial
markets. In recent months, those markets have been rocked by one corporate scan-
dal after another, causing millions of investors to question the integrity of the cap-
ital markets.
Investors need to believe that auditors of public companies are unconflicted, eth-
ical, and acting in the best interests of shareholders. Investors also need to believe
that corporate officers are honest and have the best interests of their companies and
stockholders in mind, not just what is good for their own wallets. They need to know
that their representatives on corporate boards are actively guarding their interests.
And, most of all, investors should be able to rely on the financial reports issued by
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public companies to present a clear and accurate picture of the financial health of
those companies.
Those beliefs have been shaken in recent months. The SECs top priority is to
work to restore those bedrock principles and the investor confidence that keeps our
economy strong. With more than half of all Americans invested in the stock market,
the SEC is entrusted with an enormous responsibility.
The President has issued a powerful call to action to reinforce the ethic of cor-
porate responsibility. This Committee and the full Senate have taken important
steps to restore investor confidence, as have the House and the SEC. Each of these
important actors in this process must remain committed to work together to restore
confidence in our capital markets by rebuilding a mutual trust among market par-
ticipants, including investors, corporate executives, and auditors. If confirmed, I will
dedicate my energy, experience, integrity, and independent judgment to achieving
that goal. I believe strongly that the SEC is a vital line of defense in protecting indi-
vidual investors, and I look forward to the opportunity to return to that institution
to serve that cause with Chairman Pitt and my fellow commissioners.
Thank you very much.
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RESPONSE TO WRITTEN QUESTIONS OF SENATOR BUNNING
FROM HARVEY J. GOLDSCHMID
Q.1. Obviously we do not want to take anyones rights or move so
fast that we falsely accuse or jeopardize a case, but it is very im-
portant that the American people see that those who have broken
the law in these latest accounting scandals are brought to justice
quickly. In your role as a Commissioner will you commit to working
toward that end?
A.1. Yes. If confirmed, I will do my utmost to ensure that the Com-
mission enforces the securities laws in a swift and even-handed
manner against those who violate them. Our Nation is now wit-
nessing the most dramatic business scandals that have occurred
during my professional life. As you suggest, it is essential that the
Commission act quickly and decisively when its investigations
uncover evidence of wrongdoing. I support the efforts of the Com-
missions Division of Enforcement in recent months to enforce the
securities laws in real time, and I am committed to the continued
execution of thorough, fair, and efficient investigations and civil en-
forcement actions.
Q.2. Will you, as a Commissioner, do everything you can to see
that when promulgating regulations, especially on this accounting
bill where there is a difference of opinion between the SEC and
Congress, that the SEC follows the intent of Congress?
A.2. Yes. It is the Commissions duty to exercise its rulemaking au-
thority in a way that is faithful to the intent of Congress. If I am
confirmed, I will work hard to ensure that every exercise of the
Commissions regulatory authority, including its regulatory author-
ity under the new accounting bill, is in accord with the intent of
Congress.
RESPONSE TO A WRITTEN QUESTION OF SENATOR AKAKA
FROM HARVEY J. GOLDSCHMID
Q.1. The use of soft dollars is opaque and not understood by most
individual investors. In a 1998 report, the SEC defined soft dollar
practices as arrangements under which products or services other
than the execution of securities transactions are obtained by an ad-
viser from or through a broker-dealer in exchange for the direction
by the adviser of client brokerage transactions to the broker-dealer.
Soft dollar transactions may result in conflicts of interest for advis-
ers and have an impact on investors. What should be done to im-
prove the transparency of soft dollar transactions?
A.1. Client brokerage is an asset of the client, not the adviser.
However, investment advisers that manage client portfolios com-
monly receive soft dollar benefitssuch as research, other prod-
ucts, or servicesin exchange for directing their clients trades to
particular broker-dealers. Soft dollar arrangements have the poten-
tial to create conflicts of interest because the adviser has an incen-
tive to select or recommend a broker-dealer based on the advisers
interest in receiving those benefits rather than on the clients inter-
est in receiving the best execution of trades at the lowest possible
rates. While the Commission currently requires advisers to disclose
their soft dollar arrangements on Form ADV and to provide that
Form to every client, it is my understanding that the Commission
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has proposed revisions to Form ADV that would enhance the dis-
closure of the advisers soft dollar arrangements and the conflicts
of interest they present. If confirmed, I will support efforts to im-
prove the quality of communications between broker-dealers, in-
vestment advisers, and their clients. Similarly, I will encourage the
staff to consider ways of creating transparency in the increasing
use of mutual fund brokerage to reward the sale of fund shares by
broker-dealers.
RESPONSE TO WRITTEN QUESTIONS OF SENATOR BUNNING
FROM PAUL S. ATKINS
Q.1. Obviously, we do not want to take anyones rights or move so
fast that we falsely accuse or jeopardize a case, but it is very im-
portant that the American people see that those who have broken
the law in these latest accounting scandals are brought to justice
quickly. In your role as a Commissioner will you commit to working
toward that end?
A.1. Yes. I believe that the SECs enforcement role is a vital aspect
of its mission. Investor confidence in the markets depends on a
strong enforcement effort against those who have broken the rules.
It is critical for investors to see that there is an effective, fair en-
forcer of the rules.
Q.2. Will you, as a Commissioner, do everything you can to see
that when promulgating regulations, especially on this accounting
bill where there is a difference of opinion between the SEC and
Congress, that the SEC follows the intent of Congress?
A.2. Yes. As a creature of statute, the SEC derives its authority
from Congress and as an independent agency, it is called upon to
interpret and enforce the law. It is essential that the SEC abide
by the intent of Congress in its regulatory and enforcement action.
As a Commissioner, I will do everything that I can to ensure that
my actions and the actions of the SEC comport with that intent.
RESPONSE TO WRITTEN QUESTIONS OF SENATOR AKAKA
FROM PAUL S. ATKINS
Q.1. I have a special interest in financial education along with sev-
eral other of my colleagues on this Committee. In your statement
you mention that while at the SEC you were involved in investor
education efforts. What is your evaluation of the SECs current in-
vestor education efforts and what could be done to enhance these
programs?
A.1. I understand that the SECs Office of Investor Education and
Assistance (OIEA) has been pursuing a number of initiatives to
reach investors. For example, in January 2002, the SEC launched
a fake scam website to warn investors about fraud before they
lose money.
When I was on the staff of the SEC, we produced the first bro-
churescalled Invest Wiselyaimed at individual investors. I un-
derstand that the SEC has continued and expanded this effort. It
produces and distributes educational materials in print, and the
staff organizes and attends educational events directed at indi-
vidual investors. In addition, each year Commission staff individ-
ually responds to thousands of investor complaints and questions.
73
In every facet of its investor education program, the Commission

