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IV Page Edward M. Gramlich, of Virginia,to be a Member of the Board of Governors of the Federal Reserve System - Continued Prepared statement - Continued Background The Federal Reserve Biographical sketch of nominee Curriculum Vitae Response to written questions of: Senator Enzi Senator Dodd Roger W. Ferguson, Jr., of Massachusetts, to be a Member of the Board of Governorsof the Federal Reserve System Prepared statement Biographical sketch of nominee Response to written questions of: Senator Enzi Senator Dodd 73 73 75 82 120 122 21 92 95 122 124 N O M I N A T I O N S O F : L A U R A S. U N G E R , O F N E W Y O R K , T O B E A C O M M I S S I O N E R O F T H E S E C U R I T I E S A N D E X C H A N G E C O M M I S S I O N P A U L R. C A R E Y , O F N E W Y O R K , T O B E A C O M M I S S I O N E R O F T H E S E C U R Í T I E S A N D E X C H A N G E C O M M I S S I O N D E N N I S D O L L A R , O F M I S S I S S I P P I, T O B E A M E M B E R O F T H E N A T I O N A L C R E D I T U N I O N A D M I N I S T R A T I O N B O A R D E D W A R D M. G R A M L I C H , O F VIRGINIA , T O B E A M E M B E R O F T H E B O A R D O F G O V E R N O R S O F T H E F E D E R A L R E S E R V E S Y S T E M O F R O G E R W. M A S S A C H U S E T T T H E B O A R D O F F E D E R A L R E L L E N F E R G U S O S , T O B E G O V E R N O E S E R V E S S E I D M A N , O F T H E N A R Y , JR . M E M B E R S O F T H E S T E M D I S T R I C T O F O F C O L U M B I A , T O B E T H E D I R E C T O R O F T H E O F F I C E O F T H R I F T S U P E R V I S I O N T U E S D A Y , S E P T E M B E R 30 , 1997 U.S. S EN A TE , C O M M I T T E E O N B A N K I N G , H O U S I N G , A N D U R B A N AFFAIRS, Washington , D C . T h e Co m mi tt ee m e t at 9:40 a.m. , in r o o m S D - 538 of the Dirksen Senate Office Building, Senator Alfonse M. D ' A m a t o (C h a i r m a n of the C omm itt ee ) presiding. O P E N I N G S T A T E M E N T O F C H A I R M A N A L F O N S E M. D ' A M A T O T h e C H A I R MA N . G o o d m or n in g. Today , the Co mmi tte e is holding a hearing on six important nominations. O n our first panel, w e will hear from two nom inees w h o I k n o w very well, a n d it's m y great pleasure to w o r k with both of them , La ur a U n g e r a n d Paul Carey. (1) 2 T h e y have been nominated to be Commissioners of the Securities an d Ex ch an g e Co mm iss io n . I a m pleased to note the presence of S E C C h a i r m a n Arthur Levitt as well . I think his presence indi cates his deep appreciation , support, an d concern with respect not only to the Commission , but with respect to these two nominees w h o m he's h a d an opportunity to w o r k with . O n our second panel, w e will hear from E d w a r d Gramlich a n d Roger Ferguson , w h o h a v e been nominate d t o be M e m b e r s of the Board of Governors of the Federal Reserve System . O n our third panel, w e have Dennis Dollar, w h o has been n o m i nated to be a M e m b e r of the National Credit U n io n Administration Board , an d Ellen Seidman , w h o has been nominated to be the D i rector of the Office of Thrift Supervision . Iw a n t to take this opportunity to welcom e each of our n o m i n e e s. N o w w e will begin with our first panel, the nominees for the S e curities and E xch an ge Commission , Lau ra U n g e r a n d Paul Carey. Before swearing in our nominees , I would like to m a k e several r e m a r k s about L a u r a U n g e r and P a u l Carey . I n m y opinion , the President could not have chosen t wo m o r e qualified people to serve on the S E C . La ura U n g e r has done a very outstanding job a s the Securities Counsel o n t h e B a n k i n g C om mit te e since 1992. L a ur a actually started working for the Co mm it t ee a n d for m y office in 1990 , w h e n she c a m e ov er from the S E C as a Congressional Fellow . Before that, she served as a staff attorney in the S E C Division of Enforce m e n t from 1988 to 1990. L aur a is a native of N e w York . Sh e r e ceived her undergraduate degree from U . C . Berkeley an d her law degree from N e w Y o r k L a w School . Hav ing wor ked with Laura over the last 7 years, I k n o w from firsthand experience that she will be an excellent Commissioner . S he has the expertise an d the experience in this area that will be a tremendous asset to the S E C . S he is also the proud mo ther of S i m o n e, w h o is here with us today . Let's see , S i m o n e is 9 m o n t h s old. Is that right? Ms. U N G E R . Yes . T h e C H A I R M A N . Beautiful, beautiful girl, an d she's married to Peter U n g e r , this youthful, h a n d s o m e, debonair gentleman in the first r o w . [Laughter.] Iw i s h to extend a special w elco me to Si m on e a n d to Peter . N o w , with respect t o Paul Carey . W h a t can you say about a Carey that hasn't been said by his father already? [Laughter .) I have k n o w n the Carey family for m a n y , m a n y years. I've k n o w n t h e m w h e n w e haven't been on the s a m e side, I've k n o w n t h e m w h e n we've h a d differences, I've k n o w n t h e m w h e n we've been on the s a m e side, a nd I would m u c h rather have t h e m on m y side. There are m a n y of them . T h e y are formidable . T h e y are dedi cated . T h e y are a great family, and they have m a d e N e w Y o r k the E m pi r e State . W e are indeed fortunate today to have the former Governor of the State of N e w Y o r k with us , and I k n o w this m u s t be a very proud d ay for Governor Carey to w at ch his son , Paul, go through the process of becoming a Securities a n d Ex ch an ge Commissi oner because I k n o w it will be a reality. 3 Gov erno r Carey , would you stand so w e can recognize you and t h a n k you for being here? [Applause . ) T o say that the Irish Tribe is alive, well, a nd thriving wou ld be a n understatement . Three of Paul's brothers are also here; Brian , T h o m a s , and Kevin . W e w e l c o m e all of y ou . Paul h a s been working in the W hite H o u s e as a Special Assistant to the President since February 1993. H e is a native N e w Yorker a n d a graduate of Colgate University. Th rou gh his job in the White H o u s e , Paul an d I, as well as m a n y M e m b e r s of the Com mit tee , ha v e h a d the opportunity to w o r k together on a wide range of legis lative issues . H e is a m a n of utmost integrity and competence , a true professional, an d a dedicated and courageous public servant. H e ha s served the President a nd the country well , and h a s earned the confidence a nd respect of everyone he has wo rk ed with . I w a n t to wel co me Paul a nd his family and friends w h o are in attendance a n d look forward to watching his w or k for m a n y years to c o m e . N o w , at this point, I will swear in our two witnesses. I see w e have been joined by Senator Reed . D o you have a state m e n t , Senator ? OPENING C OM M E NT S OF SENATOR JACK REED Senator R E E D . Mr. Chairman , I too w a n t to c o m m e n d the n o m i nees a nd I wish t h e m well . I ha ve h a d a chance to w o r k very closely with Paul over the last several years , and I'm disappointed that L aura is leaving us to join the S E C , but to both of t h e m best wishes . T h e C H A I R M A N . T h a n k you , Senator . W o u l d you please rise for the oath ? [Witnesses sworn .) S W O R N T E S T I M O N Y O F L A U R A S. U N G E R O F N E W Y O R K ,T O B E A C O M M I S S I O N E R O F T H E SECURITIES A N D E X C H A N G E C O M M I S S I O N Ms. U N G E R . C h a i r m a n D 'A mat o , Senator Sarbanes, and M e m b e r s of the C omm itt ee , as a m e m b e r of the C om mi tte e staff, it is a n es pecially great ho nor to a p pe a r before you today to testify on m y nomination by the President to be Commissioner of the Securities a n d Ex ch an ge C omm iss ion . A s you noted earlier, I w a nt e d to mention m y beautiful h usb an d a n d daughter sitting behind m e , a nd th ank m y h u s b a n d in particu lar for his support a n d for extricating m e from N e w Yo rk City to c o m e to Washington - which I did kicking a nd screaming only to h a v e a wonderful time here. I also w a n t to thank m y beautiful daughter Simone's wonderful n a n n y , w h o m a k e s it possible for m e to go to w o r k every day an d not have to worry about m y daughter having a good time. I a m also pleased to share the table today with m y able col league, Paul Carey, the President's choice for the other vac ant S e curities a nd E xc ha ng e Commissioner seat, a fellow N e w Yorker , a nd an individual with w h o m I have ha d the pleasure of working. If confirmed , I look forward to sharing a table at the C om mis si on with Mr. Carey . 