works closely in partnership with private organizations, trade asso-
ciations, and other governmental agencies to leverage its resources
and achieve greater impact for its educational materials. I look for-
ward to reviewing the current status of the SECs program in more
detail and exploring with the Chairman, my fellow Commissioners
and the staff ways in which to expand this very important effort
of the Commission.
Q.2. What is your evaluation of the SECs current investor edu-
cation efforts and what could be done to enhance these programs?
A.2. Please see above response to Question 1.
Q.3. The use of soft dollars is opaque and not understood by most
individual investors. In a 1998 report, the SEC defined soft dollar
practices as arrangements under which products or services other
than the execution of securities transactions are obtained by an ad-
viser from or through a broker-dealer in exchange for the direction
by the adviser of client brokerage transactions to the broker-dealer.
Soft dollar transactions may result in conflicts of interests for ad-
visers and have an impact on investors. What should be done to
improve the transparency of soft dollar transactions?
A.3. Currently the Form ADV requires disclosure of soft dollar
practices. In my term as Commissioner, I look forward to reviewing
the state of communications between investment advisers, broker-
dealers, and their customers to assure that there are appropriate
disclosures of conflicts of interest and that the disclosure of other
key elements of securities transactions are clear and easily under-
stood by investors.
74
75
NOMINATIONS OF:
DONALD L. KOHN, OF VIRGINIA
AND
BEN S. BERNANKE, OF NEW JERSEY
TO BE MEMBERS OF
THE BOARD OF GOVERNORS OF
THE FEDERAL RESERVE SYSTEM
TUESDAY, JULY 30, 2002
U.S. SENATE,
URBAN AFFAIRS, AND
Washington, DC.
The Committee met at 2:05 p.m. in room SD538 of the Dirksen
OPENING STATEMENT OF CHAIRMAN PAUL S. SARBANES
I am very pleased to welcome before the Committee on Banking,
Housing, and Urban Affairs this afternoon Donald Kohn and Ben
Bernanke, who have been nominated by President Bush to be
Members of the Board of Governors of the Federal Reserve System.
This hearing was originally scheduled for this morning. But the
President had his bill signing with respect to the Investor Protec-
tion Corporate Accountability Act and therefore we put it off un-
til this afternoon. I hope it did not inconvenience either of our
nominees.
Both of these nominees are highly respected economists who,
based on their records, appear to be well qualified to serve as mem-
bers of the Federal Reserve Board of Governors.
Don Kohn is well known to Members of this Committee through
his long service at the Fed. A graduate of the College of Wooster
in Ohio, he received his Masters and PhD, in economics from the
University of Michigan, and then has spent his entire professional
career in the Federal Reserve System, first at the Federal Reserve
Bank of Kansas City and then he came to Washington and has
worked in a number of divisions of the Fed, including being the
Chief of the Capital Markets Section. He was the Associate Direc-
tor of the Division of Research and Statistics, Deputy Staff Director
of the Office of Staff Director for Monetary and Financial Policy.
From 1987 to 2001, he was Director of the Division of Monetary Af-
fairs of the Fed. And since 2001, has been an adviser to the Board
(77)
78
for Monetary Policy. He has also been Secretary and Economist for
the Federal Open Market Committee.
He is the Senior Career Monetary Policy Expert down at the Fed,
widely respected for his expertise. And we are very pleased that
not only, but I think the Fed staff, have been honored by this nomi-
nation to move from a career staff position to be a member of the
Board of Governors.
Our research indicates, and I am not altogether vouching for its
accuracy, that this has only happened three times previously in the
history of the Fed, and this is the first time that it has occurred
in the last 25 years. In our view, it is an honor that is well
deserved.
Ben Bernanke is currently Howard Harrison and Gabrielle Sny-
der Beck Professor of Economics and Public Affairs at Princeton
my alma mater, I hasten to add
[Laughter.]
and serves as Chairman of Princetons Economics Depart-
ment. He received his undergraduate degree from Harvard in 1975,
his PhD from MIT in 1979, and he then went to the west coast,
where he was first an Assistant Professor of Economics and then
Associate Professor at Stanford Business School, and came to
Princeton in 1985 as a Professor of Economics.
He is the director of the program in Monetary Economics of the
National Bureau of Economic Research and he is the Editor of the
American Economic Review. Also highly respected as an expert in
monetary policy and it is clear that he would bring very strong
qualifications to the Board of the Governors of the Federal Reserve.
So we look forward to hearing the opening statements from our
witnesses and having an opportunity for some questions.
It is the practice of this Committee to swear in the nominees. So
before you give your statements, I would like to ask you to stand
and take the oath.
Do you swear or affirm that the testimony that you are about to
give is the truth, the whole truth, and nothing but the truth, so
help you God?
Mr. KOHN. I do.
Mr. BERNANKE. I do.
Mr. BERNANKE. I do.
Mr. KOHN. I do.
Since we believe, at least continue to believe, to some extent, in
the seniority system, and since Don Kohn has been at the Fed for
some years and Ben Bernanke is just coming to the Fed, I think
we will hear Don Kohns statement first and then we will go to Dr.
Bernanke.
And if either of you wishes, if you have members of your family
here that you might want to introduce in your opening or in the
course of your statement, we would certainly invite you to do that.
79
STATEMENT OF DONALD L. KOHN, OF VIRGINIA
TO BE A MEMBER OF THE BOARD OF GOVERNORS
OF THE FEDERAL RESERVE SYSTEM
Mr. KOHN. Thank you very much, Mr. Chairman.
I would like to introduce the members of my family. This is my
wife, Gail, sitting in the seat I used to occupy.
[Laughter.]
My son, Jeff, daughter-in-law, Sue Matthiesen, mother Pat, and
niece, Zoey Kohn.
Chairman SARBANES. Good. Well, we are very pleased to have
them here with us.
Mr. KOHN. Chairman Sarbanes and Members of the Committee,
I very much appreciate your expeditious consideration of my nomi-
nation to be a Member of the Federal Reserve Board. I have en-
joyed a productive working relationship with this Committee and
its staff over a number of years. Should the Senate confirm my
nomination to the Board, I very much look forward to continuing
to work with you to promote a strong economy and a robust finan-
cial system that serves the needs of all Americans. I am most
grateful to President Bush for this nomination and deeply honored
by his judgment that my abilities and experience will help the
Board to carry out the critical responsibilities you, the Congress,
have entrusted to it. Having spent my working life at the Federal
Reserve, I may be more aware than most nominees who come be-
fore you of both the challenges and the rewards of the position to
which I aspire.
Our economy has made considerable progress over the last two
decades toward the goals you have set for monetary policy of max-
imum employment, stable prices, and moderate long-term interest
rates. We have enjoyed two exceptionally long economic expansions
punctuated by relatively mild recessions, an inflation rate that has
reached what many would consider to be a zone of price stability,
and relatively low long-term interest rates that have helped to pro-
mote wider homeownership. Technological innovation, deregulation,
and globalization, by fostering greater economic and financial flexi-
bility and resiliency and more rapid increases in productivity,
largely account for this favorable performance. But the conduct of
monetary policy surely also has played a role in establishing a
background conductive to economic vitality. This policy has been
marked by a balancing of discipline and flexibilitythe discipline
of focusing on long-run price stability as a necessary precondition
for maximum employment and moderate long-run interest rates,
and the flexibility within that long-term discipline to counter dis-
turbances to the economy and financial markets might threaten
maximum sustainable employment as well as stable prices.
Going forward, in order to do its part in promoting good economic
performance, the Federal Reserve will continue to be faced with the
need to analyze and adapt to a dynamically changing economy and
financial markets. Innovation and deregulation in markets and the
globalization of finance are affecting the flow of funds between sav-
ers and spenders and the distribution of risks and returns in the
financial system. These changes, in my view, have not detracted
from the effectiveness of monetary policy, and they have increased
both economic efficiency and financial stability. But they have also
80
opened the economy to new kinds of influences and they are alter-
ing the channels through which policy affects the economy. In just
the last few years, our financial and economic stability has been
challenged by crises originating in East Asia and Russia, and by
huge variations in asset prices here and abroad as investors strove
to peer through considerable fog to evaluate the implications of
rapidly changing technologies and market structures. The signifi-
cance of those asset price movements has been magnified by the
growing importance of wealth to household financial conditions.
Policymakers have been required to decipher the shifting forces
driving the economy and to adjust policy, sometimes rapidly, to
provide a counterweight to developments that threatened to under-
mine economic performance. Where possible, those policy adjust-
ments have been forward-lookinganticipating the effects of eco-
nomic forces so as to forestall emerging instabilities. It is a process
in which I have been deeply involved, working with policymakers
and staff, and I would welcome the opportunity in a new role to
bring my experience and expertise to bear on the difficult, but fas-
cinating, issues that confront the Federal Reserves conduct of mon-
etary policy.
The increasing volume of finance flowing through securities mar-
kets, the spread of wealth to more Americans, and the growing
prominence of global investors in our financial markets have put
an additional premium on the ability of the Federal Reserve to ex-
plain its policy to the public. More people from more diverse back-
grounds are making important decisions based on their expecta-
tions of policy actions and the effects of those actions. When savers
and borrowers understand how the Federal Reserve sees the forces
developing in the economy relative to its objectives, interest rates
and other prices in financial markets are more likely to be set in
a way that helps to achieve these objectives. I have worked exten-
sively in my career at the Federal Reserve to help policymakers ex-
plain monetary policy. While we have made considerable progress
in recent years, improving the clarity, completeness, and timeliness
of our various public statements is an ongoing process that must
be continued.
As the Congress recognized when it created the Federal Reserve,
economic stability rests on a foundation of financial stability. In no
area of Federal Reserve responsibilities do changing market struc-
tures pose a bigger challenge than in carrying out the supervision
and regulation of banks and holding companies. Changes in the
legislative framework for the financial sector in recent years have
allowed consolidation within the banking sector and, now, between
banking and other financial service providers, permitting markets
to realize economies of scale and scope in the delivery of services.
This consolidation, along with the proliferation of new instruments
to price and trade various aspects of risk, I believe, promotes
sounder, more diversified, institutions and a system in which both
those supplying and using savings have many more alternatives.
The regulatory implementation of these new laws needs to allow
the markets to evolve with changing preferences and technologies,
while preserving competition in the delivery of services and finan-
cial stability. It also must protect against the effective spread of
the safety net beyond the core depositories for which Congress in-
81
tended special protection. No depository institution should be insu-

lated from market forces by being considered too big to fail. But be-
cause banks do have access to the safety net, market signals are
muted by moral hazard. Moreover, as institutions become more
complex and deal in a great number of new instruments, markets
and managers may find it difficult to evaluate some risks accu-
rately, increasing the changes for unexpected losses. In order to
promote efficient resource allocation and maintain financial sta-
bility, supervisors must anticipate potential problem areas and
must put into place oversight structures that build on existing mar-
ket signals and risk management and also simulate market pres-
sures where those signals are inadequate.
The growing access to credit markets for all our citizens is an-
other very positive development in our financial system. It has re-
sulted from efforts to eliminate discriminatory practices along with
the recognition by lenders that profitable opportunities exist in
making credit available to those with lower income and wealth. But
regulators, borrowers, and lenders are still adjusting to the expan-
sion of the market. Many borrowers in the so-called subprime seg-
ment of the credit markets are having difficulty servicing the addi-
tional debt, more difficulty than lenders anticipated, resulting in
the need for supervisory actions for a number of bank lenders. In
addition, it has increased the opportunities for unscrupulous lend-
ers to take advantage of less well-informed consumers. Clearly, ef-
forts to educate credit users better should have important payoffs.
More generally, the key in this area is to find the very difficult bal-
ancing point for regulation that allows the markets to generate the
greatest number of legitimate alternatives for borrowers while pro-
scribing clearly abusive practices.
Meeting these various challenges will require a strong Federal
Reserve System. You have such an institution now. It is widely re-
spected and relied upon, not only to follow the appropriate policies
but for its advice in a variety of economic and financial matters.
Although the Federal Reserve tends to speak with one voice, in my
experience, decisions are preceded by healthy give-and-take among
policymakers with diverse views supported by talented and dedi-
cated staff. Should the Senate see fit to confirm my nomination, I
am looking forward to adding my own perspective to that dialogue
as a policymaker and will do my best to pass on to future genera-
tions an institution just as strong as the one its current and past
leaders have bequeathed to this generation of Americans.
Thank you, Mr. Chairman. I would be pleased to answer any
questions you might have.
Mr. Bernanke, we would be happy to receive your statement.
STATEMENT OF BEN S. BERNANKE, OF NEW JERSEY

TO BE A MEMBER OF THE BOARD OF GOVERNORS
OF THE FEDERAL RESERVE SYSTEM
Mr. BERNANKE. Thank you, Mr. Chairman. I would like to start
by introducing my support groupmy wife, Anna, my son Joel, my
daughter Alyssa, my brother-in-law, Victor Friedmann, his wife,
Toni Jo Friedmann, and our neighbor, Todd Hunter.
82
Chairman SARBANES. Good. We are very pleased to have them

here with us today.
Mr. BERNANKE. Thank you. Chairman Sarbanes, Senator
Gramm, Members of the Committee, I am deeply honored to ap-
pear before you today as the Presidents nominee to serve on the
Board of Governors of the Federal Reserve System. If I am con-
firmed to this important position, I will do my utmost to advance
the economic well-being of all Americans.
The opportunity to serve at the Federal Reserve would be a great
privilege, as it would allow me to apply in the public interest the
fruits of a lifetime of thinking and writing about central banking
and the economy. In my academic career of nearly 25 years, I have
written widely on topics relating to monetary policy, banking and
credit markets, economic growth and business cycles, macro-
economic history, and the statistical analysis of the economy, all of
which bear directly on the work of the Federal Reserve. Moreover,
over the years I have maintained close contact with the Federal Re-
serve System, as a consultant, visiting scholar, and adviser; and I
have visited and advised the central banks of many industrialized
and developing countries.
In various roles during my career, I have also learned how to
work with people and to get things done. Among other duties, I
have served for the past 6 years as Chair of the Princeton Univer-
sity Economics Department. I also served as the first Director of
Princetons new Center for the Study of Financial Markets; as the
Director of the Monetary Economics Program of the National Bu-
reau of Economic Research; as the Editor of the economics profes-
sions leading research journal; andlast, but certainly not least
as a two-term elected Member of the Montgomery Township, New
Jersey Board of Education.
One of the remarkable features of the Federal Reserve System is
the wide range of its responsibilities, including not only the making
of monetary policy but other important areas such as financial reg-
ulation and supervision, consumer protection, payments systems,
international finance, and others. Although at present my greatest
expertise is in monetary policy and macroeconomics, I am keenly
interested in and broadly familiar with each of the Feds other
areas of responsibility, and if I am confirmed, I look forward to
learning a great deal more. I particularly look forward to inter-
acting with, and learning from, both colleagues on the Board and
the Federal Reserves able staff.
Let me turn briefly to issues of policy and the current economy.
The Federal Reserve has considerable operational independence,
but ultimately derives its legitimacy and powers solely from its leg-
islative mandate. I would like to take this opportunity to strongly
affirm my support for the monetary policy goals set for the Federal
Reserve by Congress in the Federal Reserve Act: maximum employ-
ment, stable prices, and moderate long-term interest rates. While
one can always hope to do better, I think the Federal Reserve has,
on the whole, done a remarkably good job of promoting these three
objectives over the past 20 years or so.
In my view, a key operational element in the Feds success at
achieving its tripartite objectives has been the Federal Open Mar-
ket Committees emphasis on keeping the rate of core inflation low
83
and stable. Low and stable inflation is intrinsically beneficial, as it

reduces the need for households and firms to expend time and
resources to protect themselves from the adverse effects of rapidly
and erratically changing prices. Consistently low inflation also di-
rectly promotes the objectives of high employment and rapid eco-
nomic growth, by providing a stable monetary environment in
which firms and markets can function most efficiently. In a low-in-
flation environment, lenders are less concerned about erosion of
their principal, and so nominal interest rates tend to be low.
Finally, a strong commitment to low and stable inflation, by
moderating and anchoring the publics inflation expectations, actu-
ally enhances the ability of monetary policy to respond actively to
short-run economic disturbances when necessary.
For example, during the past year, the Federal Reserve was able
to cut interest rates quite aggressively without engendering signifi-
cant inflationary pressures or igniting a wage-price spiral. Public
confidence that inflation would be kept under control was essential
to giving the Federal Reserve this heightened flexibility.
In my academic writings, I have argued that the efficacy of mon-
etary policy at achieving its mandated objectives could be further
improved by the Feds adoption of an approach known as inflation
targeting. In anticipation of possible questions, let me say a bit
more about this proposal. The main operational change under infla-
tion targeting would be that the Fed, in consultation with the exec-
utive and legislative branches, would announce an explicit numer-
ical objective for core inflation over the medium term, say 1 to 2
years.
For example, allowing for the upward biases in inflation meas-
urement and a zone of safety to avoid accidental deflation in prices,
an inflation target in the range of 1 to 2 percent per annum for the
core PCE deflator might be a good initial choice, although some
might reasonably disagree about either the number or the choice
of index. As part of the targeting process, the Federal Reserve
would report to Congress its expectations for future inflation, its
reasons for any target misses, and its projected trajectory for bring-
ing inflation to its targeted level.
It is important to stress that inflation targeting, as I interpret
it, would not represent a major departure from the current practice
of U.S. monetary policy or a change in policy objectives. Rather, its
primary goal would be to build on policy successes of the past two
decades by strengthening the Federal Reserves institutional com-
mitment to the approach used by the Fed under Chairman Volcker
and Chairman Greenspan. As I discussed a moment ago, the center
piece of this approach is an emphasis on keeping the rate of core
inflation low and stable. Based on the experiences of a number of
other countries that have adopted this model, I believe that an ex-
plicit inflation target would improve further the Feds ability to
reach all three of the goals set forth in the legislative mandate for
monetary policy. Among the potential advantages of an explicit in-
flation target are increased stability of the publics inflation expec-
tations, lower economic and financial uncertainty, increased central
bank credibility, greater continuity and consistency of policy, and,
importantly, enhanced accountability of the Fed. Although I am fa-
vorably disposed toward these incremental changes in the current
84
framework of U.S. monetary policy, I know that not everyone

agrees with this view, and that there are important, substantive
arguments to be made on both sides of the issue. I look forward to
discussing these ideas with Federal Reserve colleagues and others
interested in the making of monetary policy.
Turning finally to the current economic situation: In recent
months, investors have been battered by sharp declines in equity
prices, not only in the United States, but in many other countries
as well. The losses in wealth are large and serious indeed. Equally
serious and disturbing is the rash of corporate and accounting
scandals that have certainly played a role in the stock markets
plunge. Financial markets cannot do their job of efficiently allo-
cating capital and sharing risk if investors do not feel that they are
receiving accurate and timely information, or if they fear that those
who should be stewarding their funds cannot be trusted to do so
honestly. I fully support the efforts of Congress and the President
to restore investor confidence in the accuracy and reliability of fi-
nancial statements and in the trustworthiness of those who man-
age our corporations and financial institutions.
Although the fall in equity prices is frightening and dispiriting
for many, I do not think distinctions need to be made. Saturation
coverage by cable TV networks notwithstanding, the stock market
is not the whole economy. While the gyrations of the Dow or
Nasdaq attract the most attention, the broader economyas re-
flected in the daily activities of American workers, managers, busi-
ness owners, and entrepreneurshas overcome a significant part of
the effects of last years recession and the September 11 terrorist
attacks, and by most indications is continuing to grow. Most im-
pressive is the fact that worker productivity continues to expand
rapidlyat more than an 8 percent rate in the first quarterde-
spite adverse cyclical conditions. New capital and innovative tech-
nologies have both played an important role in this resurgence. To
be sure, the cumulative decline in the stock market poses risks for
economic growth over the rest of the year. Despite our current dif-
ficulties, however, we should not lose sight of the underlying
strength of our economy.
To conclude, I am grateful for this opportunity to appear before
this Committee. These are indeed challenging times for the United
States, for our economy, and for the Federal Reserve itself. I look
forward to contributing to the making and implementation of sound
economic policies. If I am confirmed, I will devote myself to becom-
ing a constructive and effective Member of the Board of Governors
of the Federal Reserve.
Thank you. I will be pleased to answer any questions.
Chairman SARBANES. Well, I want to thank both of you for your
statements. We will go into 5 minute rounds of questioning now,
unless any Member has an opening statement he wants to make.
COMMENT OF SENATOR JIM BUNNING
Senator BUNNING. I would just like to put one into the record.
Chairman SARBANES. Without objection, so ordered.
I am interested in the question of the transparency of the deci-
sionmaking of the Federal Reserve so that the public can gain a
better understanding. I would just like to hear your views on how
85
important you think that is and what steps might be taken to im-
prove the transparency of board decisions.
Mr. KOHN. Thank you, Mr. Chairman. I think it is absolutely
crucial. As I indicated in my opening statement, the Federal Re-
serve has become more transparent over the years, announcing our
decisions, giving reasons for the decision, announcing the votes
now. I think we have improved the understanding of the financial
markets and the public at large. We have helped the accountability
of the Federal Reserve with you, the Congress, by becoming more
open. When people understand what we are trying to do, when
markets understand what we are trying to do, what issues we are
dealing with, how we see the forces developing in the economy,
they can evaluate that and they are more likely to anticipate our
actions, to work with us to stabilize financial markets and stabilize
the economy.
So, I think transparency is very crucial to the effectiveness of
monetary policy and I believe there have been a number of studies
coming out in recent years showing that the increased trans-
parency at the Federal Reserve has, in fact, allowed markets to
better anticipate what we are going to do and act in a stabilizing
fashion. I do not have concrete proposals for what we could do next
to increase our transparency. This is a subject that is under con-
stant review at the Open Market Committee. Each step tends to
be small and incremental, in part, because once you take it, you
cannot take it back again. So you need to be sure that it is what
you intend to do. I think we could increase the clarity of what we
are saying, help people understand what it is. This is just some-
thing that we need to keep working at, make small steps, get the
feedback from the market and the public as to what they would
like and what works and does not work, and keep pushing at it.
Chairman SARBANES. Good. Dr. Bernanke.
Mr. BERNANKE. I agree with Dr. Kohn that transparency is very
important for effective operation of monetary policy. It reduces un-
certainty. It helps markets anticipate and respond more effectively
to monetary policy changes. It is also important to educate markets
and the public about what monetary policy is trying to do in order
to improve decisionmaking. And finally, clarity and transparency
are an important part of the accountability of the Federal Reserve
in representing its goals and objectives and how it is going to ap-
proach those goals and objectives.
I want to commend the Federal Reserve. On the whole, there has
been a remarkable movement over the last decade or so toward
greater transparency in terms of releasing minutes, releasing tran-
scripts, providing additional information about the so-called bias of
policy and so on. I think there is more that could be done. One sug-
gestion which I have already made in my statement was to an-
nounce an inflation target. Perhaps the minutes and other informa-
tion could be redacted to allow them to be released more quickly.
I would like to have some experience on the board before I make
too many concrete recommendations.
Chairman SARBANES. That is a prudent point of view.
[Laughter.]
86
Mr. BERNANKE. But I think that, in general, my philosophy is

that the more transparency that can be provided, the better, and
I would work toward that goal.
Chairman SARBANES. I am interested in your statementyou
have this inflation target. What is your unemployment rate target?
Mr. BERNANKE. There is no unemployment rate target, Senator
because what we try to achieve is the greatest possible growth rate
and the lowest possible unemployment that is consistent with an
economy that is not overheating.
Chairman SARBANES. You are going to give an inflation target,
but not an unemployment rate target.
Mr. BERNANKE. Because, conceptually, sir, we have a basic idea
of what is the optimal inflation rate based on considerations
Chairman SARBANES. Well, now, the European Central Bank has
a target of inflation below 2 percent. But it has been running there
a few tenths of a point higher than 2 percent.
But, at the same time the growth in employment figures have
been disappointing, critics have been charging that the ECB is re-
sponding too timidly to the European economic slowdown. They
argue that while it is important to maintain confidence that infla-
tion will not grow too rapidly, it is also important to maintain con-
fidence that output growth is being stabilized, since businesses
make their hiring and investment decisions on expectations for
growth.
If they lack confidence that the Central Bank, or if they feel that
the Central Bank is too committed to an inflation target that will
allow growth to stagnate, cant this result in lower growth and
raise unemployment over a sustained period of time?
Mr. BERNANKE. I agree with the critics of the European Central
Bank, Senator. The European Central Bank has a hierarchical tar-
get which places the inflation rate above any other objective. My
view is that low inflation is in part an objective in itself, but it is
also an instrumental means by which we achieve maximum em-
ployment and rapid economic growth.
I would take the view that an inflation target actually increases
the flexibility and the ability of a central bank to respond to short-
run economic disturbances to promote employment, to promote
growth. That happens in two ways. First, low inflation tends to
lead to long-run economic growth by creating a more stable mone-
tary environment. But second, and I think very importantly, by
maintaining low and stable inflation expectations, the Central
Bank actually releases itself to have more ability to respond to
short-run economic disturbances.
Chairman SARBANES. Well, let me ask you this question, then I
will yield to my colleagues.
Mr. BERNANKE. Yes.
Chairman SARBANES. If the United States had inflation slightly
above the personal target you have set out in your statement, but
also had very weak output growth, how would you reconcile that
situation? Particularly, how would you reconcile it with the legal
mandate that has been given to the Federal Reserve by statute?
Mr. BERNANKE. I would attempt to restore the economy to its
equilibrium level, which is the level which promotes maximum em-
ployment and growth.
87
I would not try to do that by creating artificial inflation or ex-

tremely high inflation. But I would try to turn the economy to its
normal potential growth path as quickly as possible.
Chairman SARBANES. What would that mean in that instance,
though, when the inflation is above your target rate, and yet, the
output growth is very weak?
Mr. BERNANKE. I would not return inflation to its target at the
expense of creating a deep recession in the economy. I would take
a gradual approach and I would try to make sure that the economy
was on a stable, maintainable, healthy growth path as part of that
process.
Chairman SARBANES. Senator Gramm.
COMMENTS OF SENATOR PHIL GRAMM
Senator GRAMM. Your thesis is that a low inflation rate promotes
an environment in which economic growth is maximized and unem-
ployment is minimized. Right?
Mr. BERNANKE. That is correct, sir.
Senator GRAMM. Let me be brief, Mr. Chairman, because we are
going to have a vote here in a minute and everybody is going to
have trouble getting back.
Let me say, I think these are two excellent nominees. We have
been blessed with a lot of good people on the Federal Reserve
Board. The Federal Reserve Bank has become in the post-war pe-
riod our most successful independent agency. And I want to thank
both of you for your willingness to serve.
Let me say, in the case of Dr. Kohn, I do not think we should
have staff members go on the board every day. But every once in
a while, it is a good thing. It encourages good people to come to
work at the Fed. It shows that you can literally come in at the bot-
tom and end up at the top. It is unusual. But I think in that sense,
it is a good thing.
So, I want to commend both of you. Let me stop because I know
other people want to say something or ask a question before we
have this vote in 6 minutes.
Chairman SARBANES. Senator Reed.
COMMENTS OF SENATOR JACK REED
Senator REED. Thank you very much, Mr. Chairman.
Mr. Bernanke, you say your thesis is low interest rates tend to
promote economic growth. But there is an example of Japan, where
interest rates have been very low and economic growth has been
anemic.
As the author of Japanese Monetary PolicyA Case of SelfIn-
duced Paralysis might you draw some conclusions or give us some
insights about the differences?
Mr. BERNANKE. I would be glad to, Senator. I have in fact ad-
vised the Bank of Japan, I think their monetary policy is very poor.
One of the benefits of an inflation target is that it avoids defla-
tion as well as excessive inflation. Their deflationary policies have
been highly detrimental to their economy. They should set an infla-
tion target. They have been called upon to set an inflation target
of, say, 1 to 2 percent positive, not negative, inflation. They could
achieve that if they had the will and the desire to do so.
88
Japan is an excellent example of a country without an inflation