4 A s the C h a i r m a n mentioned earlier, I joined his staff as a C o n gressional Fellow from the S E C almost exactly 7 years ago. O v e r the last 7 y e ar s ,I have h a d the pleasure a n d privilege to w o r k closely with the C h a i r m a n a nd Co mm it te e M e m b e r s on a variety of issues. It has never been dull. I have h a d the opportunity to w o r k on a n u m b e r of important pieces of legislation a n d h a v e e n joyed every m o m e n t of m y tenure o n the Co mm it te e staff. W o r k i n g for the C h a i r m a n a nd the C o mm it te e at this challeng ing time in our financial history has afforded m e the opportunity toh e l p shape the securities laws a n d to participate in important policydecisions concerning the efficiency a n d fairness of the capital markets a nd the protection of investors. Should the Senate confirm m y nomination , I look forward to continuing m y w o r k in this area as a Securities a nd E xcha nge Commissioner . The Commission's mission is to administer and enforce the s e c u rities laws to protect investors an d to maintain fair, honest, and e f ficient markets. T o fulfill this mission , the S E C m u s t consider the delicate balance between investors and the marketplace . Wit ho ut investor confidence, the capital markets will not flourish . H o w e v e r , too m u c h regulation will m a k e the markets a n unattractive source of financing t o companies. If confirmed , I will w o r k to ensure that the Commission's programs strike the appropriate balance . I feel extraordinarily honored to h a v e been the President's choice for a seat on the C o mm is s io n . A s the Co mm is s io n heads toward the 21st century, it will face a myriad of challenges, including issues involving ma rke t structure, technology , internationalization , c o n tinued growth in the m utua l fund industry , as well as financial modernization. If confirmed , I wel com e the opportunity to w o r k on these issues a n d to be a M e m b e r of the C o mm is s io n as it prepares for the n e w millennium . W h e n I left the S E C 7 years ago to c o m e to Capitol Hill and w o r k for Senator D' Am at o , I promised Iwould return to the Commission . At that time , I h a d no idea in w h a t capacity. A s hard as it will be to leave the C om m it t ee, the Committee M e m b e r s , an d all of m y col leagues on the staff, should the Senate confirm m y nomination , it is with great enthusiasm a nd anticipation that Iwill return to the C om mis si on to serve as a C om mi ss io ne r. If confirmed , I look for w a r d to continuing to w o r k with this C om mi tt ee an d staff in m y n e w capacity . T h a n k you , Mr. Chairman , for everything. It has been a w o n d e r ful experience. I look forward to answering a n y questions. T h e C H A I R M A N . T h a n k y o u , L aura . It'sgreat having you on that side of the table not testifying as an expert witness . Before I call u po n Paul C a r e y for his remark s , I w ould like to a c knowledge his dear friend w h o d o es h i m honor, h i s family h o n o r, and the process honor , former President of the E x -I m B a n k , K e n Brody and Mrs. Brody. Ken , th ank you for being here with us today . I would also like to a d d into the record two very strong state ment s of support on behalf of both nominees from the Senior S e n ator from N e w York , Senator Moy nihan , w h o unfortunately is not feeling well , which precludes h i m from being here. H e aske d m e to p a y special tribute to P au l. H e said that he is going to miss working with you , but he certainly looks forward to 1 1 1 5 w o r k i n g with you in your n e w position , and he has asked m e to e x t end personally his best wishe s to the Governor . I a m going to ask that both of these statements be placed in the record as if read in their entirety. M r . Carey . S W O R N T E S T I M O N Y O F P A U L R. C A R E Y O F N E W Y O R K ,T O B E A C O M M I S S I O N E R O F T H E SECURITIES A N D E X C H A N G E C O M M I S S I O N M r . C A R E Y . T h a n k you , M r . C h a i r m a n , Senator Sarbanes, a nd M e m b e r s of the Co mm it te e . I a m grateful to the President for n omina ting m e to the Securities a n d E xcha nge C o mm is s io n . I a m also honored to appear before you today and appreciate the C o m mittee's scheduling the hearing in such a n expedited fashion . I a m especially pleased to b e e mba rki ng on this endeavor at the s a m e time as L a u r a Unger . I have h a d the good fortune to w o r k with L a u r a on m a n y issues. If confirmed , I a m enthusiastic about the contribution w e can both m a k e to this C o mm is s io n by our ability to w o r k together. Before his elevation to the S u p r e m e Court by President Franklin D. Roosevelt , William O. Douglas served as the third C h a i r m a n of the S E C — from 1937 to 1939. H e described the mission of the S E C in very simple but compelling words . "W e are the investor's a d v o cate .” T h a t remains true to this da y , and I believe it has been p a r ticularly evident during the tenure of C h a i r m a n Arthur Levitt. I am proud to note that m y relationship with the C h a i r m a n dates b a c k to the 1970's w h e n our fathers served together as Governor a n d Comptroller of N e w Y or k State . If confirmed , I look forward to extending into this generation the s ha r ed h o n o r of public service of our t w o families b y joining the S E C with Ch ai rm an Levitt. I believe the S E C , in recent years , has been a model for the rela tionship that should exist b e t w e e n the regulators a n d the r e g u lated . This relationship requires both a healthy tension and a level of cooperation on a variety of issues. W e have i m p r o v e d th e w a y our markets function and preserved the United States capital m a r kets' exemplary standing throughout the world . A s a result, the fairness an d transparency in our markets have been enhanced , to the e no r mo u s benefit of investors. M a n y of the challenges that lie ahead are in the relationship b e tw e e n o u r markets an d those of other nations. O ngoi ng efforts to arrive at international accounting standards as well as cooperation on enforcement matters s ho ul d permit us to ac c om m o da t e the growth of across-the-border transactions without diminishing inves tor protection . T h e integrity of our markets and the confidence that has p r o du c e d is owed in large m ea su re to the vigorous enforcement efforts of the S E C . M a r k e t s are dramatically affected by the rapid development of technology, w h i c h presents both opportunities an d risks t ha t m u s t b e carefully monitored . Investors will also benefit from the SEC's "plain English " effort to m a k e disclosure docu ments clearer an d easier to understand, as well as the Investor Education a n d Assistance P r o g r a m which gives investors a foru m in whic h they can get objective information. It takes vigilance a nd j u dg m en t to encourage capital formation a n d vigorously maintain investor protection. This will be m y p rin 6 cipal concern if I a m confirmed by this C omm itt ee a nd the full S e n ate as a Securities a nd Ex chan ge Commissioner . I hope that I can look forward to working with this Com mit tee and its staff on the m a n y issues w e will face together . T h a n k you . I look forward to taking any questions that you m a y have . T h e C H A I R M A N . W e have been joined by the F o r m e r C h a i r m a n and R ank in g M e m b e r of the Co mmi tte e , Senator Sarbanes . Senator Sarbanes . O P E N I N G S T A T E M E N T O F S E N A T O R P A U L S. S A R B A N E S Senator S A R B A N E S. Mr. C h a i r m a n , thank you very m u c h . I'll be very brief. Unfortunately, I a m not going to be able to stay this mo rning .I regret that because I w a s looking forward to exchanging views with the various nominees that are before us . I w a n t to thank you for scheduling this very important hearing : I wou ld like to m a k e the observation that all six of the nominees that will be before the Co mm i tt ee today have very important r e g u latory responsibilities . W e often think of the Federal Reserve s i m ply in terms of its monetary policy responsibilities, but it has very significant regulatory responsibilities and it will fall on all six of these nominees to ensure that the f ram ewo rk within which the e c o nomic system is functioning is one that maintains the honesty an d the integrity of the markets and the honesty a nd integrity of finan cial activity. This is a heavy responsibility and one which I believe, if not properly discharged, can un der min e the workings of our economic system . I just w a n t to underscore that . I intend to support all of the people that are here before us . I k n o w Paul Carey a n d L aura U ng e r well from their w o r k either for or with this C omm itt ee . T h e y have both been very m u c h involved in securities legislation which has been enacted in recent years , and n o w they're going to have an opportunity to imp lement t hose statutes and enforce t h e Federal securities laws . While they are both y ou ng , or younger than us , at least, I guess might be the w a y to put it,w e ' r e looking forward to their tenure in this important position. I wish t h e m well , but underscore the important burdens they will be assuming . I have h a d the opportunity to m ee t w i t h the two n o m i n e e s for the Federal Reserve B o a r d . În any event, they will be coming u p in a later panel , but I'm afraid I won't b e able to get back for that panel. While I have underscored their responsibilities an d regula tion in