target which is allowing prices and the economy to drift without di-
rection, without a frame of reference. And it is an excellent case
study for exactly my point. Their performance is due almost en-
tirely to very poor monetary policy which has been allowing prices
to decline now for almost a dozen years.
Senator REED. Let me follow up. There has been some discussion
in the financial press at least, of are there similarities to the Japa-
nese experience here in the United States that, even though we are
maintaining historically very low interest rates, our growthwe
are in a recessionthe growth is coming back somewhat feebly.
What would you say to those types of discussions?
Mr. BERNANKE. Sir, while the Federal Reserve needs to pay close
attention to the state of the economy and the state of inflation, I
think the risks of the United States falling into a Japanese-style
deflation trap are extremely small.
There are two reasons for that. First, our banking system is far
sounder and it is not subject to the massive, nonperforming loan
problem that the banks of Japan now face. Second, I believe the
Federal Reserve, whether it has an explicit inflation target or not,
fully understands the importance of maintaining or avoiding defla-
tion in prices. And so, I think that we have the safeguards and the
initial conditions that allow us to avoid such a trap.
Senator REED. Thank you. Dr. Kohn, why dont you comment on
this line of questioning?
One other point that I would put in is that the presumption that
we have a sound banking system is one that I share. But we have
to consider the possible effects of the current downturn in corporate
Americadeclining stock prices, bankruptcies, loans that were
good 6 months ago, and now might be questionable. Dr. Kohn, your
comments?
Mr. KOHN. Senator, I think we still have a sound banking sys-
tem, even if it is facing some problems, and its bad loans are likely
to get a little worse. The capital level of our banks is extremely
high. They are very well capitalized.
I think even more than the soundness from a capital perspective,
is the way our financial system and our economy operates relative
to Japans. It is a much more flexible, diverse financial system, so
that if one type of institution has trouble, there are other sources
of finance for most businesses and households, and that is a real
strength. It is a much more flexible economy, much more adaptable
economy.
And I would say another very big difference between the United
States and Japan is that our legislators have stepped up to the
problem and addressed the emerging issues, instead of trying to
sweep them under the rug or ignore them and hope they go away.
So we have a political and an economic system that is more im-
mune to difficult downward problems.
I completely agree with Dr. Bernankes analysis that this is not
really an issue in the United States for other reasons as well. The
Federal Reserve, although we do not have an inflation target per
se, is very aware of the risks of a soft economy enduring, of infla-
tion getting lower and perhaps turning into deflation.
89
The FOMC has said in its minutes that it has addressed this
issue and this problem, and will act aggressively to head off such
a thing if it looks like it is occurring. My best guess is it is not oc-
curring. The economy is growing and recovering. I do not think we
have such a problem. But it is always at least a little bit of a risk,
and the lower the inflation rate is, the bigger the risk is. But the
FOMC is very aware of those risks.
Senator REED. Thank you, Mr. Chairman. I note that the votes
are pending, so I will stop here. But just one final comment.
As Vice Chairman of the Joint Economic Committee, we have
been very concerned about the quality of Federal financial statis-
tics, and the ability to generate those statistics. And I would hope
that, at the Federal Reserve, you two would share the interest in
institutionally ensuring that we have even better numbers than we
have today.
Chairman SARBANES. I might note that Chairman Greenspan,
who never recommends a spending program to the Congress, has
recommended that we do better by the statistic. It is not a big item,
but neverthelessSenator Bunning.
Senator BUNNING. Thank you, Mr. Chairman.
This is for Dr. Kohn. As you know from our personal meeting,
I have very big concern about having an independent governors
board for the Federal Reserve. Given your long employment with
the Fed, how can you assure me that you will be independent?
Mr. KOHN. Senator, you have my word for it. I have had a long
association with the Federal Reserve, 32 years. I have worked
closely with Chairman Greenspan for the last 15 years. I think one
reason why he and other governors have found me a useful sound-
ing board, someone they like to work with, is that I interact well
with them and will tell them when I think their analysis is off, or
when I think policy
Senator BUNNING. That is my next question. So since we have a
very short time, I am going to get more than one question in. Give
me an example of when you either privately or publicly disagreed
with the Chairman. And if privately, did you inform him of the dis-
agreement?
Mr. KOHN. I have had a lot of private conversations with the
Chairman as a staff member. I certainly have told him when I
thought that, as I just noted, the analysis wasnt quite right. And
I recognize that in my new role, that I will need to take these dis-
agreements into the FOMC, into the Board, that it will be my job
to persuade other voting members of the Board, of the FOMC, that
my analysis is correct and they should do what I recommend.
Senator BUNNING. Last question, and this is for both of you.
Do you think the Chairman of the Federal Reserve should try to
influence security markets or any other markets by coming to the
market itself and trying to talk the market up or down, in his testi-
mony before the Banking Committee?
Mr. KOHN. No, sir, I do not think that that is something he
should be doing. I think he should be talking about the markets
as they interact with monetary policy and our pursuit of our Con-
gressional goals. So he cannot not discuss the markets, but he
90
should discuss them in the context of how they affect the pursuit
of the goals.
Senator BUNNING. Doctor.
Mr. BERNANKE. As I have written in some papers, including one
that was presented to the Federal Reserves annual conference at
Jackson Hole, Wyoming, I believe that the Federal Reserve should
not attempt to target asset prices. It should respond at most to the
influence of asset prices on the economy. That is, it should keep its
eye on the economic ball, so to speak, and not try to influence or
target asset prices.
Senator BUNNING. Do you think there is any more room right
now for lowering of interest rates in the current circumstances we
are sitting in?
Mr. BERNANKE. We are in a situation where, I would call it a
vigilant optimism, is probably the right approach.
As I said in my statement, I think the economy is recovering. On
the other hand, there is also no sign of inflation. So we can watch
carefully and see how the economy progresses over the next quar-
ter or two. We are getting GDP numbers tomorrow. If necessary,
we certainly could do so.
Senator BUNNING. Doctor.
Mr. KOHN. Senator, I think we do have an economy that is
advancing. There are a lot of positives in the outlook, including
productivity growth, low interest rates already that stimulate con-
sumption.
Senator BUNNING. Thank you.
Chairman SARBANES. Senator Corzine.
COMMENTS OF SENATOR JON S. CORZINE
Senator CORZINE. Thank you, Mr. Chairman.
These are two extraordinary candidates. Anybody from New Jer-
sey with a beard is okay with me.
[Laughter.]
Chairman SARBANES. A rather small club, though, isnt it?
Senator CORZINE. Yes.
[Laughter.]
And I think on top is joining that future recommendation.
I also have worked with Dr. Kohn for the better part of 20 years
in my private career and find him an exceptional public servant
with great judgment. And I assure you, Senator Bunning, if there
is anybody who will speak his mind, it is Dr. Kohn. He just likes
to do it out of the limelight.
Senator BUNNING. Will I know about it?
Senator CORZINE. I am sure that if you read the minutes care-
fully, you will find his opinions very clearly espoused.
Let me ask a general question which will lead to a specific. Both
of you I would like to hear your comments on. Do you think our
economy is over-regulated and is it stifling entrepreneurship?
Mr. BERNANKE. I will try this one first.
As an economist, I have a tremendous appreciation for the power
of markets. Free markets are a tremendous source of wealth cre-
ation, the most tremendous source of wealth creation that has ever
been created.
91
Free markets does not mean anarchy, though. Free markets have
to be carefully monitored. There have to be ground rules that chan-
nel the energies of market participants toward constructive ends,
that allow information to be revealed, and that allow markets to
allocate resources in the most productive way.
In the U.S. economy, there are certainly areas where regulation
no doubt is not optimal, and areas where regulation perhaps should
be increased. On the whole, it is the most market-oriented and
properly regulated economy in the world, and I think that is a
major reason why our growth and our development has been so
impressive.
Mr. KOHN. Senator, I do not think you can really generalize
about the whole economy. You need to look at it on a market-by-
market or situation-by-situation basis.
The economy has benefited enormously from the deregulation
that has occurred over the last 30 years. I think it has freed up
lots of markets to the benefit of consumers and businesses, particu-
larly consumers. Think about airlines and trucking and things like
that.
So, I think we should be continually looking for opportunities to
allow those market forces to work and to work more, provided
there can be seen to be enough competition in the markets so that
the benefits of the market forces flow through to the consumers.
That does not mean that all we should be doing is looking for de-
regulation. Things happen on occasion that suggest that
Senator CORZINE. Let me ask a specific with regard to the deriva-
tives market, and particularly with regard to energy, natural gas,
and electricity markets. Derivatives particularly, but the markets
themselves. Either or both.
Mr. KOHN. I do not really have any expertise in those markets,
Senator.
I think before I would support additional regulation there, I
would want a thorough analysis of what was going on and is going
on. But I would not rule out that possibility if that is what that
analysis showed.
Mr. BERNANKE. Derivatives are, on the whole, a very valuable
tool. They allow all kinds of risk-sharing, various ways of financing
various kinds of projects and so on. I would be very hesitant to do
anything that would eliminate their use.
From the Federal Reserves perspective, the Federal Reserve is
trying to create very sophisticated monitoring systems that will ap-
propriately assess capital charges against different types of deriva-
tive books.
Like Dr. Kohn, I am not very familiar with the energy situation.
My impression is that there were some problems with the deregula-
tory process as well in the energy market which interacted with
some of the risk-taking in derivatives. The same thing happened in
the savings and loan industry. You had some deregulation, which
was not the best, and it interacted with risk-taking on the part of
individuals, to create a problem. So, I think the whole situation
needs to be rethought. I do not think that derivatives are the cen-
ter of the problem.
Senator CORZINE. Thank you.
92
Chairman SARBANES. Senator Miller.
COMMENTS OF SENATOR ZELL MILLER

Senator MILLER. I think you answered the question that I had.
By the way, two very good nominees and thank you for your will-
ingness to serve.
I was going to ask the question which I have asked Chairman
Greenspan the last two times he has been with us, and he was very
forthcoming in his reply. And that was, have either of you formu-
lated a view on the Feinstein derivatives piece of legislation?
Mr. KOHN. I have not, Senator.
Mr. BERNANKE. Neither have I, sir.
Senator MILLER. I believe you need to be looking at it.
Chairman SARBANES. I will say to my colleagues, of course we
have a vote on and we need to go to the vote. I would be happy
to come back if colleagues want to pursue the dialogue.
Otherwise, it is my intention to bring the hearing to a close.
These are very important positions and the term actually is more
than twice the term of a Senator, just to underscore the importance
of these positions. But if not, it is my intention to bring the hearing
to a close.
Let me say that I am appreciative that both of you in your state-
ments made reference or set out the monetary policy goals that
have been set for the Federal Reserve by the Congress in the stat-
ute. The Federal Reserve is a creature of the Congressmaximum
employment, stable prices, and moderate long-term interest rates.
Occasionally, we get nominees who come before us and they do
not really know the statutory standard that they are supposed to
be putting into place in policy terms. It is encouraging, and reas-
suring, I guess would be a better word. It is reassuring, at least
to this Member, that both of you have clearly integrated those stat-
utory goals into your statements.
I spoke with Senator Gramm. We are going to try and see if we
cannot put together a quorum of the Committee tomorrow to try to
report you out. If we can do that, that would open up the possi-
bility, although we do not control, of course, the floor calendar. But
at least it would get you on the calendar and open the possibility
that you might actually be confirmed by the Senate before the Sen-
ate leaves at the end of the week for the August recess. And that
would then make it possible for you to move in and assume these
assignments.
As I indicated at the outset, I agree with my colleagues that
these are two very good appointments. I commend the President for
making them, and we look forward to trying to get you on the job.
Thank you for being here.
Mr. KOHN. Thank you very much, Mr. Chairman.
Mr. BERNANKE. Thank you, Mr. Chairman.
Chairman SARBANES. The hearing stands adjourned.
[Whereupon, at 2:56 p.m., the Committee was adjourned.]
[Prepared statements and biographical sketches of the nominees
supplied for the record follow:]
93
PREPARED STATEMENT OF SENATOR JIM BUNNING
I would like to thank you, Mr. Chairman, for holding this nomination hearing and
I would like to thank our nominees for coming before us today.
I dont think it has been any secret that I have occasionally disagreed with the
Chairman of the Federal Reserve, Dr. Alan Greenspan. I think he sometimes starts
getting involved in things that he really is not supposed to worry about, instead of
concentrating on monetary policy. To be fair, many times he gets involved and com-
ments on things that are not under his job description because Members of Congress
ask him for his opinion. I just wish he would decline to answer those questions.
I do think that there has been a problem at the Fed, one we are trying to correct.
I believe there has not been a lot of independent thought over there. Obviously the
Chairman is a very intelligent and well respected man. I am sure he can be very
persuasive and possibly even intellectually intimidating to some especially when the
rest of the Board is going along. But we think all of the board members are smart.
We would not vote for them if we didnt.
What I want of the individual governors are strong people who will not be afraid
to speak up when they think the Chairman is wrong. I want people who are not
afraid to be the lone dissenting vote. We need strong, independent Fed governors
who are willing to challenge the status quo and to make the hard call. We do not
need governors who never question the chairman, or other board members, who will
never take the contrary view.
This is a 14 year term we are voting on. If we screw it up, it will be a long time
before we can fix it. Many of us wont around be here to fix it. If our two nominees
can convince me that they will be independent voices who are not afraid to be the
lone dissenter, they will have my support for their nomination.
PREPARED STATEMENT OF DONALD L. KOHN