terms of assuring the viability of the financial structure, they also have important responsibilities in formulating monetary policy. T h e Ame rica n ec o n om y is n o w working extremely well . W e have brought the deficit d o w n . I believe the latest estimate is that it is expected to b e under $ 30 billion at the e nd of this fiscal year. It w a s $290 billion in fiscal 1992 , so w e have h a d a constrained fiscal policy which has helped to bring the deficit d o w n . At the s a m e time , w e have needed an a ccommo dating m on eta ry policy in order to ensure that economic activity stays at h ig h levels. W e have m a n a g e d to achieve that, and w e have the lowest u n e m ployment in 25 years and the lowest inflation in 30 years. That's 7 a n enviable record, an d both Professor Gramlich and Mr. Ferguson will h av e a hea vy burden in carrying that through . I am very glad w e are at last going to get a Director at the Office of Thrift Supervision , especially som eo ne of the caliber of Ellen S e i d m a n . It has been s o m e time since that position has been filled. I think this C om mi tt ee has consistently, in the past , urged A d m i n istrations to fill that post. Often people e n d up doing double duty in that office and , as Director of t h e Office of Thrift Supervision , it's not a desirable situation . Finally, Mr. Chairman , I have h a d an opportunity to meet with De nni s Dollar, an d I m u s t say I think he will bring to the Board of the N C U A a good understanding of the credit union m o v e m e n t . H e has been involved in it personally, he's done a very good job, a n d h e understands the important role that it has played in our e c o n o m y. In our discussions, he outlined his full appreciation of the N C U A ' s responsibility to protect the safety a nd soundness of the credit u nion industry. I a m pleased to support his nomination as well . I apologize to all of the nominees that I'm not going to be able to stay through this. T h a n k you very m u c h . T h e C H A I RM A N . T h a n k you , Senator . Let m e ask , Ms. Un g e r, just one question . H a v e you adequately prepared the staff a nd Mr. Menell for your n e w successor? (Laughter .] H a v e you m a d e an y recommendations ? Ms . U N G E R . I'm not sure Mr. Menell has accepted the fact that I m ig h t be departing. (Laughter .] T h e C H A I R M A N . I w a n t to ask the s a m e question of Mr. Carey. H a v e you adequately prepped your successor ? D o you k n o w w h o it is? Mr. C A R E Y . I don't know w h o m y successor is. T h e C H A I R M A N . W e m a y have to hold this until w e determine that. (Laughter .) Mr. C A R E Y . B u t I'm sure that he or she will carry on the tradi tion of working in a cooperative fashion with this Co m mi t te e . T h e C H A I R M A N . I think I woul d be wasting the Committee's time w e re this Senator to put forth questions to the nominees regarding w h a t they considered t o be the greatest problem , et cetera. I k n o w they are going to be looking at all of the issues as they c o m e u p on the radar screen, a nd will be of very valuable assist ance to C h a i r m a n Levitt. Senator R ee d , do you have a n y questions ? Senator R E E D . T h a n k you , Mr. Chairma n . I wou ld just like to raise a couple of issues for your thoughts. First is that shortly the S E C will be issuing regulations with r e spect to Rule 14 (a)(8 ), which is the proxy rule whic h wou ld limit their oversight of the process . I wo n de r if both nominees could c o m m e n t u p o n their views with respect to the regulation of the S E C in this n e w 14 (a)(8) proposal. 8 Ms. U N G E R . Senator, I have h a d the opportunity to be briefed on the SEC's Rule proposal in m y capacity as a staff m e m b e r of this C o m mi t t ee. I k n o w the Commission's goal w a s to balance s h a r e holder access to the corporation and to have input in certain a s pects of the corporation's activities without unduly constraining the corporation's ability to conduct its day -to -day activities. It is m y u n derstanding that the proposal w a s a n attempt to balance the share holders'interest in participating in the corporation's activities with that of the corporation in conducting its activities. I h a v e heard since the proposal has been released that people might b e of the opinion that it's not a balanced proposal. I w o u l d need to look at it further . I do believe that shareholders should have a say, w h e n appropriate, in the activities and conduct of the c o m p a n y in which they invest. B u t I do understand the company's