MEMBER-DESIGNATE OF THE BOARD OF GOVERNORS OF THE
FEDERAL RESERVE SYSTEM
JULY 30, 2002
Chairman Sarbanes, Senator Gramm, Members of the Committee, I very much
appreciate your expeditious consideration of my nomination to be a Member of the
Federal Reserve Board. I have enjoyed a productive working relationship with this
Committee and its staff over a number of years. Should the Senate confirm my nom-
ination to the Board, I very much look forward to continuing to work with you to
promote a strong economy and a robust financial system that serves the needs of
all Americans. I am most grateful to President Bush for this nomination and deeply
honored by his judgment that my abilities and experience will help the Board to
carry out the critical responsibilities you, the Congress, have entrusted to it. Having
spent my working life at the Federal Reserve, I may be more aware than most nomi-
nees who come before you of both the challenges and the rewards of the position
to which I aspire.
Our economy has made considerable progress over the last two decades toward
the goals you have set for monetary policy of maximum employment, stable prices,
and moderate long-term interest rates. We have enjoyed two exceptionally long eco-
nomic expansions punctuated by relatively mild recessions, an inflation rate that
has reached what many would consider to be a zone of price stability, and relatively
low long-term interest rates that have helped to promote wider homeownership.
Technological innovation, deregulation, and globalization, by fostering greater eco-
nomic and financial flexibility and resiliency and more rapid increases in produc-
tivity, largely account for this favorable performance. But the conduct of monetary
policy surely also has played a role in establishing a background conducive to eco-
nomic vitality. This policy has been marked by a balancing of discipline and flexi-
bilitythe discipline of focusing on long-run price stability as a necessary pre-
condition for maximum employment and moderate long-run interest rates, and the
flexibility within that long-term discipline to counter disturbances to the economy
and financial markets that might threaten maximum sustainable employment as
well as stable prices.
Going forward, in order to do its part in promoting good economic performance,
the Federal Reserve will continue to be faced with the need to analyze and adapt
to a dynamically changing economy and financial markets. Innovation and deregula-
tion in markets and the globalization of finance are affecting the flow of funds be-
94
tween savers and spenders and the distribution of risks and returns in the financial
system. These changes, in my view, have not detracted from the effectiveness of
monetary policy, and they have increased both economic efficiency and financial sta-
bility. But they have also opened the economy to new kinds of influences and they
are altering the channels through which policy affects the economy. In just the last
few years, our financial and economic stability has been challenged by crises origi-
nating in East Asia and Russia, and by huge variations in asset prices here and
abroad as investors strove to peer through considerable fog to evaluate the implica-
tions of rapidly changing technologies and market structures. The significance of
those asset price movements has been magnified by the growing importance of
wealth to household financial conditions. Policymakers have been required to deci-
pher the shifting forces driving the economy and to adjust policy, sometimes rapidly,
to provide a counterweight to developments that threatened to undermine economic
performance. Where possible, those policy adjustments have been forward looking-
anticipating the effects of economic forces so as to forestall emerging instabilities.
It is a process in which I have been deeply involved, working with policymakers and
staff, and I would welcome the opportunity in a new role to bring my experience
and expertise to bear on the difficult, but fascinating, issues that confront the Fed-
eral Reserves conduct of monetary policy.
The increasing volume of finance flowing through securities markets, the spread
of wealth to more Americans, and the growing prominence of global investors in our
financial markets have put an additional premium on the ability of the Federal Re-
serve to explain its policy to the public. More people from more diverse backgrounds
are making important decisions based on their expectations of policy actions and
their effects. When savers and borrowers understand how the Federal Reserve sees
the forces developing in the economy relative to its objectives, interest rates, and
other prices in financial markets are more likely to be set in a way that helps to
achieve these objectives. I have worked extensively in my career at the Federal Re-
serve to help policymakers explain monetary policy. While we have made consider-
able progress in recent years, improving the clarity, completeness, and timeliness
of our various public statements is an ongoing process that must be continued.
As the Congress recognized when it created the Federal Reserve, economic sta-
bility rests on a foundation of financial stability. In no area of Federal Reserve re-
sponsibilities do changing market structures pose a bigger challenge than in car-
rying out the supervision and regulation of banks and holding companies. Changes
in the legislative framework for the financial sector in recent years have allowed
consolidation within the banking sector and, now, between banking and other finan-
cial service providers, permitting markets to realize economies of scale and scope in
the delivery of financial services. This consolidation, along with the proliferation of
new instruments to price and trade various aspects of risk, I believe, promotes
sounder, more diversified, institutions and a system in which both those supplying
and using savings have many more alternatives. The regulatory implementation of
these new laws needs to allow the markets to evolve with changing preferences and
technologies, while preserving competition in the delivery of services and financial
stability. It also must protect against the effective spread of the safety net beyond
the core depositories for which Congress intended special protection. No depository
institution should be insulated from market forces by being considered too big to
fail. But because banks do have access to the safety net, market signals are muted
by moral hazard. Moreover, as institutions become more complex and deal in a great
number of new instruments, markets and managers may find it difficult to evaluate
some risks accurately, increasing the chances for unexpected losses. In order to pro-
mote efficient resource allocation and maintain financial stability, supervisors must
anticipate potential problem areas and must put in place oversight structures that
build on existing market signals and risk management and simulate market pres-
sures where those signals are inadequate.
The growing access to credit markets for all our citizens is another very positive
development in our financial system. It has resulted from efforts to eliminate dis-
criminatory practices along with the recognition by lenders that profitable opportu-
nities exist in making credit available to those with lower income and wealth. But
regulators, borrowers, and lenders are still adjusting to the expansion of the market.
Many borrowers in the so-called subprime segment of the credit markets are having
difficulty servicing the additional debt, more difficulty than lenders anticipated, re-
sulting in the need for supervisory actions for a number of bank lenders. In addi-
tion, it has increased the opportunities for unscrupulous lenders to take advantage
of less well-informed consumers. Clearly, efforts to educate credit users better
should have important payoffs. More generally, the key in this area is to find the
difficult balancing point for regulation that allows the markets to generate the
95
greatest number of legitimate alternatives for borrowers while proscribing clearly
abusive practices.
Meeting these various challenges will require a strong Federal Reserve System.
You have such an institution now. It is widely respected and relied upon, not only
to follow the appropriate policies but for its advice in a variety economic and finan-
cial matters. Although the Federal Reserve tends to speak with one voice, in my ex-
perience decisions are preceded by healthy give-and-take among policymakers with
diverse views supported by talented and dedicated staff. Should the Senate see fit
to confirm my nomination, I am looking forward to adding my own perspective to
that dialogue as a policymaker and will do my best to pass on to future generations
an institution just as strong as the one its current and past leaders have be-
queathed to this generation of Americans.
Thank you. I would be pleased to answer any questions you might have.
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PREPAPRED STATEMENT OF BEN S. BERNANKE
MEMBER-DESIGNATE OF THE BOARD OF GOVERNORS OF THE
FEDERAL RESERVE SYSTEM
JULY 30, 2002
Chairman Sarbanes, Senator Gramm, Members of the Committee, I am deeply
honored to appear before you today as the Presidents nominee to serve on the
Board of Governors of the Federal Reserve System. If I am confirmed to this impor-
tant position, I will do my utmost to advance the economic well-being of all Ameri-
cans.
The opportunity to serve at the Federal Reserve would be a great privilege, as
it would allow me to apply in the public interest the fruits of a lifetime of thinking
and writing about central banking and the economy. In my professional academic
career of nearly 25 years, I have written widely on topics relating to monetary pol-
icy, banking and credit markets, economic growth and business cycles, macro-
economic history, and the statistical analysis of the economy, all of which bear di-
rectly on the work of the Federal Reserve. Moreover, over the years I have main-
tained close contact with the Federal Reserve System, as a consultant, visiting
scholar, and adviser; and I have visited and advised the central banks of many other
industrialized and developing countries.
In various roles during my career, I have also learned how to work with people
and to get things done. Among other duties, I have served for the past 6 years as
Chair of the Princeton University Economics Department. I also served as the first
Director of Princetons new Center for the Study of Financial Markets; as the Direc-
tor of the Monetary Economics program of the National Bureau of Economic Re-
search; as the Editor of the economics professions leading research journal; and
last, but certainly not leastas a two-term elected Member of the Montgomery
Township (New Jersey) Board of Education.
One of the remarkable features of the Federal Reserve System is the wide range
of its responsibilities, including not only the making of monetary policy but other
important areas such as financial regulation and supervision, consumer protection,
payments systems, international finance, and others. Although at present my great-
est expertise is in monetary policy and macroeconomics, I am keenly interested in
and broadly familiar with each of the Feds other areas of responsibility, and if I
am confirmed I look forward to learning a great deal more. I particularly look for-
ward to interacting with, and learning from, both colleagues on the Board and the
Federal Reserves able staff.
Let me turn briefly to issues of policy and the current economy. The Federal Re-
serve has considerable operational independence but ultimately derives its legit-
imacy and powers solely from its legislative mandate. I would like to take this op-
portunity to strongly affirm my support for the monetary-policy goals set for the
Federal Reserve by Congress in the Federal Reserve Act: maximum employment,
stable prices, and moderate long-term interest rates. While one can always hope to
do better, I think the Federal Reserve has on the whole done a remarkably good
job of promoting these three objectives over the past 20 years or so.
In my view, a key operational element in the Feds success at achieving its tri-
partite objective has been the Federal Open Market Committees emphasis on keep-
ing the rate of core inflation low and stable. Low and stable inflation is intrinsically
beneficial, as it reduces the need for households and firms to expend time and re-
sources to protect themselves from the adverse effects of rapidly and erratically
changing prices. Consistently low inflation also directly promotes the objectives of
high employment and rapid economic growth, by providing a stable monetary envi-
ronment in which firms and markets can function most efficiently. In a low-inflation
environment, lenders are less concerned about erosion of their principal, and so
nominal interest rates tend to be low. Finally, a strong commitment to low and sta-
ble inflation, by moderating and anchoring the publics inflation expectations, actu-
ally enhances the ability of monetary policy to respond actively to short-run eco-
nomic disturbances when necessary. For example, during the past year the Federal
Reserve was able to cut interest rates quite aggressively without engendering sig-
nificant inflationary pressures or igniting a wage-price spiral. Public confidence that
inflation would be kept under control was essential to giving the Federal Reserve
this heightened flexibility.
In my academic writings, I have argued that the efficacy of monetary policy at
achieving its mandated objectives could be further improved by the Feds adoption
of an approach known as inflation targeting. In anticipation of possible questions,
let me say a bit more about this proposal. The main operational change under infla-
tion targeting would be that the Fed, in consultation with the executive and legisla-
107
tive branches, would announce an explicit numerical objective core inflation over the
medium term, say 1 to 2 years. For example, allowing for the upward biases in in-
flation measurement and a zone of safety to avoid accidental deflation in prices, an
inflation target in the range of 12 percent per annum for the core PCE deflator
might be a good initial choice, although some might reasonably disagree about
either the number or the choice of index. As part of the targeting process, the Fed-
eral Reserve would report to Congress its expectations for future inflation, its rea-
sons for any target misses, and its projected trajectory for bringing inflation to its
targeted level.
It is important to stress that inflation targeting, as I interpret it, would not rep-
resent a major departure from the current practice of U.S. monetary policy or a
change in policy objectives. Rather, its primary goal would be to build on policy suc-
cesses of the past two decades by strengthening the Federal Reserves institutional
commitment to the approach used by the Fed under Chairman Volcker and Chair-
man Greenspan. As I discussed a moment ago, the centerpiece of this approach is
an emphasis on keeping the rate of core inflation low and stable. Based on the expe-
riences of a number of other countries that have adopted this model, I believe that
an explicit inflation target would improve further the Feds ability to reach all three
of the goals set forth in the legislative mandate for monetary policy. Among the po-
tential advantages of an explicit inflation target are increased stability of the
publics inflation expectations, lower economic and financial uncertainty, increased
central bank credibility, greater continuity and consistency of policy, and, impor-
tantly, enhanced accountability of the Fed. Although I am favorably disposed toward
these incremental changes in the current framework of U.S. monetary policy, I know
that not everyone agrees with this view, and that there are important, substantive
arguments to be made on both sides of the issue. I look forward to discussing these
ideas with Federal Reserve colleagues and others interested in the making of mone-
tary policy.
Turning finally to the current economic situation: In recent months, investors
have been battered by sharp declines in equity prices, not only in the United States
but in many other countries as well. The losses in wealth are large and serious in-
deed. Equally serious and disturbing is the rash of corporate and accounting scan-
dals that have certainly played a role in the stock markets plunge. Financial mar-
kets cannot do their job of efficiently allocating capital and sharing risk if investors
do not feel that they are receiving accurate and timely information, or if they fear
that those who should be stewarding their funds cannot be trusted to do so honestly.
I fully support the efforts of Congress and the President to restore investor con-
fidence in the accuracy and reliability of financial statements and in the trust-
worthiness of those who manage our corporations and financial institutions.
Although the fall in equity prices is frightening and dispiriting for many, I do
think distinctions need to be made. Saturation coverage by cable-TV networks not-
withstanding, the stock market is not the whole economy. While the gyrations of
the Dow or Nasdaq attract the most attention, the broader economyas reflected
in the daily activities of American workers, managers, business owners, and entre-
preneurshas overcome a significant part of the effects of last years recession and
the September 11 terrorist attacks, and by most indications is continuing to grow.
Most impressive is the fact that worker productivity continues to expand rapidly at
more than an 8 percent rate in the first quarterdespite adverse cyclical conditions.
New capital and innovative technologies have both played an important role in this
resurgence. To be sure, the cumulative decline in the stock market poses risks for
economic growth over the rest of the year. Despite our current difficulties, however,
we should not lose sight of the underlying strength of our economy.
To conclude, I am grateful for this opportunity to appear before this Committee.
These are indeed challenging times for the United States, for our economy, and for
the Federal Reserve itself. I look forward to contributing to the making and imple-
mentation of sound economic policies. If I am confirmed, I will devote myself to be-
coming a constructive and effective Member of the Board of Governors of the Fed-
eral Reserve.
Thank you. I will be pleased to answer any questions.
108
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118
NOMINATION OF
PHILIP MERRILL, OF MARYLAND
TO BE PRESIDENT AND CHAIRMAN
OF THE EXPORTIMPORT BANK
OF THE UNITED STATES
U.S. SENATE,
URBAN AFFAIRS, AND
Washington, DC.
The Committee met at 2:30 p.m. in room SD538 of the Dirksen
OPENING STATEMENT OF CHAIRMAN PAUL S. SARBANES
The Committee on Banking, Housing, and Urban Affairs con-
venes this morning to take up the nomination of Philip Merrill to
be President of the ExportImport Bank.
We have two of our colleagues here to introduce Mr. Merrill. And
before I do my statement, I will go to them because I know they
have other pressing engagements.
Senator WARNER. Mr. Chairman, one of our colleagues is due in
another hearing, so, apart from seniority, I will yield to my good
friend, Senator Mikulski.
Chairman SARBANES. Well, John, I was going to recognize home
State preference, in any event.
Senator WARNER. Oh, I see.
[Laughter.]
It is your Committee. You can run it as you please.
[Laughter.]
Chairman SARBANES. Senator Mikulski.
STATEMENT OF BARBARA MIKULSKI
A U.S. SENATOR FROM THE STATE OF MARYLAND
Senator MIKULSKI. Thank you very much, Senator Sarbanes, for
having this hearing. And I thank the distinguished Senator from
Virginia for yielding to me.
It is the Senators from the Potomac here today to introduce Phil
Merrill to you. And as the senior Senator from Maryland, you know
his background quite well.
For the record, I would like to ask unanimous consent that a let-
ter from Congressman Steny Hoyer extolling the virtues of Mr.
(119)
120
Merrill as to why this appointment should be made, would be en-