need t o keep s o m e control over those activities or input b y the shareholders. Senator R E E D . Paul , do you have any thoughts ? I realize L a ur a has h a d m o r e proximate exposure to s o m e of these issues of the C omm itt ee . Mr. C A R E Y. Senator Reed , th ank you . I do believe the issue is o n e w h er e the S E C is trying to strike the best balance between the n e e d s a n d rights of shareholders to submit proposals , an d to be able to have access to proxy informa tion that would enable t h e m to do so. I have not ha d the opportunity to be briefed on the Commission's n e w proposal, but l o o k forward to having a mo re informed perspec tive on it. I would like to give you a m o r e thoughtful response in the future a n d tow o r k with you a nd your staff o n this issue . Senator R E E D .I appreciate that. O n e concern that's been raised is that without s o m e type of for m a l review of these proposals by the S E C , it might give too m u c h leverage to corporations to discard appropriate proposals by their shareholders, a n d if you could look att ha t, I w o u l d appreciate it. Another area of s o m e concern is with the Small Order Execution Sy ste m . There has been discussion that this system w a s designed really to help small investors an d that professional investors are entering into these trades with m o r e speculative motives, whi ch is something that could be detrimental to the interests of those small investors. Again , your thoughts or c o m m e n t s or at least an indication of your interest wo uld b e appreciated. La ur a, wo uld you like to respond to that ? Ms. U N G E R . Senator, again, as a C o m m i t t e e staffer, I ha ve h a d the opportunity to speak to people about the S O E S issue , the Small Order Execution System . T h e intent o f the system w a s , following the mar ket break in 1987 , to enable small investors to get out o f their position. A s you know , there were problems with s o m e of the orders being executed at that ti me. It enabled small investors to go into the marketplace a n d basically execute an order at a quoted price. T h e problem is that there are s o m e abuses apparently or there have been abuses that have been described with this sy ste m in that professional traders also take advantage of this system to e x e cute orders . 9 I think it's important that small investors be able to access the m a r k e t , but it's important to do it in such a w a y so as not to u n duly burden those brokers w h o are trying to conduct their business in a n orderly fashion . I k n o w the N A S D has been trying to c o m e u p with a system that will take these two competing interests into account a nd I believe they are working on a n e w proposal n o w . I wou ld be h ap p y to w o r k w it h the C om mi ss io n in order to strike the appropriate balance in that area . Senator R E E D . T h a n k you . Paul , are there any c o m m e n t s that you would like to m a k e ? Mr. C A R E Y . I would like to c o m m e n t that the system is designed a n d the n e w rules are designed to give the greatest possible trans parency to investors w h e n they are m a k i n g their trades and to give t h e m the most timely and reliable information to ensure liquidity a n d orderly execution . I believe that m a n y of the rules have been an i mpr ove men t on the current system , but w e need to w or k closely with the m ark et m a k e r s to m a k e sure that no unintended impediments to orderly trading have been created . Senator R E E D . T h a n k you . O n e final point w hi ch I believe requires n o c o m m e n t.I w ould like to simply mention a critical issue which is facing all the financial service industries, and that's preparing for the year 2000 , dealing with the technological shift a nd the computer problems . Since the securities industry is heavily dependent up on technology and c o m puterization, I w ould h o p e that both of you, i n your tenure on the Com mi ssi on , would almost immediately begin to look at an y po s sible difficulties and consequences an d w h a t the response of the industry mig ht be , so that they're fully prepared for the potential difficulties at the y e a r 2000 because of technology. Tha t woul d be something I w o u l d appreciate. Mr. C ha ir ma n , these are eminently qualified nominees a n d I b e lieve w e all look forward with m u c h enthusiasm to supporting their nominations. T h e C H A I R M A N . T h a n k you very m u c h ,Senator . I wou ld like to say that I think Mr. Carey w a s very incisive in expressing a concern that I've heard