tered into the record.
Chairman SARBANES. Yes, I have Stenys letter here and it will
be entered into the record. And when we have a little more time,
I may even quote from it.
But please go ahead.
Senator MIKULSKI. Well, thank you. Senator Sarbanes, you have
been a reformer on the ExportImport Bank and you have been a
leader to ensure that this Bank meets the needs of the American
foreign policy, promotes exporting jobs abroad, and really ensures
management and fiscal responsibility.
Your reform philosophy on the ExportImport Bank I believe will
be best carried out by Mr. Phil Merrill, who is being nominated by
the President. Mr. Merrill brings an extraordinary career to this
job, a career that covers both public service and the private sector.
First of all, the job requires someone who understands business,
banking, and management. Mr. Merrill is an innovator, an entre-
preneur and a successful businessman. And when one reviews his
record, as we know, he has been a leader in publishing both the
Annapolis Capital, the Washingtonian magazine, and the whole
Capital-Gazette umbrella organization. Six newspapers in Mary-
land, as well as a magazine. So he knows how to meet a bottom
line and he knows the stresses on business because of his inter-
action there all of the time.
At the same time, Mr. Merrill brings a great deal of background
in the area of foreign policy. He has earned both a national and
international reputation, serving in six Administrations. He served
as an Assistant Secretary General of NATO. He was awarded the
Distinguished Service medal, the highest civilian award at the De-
partment of Defense. He has held other posts at the Department.
He has even negotiated the Law of the Sea Conference, and I re-
member what a tidal mess that was.
Mr. MERRILL. Rubicks Cube.
Senator MIKULSKI. He served as a special assistant with the
State Department and as a senior intelligence analyst, and we
could go through a variety of work that he has done both at the
Defense Department and at the State Department. Again, knowing
foreign policy and making sure that there is sound management to
implement our policy.
He also has a history, as does his entire family, Ellie and his
three children are here with us today, Doug, Cathy, and Nancy, of
being a philanthropist. Most of the philanthropy, has been very
quiet and has been focused on education, the environment, and
probably a lot of other things that we do not even know about but
that it is somewhere in that thick brief.
What is clearly visible has been his role in educationThe board
at the Hopkins School of Advanced International Studies, the board
of visitors at the University of Maryland. And not only being on
boards, but essentially putting his own personal and family re-
sources behind that.
He has recently endowed the University of Maryland with $10
million at the school of journalism to ensure competency in the
field and also a framework of ethical journalism. Isnt it great that
somebody is willing to put up $10 million so that journalists would
121
know how to write, be competent, and have an ethical framework?

This is who we want in our Government.
And then, of course, he has been a staunch supporter, as has
been the Chairman, of the Chesapeake Bay Foundation. For those
of us who have worked with the Bay Foundation, we know they
were in kind of frugal and limited facilities. Through Mr. Merrill
and, again, the Merrill Foundation and the support of the entire
family, has just created a new environmental framework, a new ar-
chitecture, and a green building to operate.
So a successful businessman, a public servant with extensive ex-
perience in foreign policy, and a philanthropic heart that also is
matched by, quite frankly, a contribution.
It is not about what your wealth does. The fact that you were
willing to continue to be a giver, and what we see in Mr. Merrill
is that he continually wants to give back to this great country that
made his own success. I hope we move him unanimously through
the Committee and the Senate.
Chairman SARBANES. Thank you very much. We appreciate that
very strong statement on Mr. Merrills behalf. And I know you have
a conflicting engagement.
Senator MIKULSKI. Excuse me.
Chairman SARBANES. Senator Warner.
STATEMENT OF JOHN WARNER

Senator WARNER. I am going to ask that my statement be placed
in the record because that was a magnificent introduction by our
colleague from the great State of Maryland, and she summarized
so much of the pertinent information.
I join you today because I have been privileged to be a personal
friend, but also in recognition of the silent but very important phi-
lanthropy that has been spread throughout the greater metropoli-
tan area of Washington by both the nominee and his lovely wife,
Eleanor, known to us as Ellie. And I might add, I think the record
should reflect that this has been a husband and wife team for
many years, both of them having served in public office.
Ms. Merrill was on Senator Keatings staff, and you and I recall
that eminent Member of our institution of many years. And then
she went on to the Department of State to serve in positions of
communications.
So it has been a team effort to put together this extraordinary
career, which has been recited by my colleague and more fully laid
out in my biographical sketch.
But I did not know that you had worked on the Law of the Sea.
When I was the Secretary of the Navy under Mel Laird, Eliot Rich-
ardson, and Jim Schlesinger, as the Departments representatives.
Chairman SARBANES. Those were the glorious days of the Navy,
too.
Senator WARNER. That is right.
[Laughter.]
Mr. Chairman, we had 1,800 ships when I was Secretary.
[Laughter.]
122
But, anyway, that was an extraordinary challenge, Law of the