from others . W e m u s t see to it that the liquidity of the marketplace is not diminished to a point w h e r e w e actually w i n d up costing the c onsu mer m o r e m o n e y . I w ould hope this issue is something that w e will address in the future . I k n o w it's easier said than done , but it is very important. Before I call u p o n the third panel ahead of the second panel, b e cause w e h a v e been joined by the Senate Majority Leader , a n d r an k does have its privileges , (Laughter .) - a n d I like being C h a i r m a n of this Co m mi tt ee (Laughter .) - I might a dd that w e have been joined by another luminary w h o is here to loan his strong support to Mr. Carey, a n d that is Jud ge Richard Eaton . J udg e , it is good to have yo u here with us today. I would not w a n t your presence to go unnoticed. 10 I w a n t to than k bot h of the S E C no minees , a n d I look forward to mo vi ng this to the floor speedily, particularly since we're going to get the Senate Majority Leader u p here right n o w . T h a n k you very m u c h . O n o u r third panel, w e will be hearing from Dennis Dollar, w h o has been nominated to be a M e m b e r of the National Credit U n io n Administration Board . Let m e ask that Dennis Dollar co m e forward at this time . (Pause .) T h a n k you very m u c h . At this point , Iw o u l d like torecognize an d call u p o n the Senate Majority Leader, Senator Lott. Indeed, it's a great privilege to h av e y ou c o m e before the Com mitte e , Senator, and to have you loan your support to Mr. Dollar. Senator Lott . OPENING STATEMENT OF TRENT LOTT A U.S. S E N A T O R F R O M T H E S T A T E O F MI S S I S SI P P I Senator L O T T . T h a n k you , Mr. Ch a i rm a n . It's a great pleasure to see you here chairing this Co mmi tte e , an d I thank you for allowing m e to go out of order. I also than k you for your support on a n u m ber ofissues over the years , but most especially w h e n I've been running for leadership positions. I k n o w h o w important your s u p port has been . I thank you for this opportunity a nd I'm delighted to be here this mo rn in g in support of this no min ee and in support of the other nominees that you're holding this hearing on . I'm sure they will r e ceive, wit h your support, expeditious consideration w h e n reported from the C o m m i t t e e a n d w h e n they reach the floor. I believe the Senior Senator from Mississippi will b e joining us momentarily , an d it will s h o w the great respect whic h w e ha ve for this nom inee, D e n n i s Dollar,w h o is President of the Gulfport ,M i s sissippi V A Federal Credit U nion, nominated to serve on the Board of t he National Credit U ni o n Administration . M r . C h a i r m an , I hate to admit this, but as far back a s 1972 , w h e n I w a s just 3 0 years old and running for Congress m y first time, in a district w he re most people h a d never s e e n a live R e p u b lican before, I w e n t to a c o m m u n i t y college c a m p u s there in the Gulfport, Biloxi, Mississippi area t o debate m y o p po n e n t, a n d m y student chairman on the c a m p u s for that c a m p a i g n w a s none other than Dennis Dollar. Dennis did not h a v e a n y gray hair then . H e has gotten ahea d of m e o n the gray hair, b u t he did a great job , a nd w e n t on to lead a distinguished career. After his education at the c o m m u n i t y col lege a n d the University of Mississippi, h e, himself, joined the politi cal arena a n d w a s elected at 22 yea rs of age to the Mississippi H o u s e of Representatives. H e w a s a leader in legislation to open u p the government a n d let the sunshine c o m e in . H e w a s elected, by the w a y , as a Dem ocr at, Mr. C h a i r m a n , a n d he served in magnificent fashion in the legislature an d developed quite a reputation for being a reformer and a genuine leader .H e ran statewide for office and c a m e within, I believe, 1 pe rcent age point of being elected to Secretary of State there in the State o f Mississippi. 