Sea, and it did not unfold quite the way all of us wished, but who
knows.
But this man is eminently qualified to take on this post, as the
Chairman and our colleagues in the Senate know. And I would just
conclude by saying that I think that America is fortunate that an
individual who has done so many things diversified to prepare him
for this important task, once again steps forward for public service.
So I urge the Committee to have this hearing completed,
wrapped up, and hopefully, get to the floor. And I indicate to the
Chairman, full willingness on our side of the aisle to follow the
Chairmans instructions to expedite this nomination, such as can
be confirmed before the unknown concluding date of this Congress.
Chairman SARBANES. Well, Senator Warner, thank you very
much for that statement, and also for that offer to be helpful on
the floor as we try to move the nomination through.
Senator WARNER. Yes.
Chairman SARBANES. The papers just came a couple of days ago,
and we are trying to move along here.
Senator WARNER. Well, we are expediting a number in our Com-
mittee. And you know, having been around here a quarter of a cen-
tury plus, it can be done.
Chairman SARBANES. Thanks very much, John.
Mr. MERRILL. Yes. And it is very kind of you, and kind of you
to come personally.
Chairman SARBANES. Let me say at the outset that I regard this
as a very important nomination. One of the major economic chal-
lenges our country faces is competition in international trade.
My own view is that as long as that competition is based simply
on the price and quality of the goods and services being sold, I have
every confidence that U.S. exporters can do very well.
However, it is not that simple. Other governments move in. They
provide export subsidies to their companies in one way or another,
and that places our exporters at a competitive disadvantage that
they cannot be expected to meet on their own. They are just not
on a level playing field.
The ExportImport Bank exists in part to help U.S. exporters
level the playing field by matching the subsidies offered by foreign
governments and allowing our exporters to compete on the basis of
price and quality.
For that reason, I believe it is vital that the ExportImport Bank
be led by someone of exceptional stature and experience who can
assert the Ex-Im Banks important role in U.S. trade policy.
The previous president, John Robson, certainly met that stand-
ard and I take a moment this morning to honor him and his con-
tributions to the public interest of the country and to regret his un-
timely death.
Let me say, I am confident that the nominee before us today,
Phil Merrill, can meet that standard as well. I know our nominee
well. He is a leading citizen of our State, has had a long and distin-
guished record of service both to the State and to the Nation.
He received his undergraduate degree from Cornell University,
later served on its board of trustees. He is a graduate of the pro-
gram for management development at the Harvard Business
123
School. He worked as a reporter for the Newark Evening News, as

a writer-reporter for WABD Channel 5 in New York, for J. Walter
Thompson and company after service in the Army.
And from 1961 to 1967, worked for the Department of State as
a Special Assistant to the Deputy Secretary of State, and Senior In-
telligence Analyst in the Bureau of Intelligence and Research.
He attended the University of Chicago for a year on a Stevenson
Fellowship. And then he acquired and became Chairman of the
Board of Capital-Gazette Communications, publishers of the Wash-
ingtonian magazine, the Annapolis Capital, and a number of other
newspapers in Maryland.
During this very successful business career, he left from time to
time to do public service, Counselor to the Undersecretary of De-
fense for Policy in the early 1980s, Assistant Secretary General of
NATO from 1990 to 1992. He received the medal for distinguished
service in 1988 from the Secretary of Defense, which is the highest
civilian honor given by the Department of Defense.
As others have mentioned, he has been involved in a number of
very important philanthropic activities, working in the nonprofit
sector, the Aspen Institute, the Chesapeake Bay Foundation, the
Johns Hopkins University, the University of Maryland. It is a very
long list and I will not go through all of it, but we welcome and
commend that kind of citizen involvement, which contributes so
much to the strength of our Nation.
I believe that Phil Merrill will bring to the position of President
and Chairman of the Ex-Im Bank the kind of seasoned experience
and senior leadership positions in both the private and public sec-
tors that the Ex-Im Bank requires.
Earlier this year, the Congress, after a great deal of effort, but
we finally succeeded in reauthorizing the Ex-Im Bank, through
September 2006, and provided it with significant expanded author-
ity. So its statutory mandate is there now for almost 5 years, as
we look ahead into the future.
In a sense, that sets the stage for a new President to come in
and carry out the Ex-Im Banks mission with energy and imagina-
tion, and I am sure Phil Merrill will take full advantage of that op-
portunity, and we look forward to working with him in his impor-
tant role.
Now I do want to put in the record the letter from Congressman
Hoyer. Let me just read the first paragraph of it.
Dear Mr. Chairman:
I write to express my strong support for the nomination of Philip Merrill to serve
as Chairman and President of the ExportImport Bank of the United States.
Mr. Merrill has a long and distinguished career of public service, and I believe
his experience and background make him an ideal candidate to lead that important
organization.
And I also have a letter from the Coalition for Employment
Through Exports, from Ed Rice, the President of that organization.
We work very closely with the coalition on a number of issues in-
volving exports. In my opinion, they are a highly responsible orga-
nization. We have been privileged to have the benefit of their ad-
vice and counsel over the years, and I am going to take just a mo-
ment to read a fair part of this letter because the Coalition is ex-
124
tremely interested in the work of the ExportImport Bank. Its

member companies embrace a lot of our major exporters.
Dear Mr. Chairman:
As the Committee considers the nomination of Philip Merrill to be Chairman and
President of the ExportImport Bank, I write on behalf of our Coalition members
to support Mr. Merrills confirmation and to express our appreciation to you and
your Committee colleagues for your expedited action on this matter.
In nominating Mr. Merrill, the President has chosen an individual who would
bring a solid combination of experience and accomplishment in both the business
world and Government service. Experience in both of these sectors is important in
leading the Bank as it grapples with difficult issues related to globalization and U.S.
competitiveness in world markets.
In addition, the Bank is also faced with implementation of the recently enacted
changes in the Banks statutory charter, which will require energetic and skilled
leadership by a new Chairman. Mr. Merrills long experience in business manage-
ment and in a variety of sensitive Government assignments would be a particularly
important asset in accomplishing these new mandates.
We continue to value the leadership that you and your Committee colleagues pro-
vide in overseeing and reauthorizing the Bank, and we look forward to working with
Mr. Merrill should the Senate confirm him for this position.
Sincerely, Edmund B. Rice, President of the Coalition for Employment Through
Exports.
And we are very pleased to have that letter, given the continuing
and constant interest of the Coalition in the work of the Ex-Im
Bank and the work of this Committee with regard to it, and it will
be put in the record.
Now, it is the practice of the Committee of long standing to place
nominees under oath. So, I am going to ask you to stand and take
the oath.
Do you swear or affirm that the testimony that you are about to
give is the truth, the whole truth, and nothing but the truth, so
help you God?
Mr. MERRILL. I do.
Mr. MERRILL. I do.
Chairman SARBANES. Thank you very much. We would be happy
to receive your statement, and if you want to introduce the mem-
bers of your family that are here, we would be glad for you to do
that as well.
STATEMENT OF PHILIP MERRILL, OF MARYLAND

TO BE PRESIDENT AND CHAIRMAN
OF THE EXPORTIMPORT BANK
OF THE UNITED STATES
Mr. MERRILL. Mr. Chairman, I first want to thank you and Sen-
ators Mikulski and Warner for those wonderfully gracious introduc-
tory statements and for your respective, let me say, prior attention
to my family, and particularly to Ellie.
I call to the Chairmans attention that everytime that I have
come into Government, the general consensus has been that when
Ellie has taken over our company or our companies, they have done
infinitely better than under my management.
[Laughter.]
And so, you may have the wrong Merrill here.
[Laughter.]
125
I also want to introduce my daughter Nancy and my daughter

Cathy and her husband Paul Williams, who were kind enough to
show up here today.
Mr. Chairman, I am very pleased to come before you, frankly, es-
pecially you, as you consider my nomination to be President and
Chairman of the ExportImport Bank of the United States.
I want to thank President Bush for his confidence in nominating
me for this position and if confirmed, I looked forward to working
with you and with the other Members of the Committee to promote
the Banks basic function of promoting and creating U.S. jobs.
It is particularly interesting to me, or fortunate to me, to have
the Chairman of the Committee, at least at this point, be from my
home State of Maryland, and so, that is a fortuitous coincidence.
I know the Committee has my biographical information, so I will
not go into the details of that, but ask that they be submitted sepa-
rately.
It is with some mixed emotion that I appear before you today.
The previous Chairman, John Robson, was a friend for more than
two decades, and I, like you, am saddened by his death.
However, I am also honored and excited by the opportunity to
serve our country again. If confirmed, I shall pursue, what I said
here was with energy and enthusiasm, and I will now add imagina-
tion, to the challenges and opportunities that are presented in car-
rying out the mission of the Bank to support U.S. exports and U.S.
jobs.
I am no stranger to the public policy arena or the Government
process. So the question might be, why do you want to do this
again? I will quote something that John Robson said in his con-
firmation statement: I have never found a canvas as big to paint
on as public service offers and I am particularly excited about the
prospect of leading the ExportImport Bank.
I echo that sentiment.
If confirmed, this would be the seventh time I have taken the
oath of office. Actually, the eighth, if one includes, as I do, the very
first time as a private in the United States Army.
Each time I have felt the same mixture of inspiration, dedication,
determination, and appreciation for everything this country has
done for me, for my family, and for the cause of freedom and free
institutions.
If confirmed for this position, I believe I would bring to the Bank:
a record of successful business management and investment;
extensive Government experience in international affairs and
the ability to assess both political and commercial risk; and
a strong desire and demonstrated willingness to serve our
country.
The ExportImport Bank has enjoyed strong bipartisan Congres-
sional support since its establishment under President Franklin
Roosevelt. The Bank performs important roles in fostering Amer-
ican exports and thereby stimulating economic activity and job cre-
ation here at home.
The bipartisan support from the Congress and President Bush
for passage of Ex-Ims 5 year reauthorization, for which I thank
you, Senator, ensures that the Bank will continue to move forward
to help U.S. exporters.
126
I note particularly the desire of Congress to devote resources to

small- and medium-sized enterprises. I pledge to make every effort
to carry out that charge and to assist these, as well as all other
U.S. businesses in the highly competitive international markets of
the 21st century.
If confirmed, I look forward to working with this Committee, the
Congress, the career professionals at Ex-Im Bank, the Administra-
tions trade team, the entire exporting community, and especially
with the Chairman.
You have my commitment to continue close dialogue with this
Committee and the Congress as the Bank adjusts its policy and op-
erations to the challenge of the 21st century.
Mr. Chairman, I respectfully ask for your favorable consideration
of my nomination and will be pleased to respond to your questions.
Chairman SARBANES. Well, thank you very much. I have just a
few questions for the record.
First, you have been nominated for a term that expires on Janu-
ary 20, 2005.
Mr. MERRILL. That is right.
Chairman SARBANES. Is it your intention to serve out this term,
if confirmed?
Mr. MERRILL. Absolutely, yes, sir.
Chairman SARBANES. Second, I want to talk about this tied aid
credits and these market windows that some countries are using.
This has been kind of a running issue and in the latest author-
ization, I think we pretty well put it to rest because there was an
internal dispute within the Administration between Ex-Im Bank
and the Treasury.
The Congress I think resolved that dispute. I was on this Com-
mittee when we first put the war chest into place. That was an ef-
fort to arm the Ex-Im Bank so that it could counter what other
countries were doing in support of their exporters.
We made an effort, of course, through the OECD to try to get
rules that preclude some of the special financing so that the com-
petition can remain on price and quality. But do you have a view
about this whole issue about the tied aid war chest and the role
it can play?
Mr. MERRILL. Well, Senator, yes, I do. From our point of view,
we need it as a tool essentially to level the playing field. It is not
a perfect world. If confirmed, I will work diligently with the Treas-
ury Department to implement the tied aid procedures which have
been mandated in the new Ex-Im Bank charter, which I have here.
But this is really an OECD problem and we have to work with
them to bring it under control.
Chairman SARBANES. Well, we have been doing that and that has
been of some help. But we have to continue to counter.
Now something has developed that concerns us. Germany and
Canada, in particular, are using a new tactic to undercut the
OECD rules on export credit terms. They have set up, in effect, pri-
vate enterprises, but essentially, government-sponsored, to supple-
ment official export credits. They call those market windows, and
they are currently at least exempt from the OECD rules. So they
come in with that and they end up providing financing terms sig-
127
nificantly more attractive than what OECD rules allow. And the
U.S. exporters are very much concerned about that.
Now we gave in the reauthorization to the Ex-Im Bank explicit
authority to match market windows financing, which it previously
did not have. It may be implicit, but it was an arguable question.
We gave them explicit authority to match it and we also directed
the United States to seek negotiations for multilateral disciplines
and transparency within the OECD credit arrangement encom-
passing market windows. But how important a problem do you
think that this is?
Mr. MERRILL. Well, it is a very important problem. I am aware
that Canada and Germany have pushed the limits to the uttermost
in terms of making what they call private deals and are really pub-
lic subsidies available. I think you have it right when you say
well, anything you say, I am going to say you have it right.
[Laughter.]
But in this particular case, I think you have it right when you
say that they are a bigger problem by far than the rest of the
OECD countries.
Nevertheless, it could spread. The key word is transparency, and
that is what we have to push for. That requires us to cooperate
with any number of other agencies, especially the Treasury.
Anyway, it is a big problem, I am aware of it, and I intend to
pay very close attention to it and keep it down to the lowest pos-
sible amount that is humanly or administratively possible.
Chairman SARBANES. You have a particular opportunity to
broaden the national consensus in support of the Ex-Im Bank and
the push for exports. I know you will do this, but I hope that you
will have an open door for the Coalition for Employment Through
Exports that I mentioned, for the labor movement.
Properly presented, we ought not to have any split there because
it is, as you said, you are for exports and jobs. You went right to
it, and made the job connection.
A number of unions have actually been supportive of this export
effort and they recognize the benefits that flow to their workers
from it. Actually, export industries usually pay better. The pay
scales are higher.
But you have the bully pulpit as the head of the Ex-Im Bank and
therefore, a chance to work on developing this broad national con-
sensus. And it is very important that you have an open door to all
of these various groups to feel that they are in consultation with
the Ex-Im Bank and that their concerns and that their advice and
counsel is heard.
Mr. MERRILL. Senator, let me say that I have some experience
in that area. Again, I agree with you that you have the benefit in
this job and with this Bank of having the support of labor, as well
as management.
That is a very analogous situation to which the Defense Depart-
ment has found itself over the years because you have had any
number of labor institutions very supportive of varying acquisition
and production programs. I probably should stop there, but I will
give you one anecdote.
I once invited the leaders of the 10 largest labor unions in the
country to lunch with Cap Weinberger. Nine of them showed up.
128
We paid attention there to our supporters. By the way, the one who
did not show was William Wimpensinger of the electricians. But all
of the nine showed up, including the head of the National Maritime
Union, where I have been a card-carrying member.
And so, I think the analogy is fairly precise. That is, the Bank
is in the same fortunate position of needing, seeking, and having
the support of both the business community, export community of
the United States and the labor community of the United States.
And I intend to take full advantage of it.
Chairman SARBANES. Very good. I have no further questions.
Let me just say that the Congress will clearly be in session next
week. We do not know whether beyond that. And I am hopeful that
we can consider those nominees the first part of next week and try
to move things along.
We are anxious to get people into place before the Congress ad-
journs so that they can get on the job.
Mr. MERRILL. I am equally anxious and do not particularly want
to wait 5 more months.
Chairman SARBANES. All right. Very good.
Mr. MERRILL. So I thank you for everything you have done.
Chairman SARBANES. The hearing stands adjourned.
[Whereupon at 11:45 a.m., the hearing was adjourned.]
[Prepared statements, biographical sketch of the nominee, re-
sponse to written questions, and additional material supplied for
the record follow:]
129
PREPARED STATEMENT OF PHILIP MERRILL
PRESIDENT AND CHAIRMAN-DESIGNATE OF THE
EXPORTIMPORT BANK OF THE UNITED STATES
Mr. Chairman, Members of the Committee, I am very pleased to come before you
as you consider my nomination to be President and Chairman of the ExportImport
Bank of the United States. I would like to recognize the members of my family who
are here todayMy wife, Ellie, my daughter Nancy, and my daughter Cathy and
her husband Paul Williams.
I want to thank President Bush for his confidence in nominating me for this posi-
tion and, if confirmed, I look forward to working with this Committee, and Chair-
man Sarbanes from my home State of Maryland.
I know the Committee has my biographical information, so I will not go into the
details of my qualifications but ask that they be submitted with this oral statement.
It is with some mixed emotion that I appear before you today. I have mixed emo-
tions because the previous Chairman, John Robson, was a friend for more than two
decades, and I am saddened by his death. However, I am also honored and excited
by the opportunity to serve our country again. If confirmed, I look forward with en-
ergy and enthusiasm to the challenges and opportunities that are presented in pur-
suing the mission of the Bank to support U.S. exports and U.S. jobs.
I am no stranger to the public policy arena or the Government process. So the
question might be, why do you want to do this again? I will quote something that
John Robson said in his confirmation statement:
I have never found a canvas as big to paint on as public service offers and I am
particularly excited about the prospect of leading the ExportImport Bank.
I echo that sentiment.
If confirmed, this would be the seventh time I have taken the oath of officeactu-
ally, the eighthif one includes, as I do, the very last time as a private in the
United States Army.
Each time I have felt the same mixture of inspiration, dedication, determination,
and appreciation for everything this country has done for me, for my family, and
for the cause of freedom and free institutions.
If confirmed for this position, I believe I would bring to the Bank:
A record of successful business management and investment.
Extensive Government experience in international affairs and the ability to assess
political and commercial risk.
And of course, a strong desire and willingness to serve our country.
The ExportImport Bank has enjoyed strong bipartisan Congressional support
since its establishment under President Franklin Roosevelt. The Bank performs im-
portant roles in fostering American exports and thereby stimulating economic activ-
ity and job creation here at home. The bipartisan support from the Congress and
President Bush for passage of Ex-Ims 5 year reauthorization ensures that the Bank
will continue to move forward to help U.S. exporters.
I note particularly the desire of Congress to devote resources to small- and me-
dium-size enterprises. I pledge to make every effort to carry out that charge and
to assist these as well as all other U.S. businesses in the highly competitive inter-
national markets of the 21th century.
If confirmed, I look forward to working with this Committee, the Congress, the
career professionals at Ex-Im Bank, the Administrations trade team, and the entire
exporting community. You have my commitment to continue close dialogue with this
Committee and the Congress as the Bank adjusts its policy and operations to the
challenge of the 21th century.
Mr. Chairman, Members of the Committee, I respectfully ask for your favorable
consideration of my nomination and will be pleased to respond to your questions.
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RESPONSE TO A WRITTEN QUESTION OF SENATOR MILLER
FROM PHILIP MERRILL
Q.1. The renewable energy technology (RET) industry includes
companies representing solar power, wind power, fuel cells, and
modern biomass. As the domestic RET industry matures they be-
lieve that the growing energy needs in the developing world could
provide huge export opportunities for U.S. companies. They believe
the ExportImport Bank could assist the domestic RET industry
with access to these markets. What has been the Ex-Im Banks
past and current experience with financing needs for renewable en-
ergy technology companies? What would be your view and the
Banks view of financing for RET companies in the future?
A.1. While I have not been briefed on specific transactions, I am
aware that Ex-Im Bank has had a long-standing commitment to
supporting renewable energy exports. Although a number of broad
factors outside of Ex-Im Banks control impact the renewable en-
ergy export market, Ex-Im Bank clearly can play a valuable role
in promoting renewable energy exports. As evidence of the Banks
commitment to supporting such exports, earlier this year the Bank
established an advisory committee to provide advice and rec-
ommendations to Ex-Im Bank regarding renewable energy export
financing. I am optimistic that renewable energy export financing
by the ExportImport Bank will increase in the future.
RESPONSE TO A WRITTEN QUESTION OF SENATOR SANTORUM
FROM PHILIP MERRILL
Q.1. I understand the ExportImport Bank was contacted in July
by Members of the House Financial Services Committee regarding
allegations of fraud and money laundering by beneficiaries of Ex-
Im guaranties. I am aware of allegations that Tyumen Oil Co., an
Ex-Im Bank beneficiary, may be committing fraud and diverting
profits by wiring funds through banks located in the United States
to offshore entities. As you are aware, the Maloney Amendment
in the recently enacted Ex-Im Bank Reauthorization Act of 2002
specifically provides for the Ex-Im Bank to deny an application for
assistance with respect to a transaction if the Bank has substantial
credible evidence that any party to the transaction has committed
an act of fraud or corruption in connection with a transaction in-
volving a good or service that is the same as, or substantially simi-
lar to, a good or service the export of which is to subject of the ap-
plication. Are you familiar with situations such as this, where
beneficiaries of Ex-Im guaranties are alleged to be committing ille-
gal actions and to have an undue impact on the economies of coun-
tries such as Russia? If confirmed as President of the Ex-Im Bank,
do you believe this type of situation would warrant your attention?
Do you believe there should be standards related to this to which
Ex-Im beneficiaries should be held accountable?
A.1. While I have not been briefed on specific transactions, I am
aware that Ex-Im Bank takes very seriously matters of fraud and
corruption, in that such matters relate to creditworthiness. I be-
lieve that Ex-Im Bank should and does conduct due diligence with
respect to fraud and corruption issues as they relate to Ex-Im Bank
transactions. If confirmed, I assure you that all such matters would
warrant my attention.
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S. HRG.

NOMINATIONS OF: HARVEY J. GOLDSCHMID

JULY 18, 30, AND OCTOBER 4, 2002

U.S. GOVERNMENT PRINTING OFFICE

For sale by the Superintendent of Documents, U.S. Government Printing Office

THURSDAY, JULY 18, 2002

ADDITIONAL MATERIALS SUPPLIED FOR THE RECORD

TUESDAY, JULY 30, 2002

FRIDAY, OCTOBER 4, 2002

ADDITIONAL MATERIALS SUPPLIED FOR THE RECORD

THURSDAY, JULY 18, 2002

and accountability issues, working in the best interests of the pri-

Thank you, Mr. Chairman.

going to conference with the House. The conferees were appointed

COMMENTS OF SENATOR PHIL GRAMM

STATEMENT OF SENATOR CHRISTOPHER J. DODD

Chairman SARBANES. Do you agree to appear and testify before

STATEMENT OF HARVEY J. GOLDSCHMID, OF NEW YORK

Day by day, in his remarkably successful 8 year term, Arthur acted

consumer affairs advisory committee, and other investor education

to rely on the financial reports issued by public companies to

Senator GRAMM. Well, let me say on this recusal thing, if I

Is there any other colleague who has a time situation, because

COMMENTS OF SENATOR ZELL MILLER

Chairman SARBANES. We want to strengthen the integrity of the

Chairman SARBANES. Presumably, though, you both would agree

STATEMENT OF SENATOR THOMAS R. CARPER

Mr. GOLDSCHMID. Well, I began teaching at Columbia in 1970.

ration of a large amount of consulting from the auditing process,

David Walker, the Comptroller General of the United States, tes-

Technology is another area. That bill, that budgetary provision,

But as I said to Senator Gramm, prudent rules on conflicts, on

PREPARED STATEMENT OF SENATOR MICHAEL B. ENZI

PREPARED STATEMENT OF HARVEY J. GOLDSCHMID

In every facet of its investor education program, the Commission

TUESDAY, JULY 30, 2002

tended special protection. No depository institution should be insu-

STATEMENT OF BEN S. BERNANKE, OF NEW JERSEY

Chairman SARBANES. Good. We are very pleased to have them

and stable. Low and stable inflation is intrinsically beneficial, as it

framework of U.S. monetary policy, I know that not everyone

Mr. BERNANKE. But I think that, in general, my philosophy is

I would not try to do that by creating artificial inflation or ex-

Japan is an excellent example of a country without an inflation

Chairman SARBANES. Senator Miller.

COMMENTS OF SENATOR ZELL MILLER

PREPARED STATEMENT OF DONALD L. KOHN

FRIDAY, OCTOBER 4, 2002

Merrill as to why this appointment should be made, would be en-

know how to write, be competent, and have an ethical framework?

STATEMENT OF JOHN WARNER

But, anyway, that was an extraordinary challenge, Law of the

School. He worked as a reporter for the Newark Evening News, as

tremely interested in the work of the ExportImport Bank. Its

STATEMENT OF PHILIP MERRILL, OF MARYLAND

I also want to introduce my daughter Nancy and my daughter

I note particularly the desire of Congress to devote resources to

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