11 Den nis Dollar has been a leader in his c o m m u n i t y . If you look at his r e su m e , you will see he is a m a n that gets involved in his c o m m u n i t y , in his State, in his church , and with charity, all the w a y from the M a r c h of D i m e s to the Gulfport Job Corps, Kids V o t ing, the Mississippi Arts Fair for the Handicapped . H e really does w h a t a citizen is supp ose d to do , all the while, being a leader in the business world . H e has been the president of a junior college that focused pri marily on business courses an d has also been in the real estate business. H e has the kind of background that certainly qualifies h i m for this position, but the o n e thing that qualifies h i m m o s t is the fact that h e currently heads a Federal credit union a nd w a s s e lected as one of the five most outstanding credit union CE O' s in the United States by the Credit Union Tim es. Mr. Dollar has been properly educated . H e has been in the b u si ness world ,the academic world, the legislature, h e w a s m y ardent supporter the last time I ran for the Senate, and he's been a real leader in credit union activities. I'm very proud of his nomination a nd pleased that the President ha s submitted his n a m e for this nomination . O n c e he is reported out by the Com mi tt ee , I hope expeditiously, then w e will be able to m o v e his n a m e along with one that's been on the calendar for s o m e time, to fill the two vacant slots on the National Credit U n io n Administration Board . I wholeheartedly endorse this n omi ne e , m y friend, a n d I k n o w he will d o a great job for the State, the country, a nd for credit unions. I will not filibuster an y longer, Mr. C h a i r m a n , because I see the Senior Senator from Mississippi has arrived to provide his endorse m e n t also. T h a n k you very m u c h , Mr. Ch ai rm an , for allowing m e to go out of ord er an d for having this hearing. T h e C H A I R M A N . Senator, tha nk you. I k n o w that Mr. Dollar m u s t feel v e r y proud a nd very honored that you and Senator Cochra n w o u l d take t h e time to be here in support of his nomination . Senator Cochran . OPENING STATEMENT OF THAD CO CHRA N A U.S. S E N A T O R F R O M T H E S T A T E O F M I SS I S SI P P I Senator C O C H R A N . Mr. Chairm an , than k yo u very m u c h for the opportunity to appear with m y good friend a n d colleague, Senator Lott, to endorse t h e no mi n at io n of Dennis Dollar to serve on this important National Credit U ni on Administration Board . Dennis is well qualified, he has good ju dg men t, he's well e d u cated , he has served with distinction in the State legislature in our State, a n d he's a good friend a n d a good all-around person w h o will bring a perspective a nd good c o m m o n sense to the decisionmaking process of this B oard . W e are honored that he has been selected . O u r State is honored , a n d w e are very proud of Dennis a nd k n o w that he will do a w o n derful job. I ask that m y full statement be included in the record . T h e C H A I R M A N . So ordered . Senator, w e again are deeply appreciative. M r . Dollar, I k n o w y ou m u s t be very honored that both Senators would take their time 12 to c o m e and physically be supportive here and loan themselves so strongly to your nomination . Senators ,I k n o w that you're busy , and I don't think w e have any questions. Senator Faircloth , now's the time to ask Senator Lott w h a t you w an t ed to before. (Laughter .] In the interesto f t i m e, I a m going to suggest w e hear from the third panel n o w . I hope the second panel will understand . I'm going to ask that both Ms. S e i d m a n a nd Mr. Dollar stand for the oath . [Witnesses sworn .] Mr. Dollar , w h y don't w e turn to yo u for your opening statement, an d then w e will go to Ms. Sei dman . 1 1 1 1 4 S W O R N TESTIMONY OF DENNIS DO L LA R O F M I S S I S S I P P I, T O B E A M E M B E R O F T H E NATIONAL CREDIT UNION ADMINISTRATION B O A R D Mr. D O L L A R . T h a n k you , Mr. C ha i rm an , a nd ladies an d gentle m e n of the Co mmi tte e . I appreciate very m u c h the confidence of the President a n d the nomination to serve as a M e m b e r of the N a tional Credit Un io n Administration Board , and t h e appearance here today of both Senator Lott and Senator Cochran . It is quite an honor, a nd I appreciate it so m u c h . I also appreciate the o p p o r tunity to m ee t before the C ommi tte e , an d I w a n t to tha nk y o u for this prompt hearing. A s the Chief Executive Officer of a credit union which can best be described as of small to moderate size — the Gulfport V A Federal Credit U nio n has approximately $ 31 million in assets, right on the nationwide average of b et wee n $ 25 a nd $ 30 million — for the past 6 years , I have dealt with the day -to-d a y issues facing our Nation's credit unions . I have sat across the desk from the m e m b e r of limited m e a n s w h o says , “ I can't send m y daughter to college without this loan ," or “M y son will not have clothes for school unless m y credit union can help m e .” I have stood in the parking lot with that proud m e m b e r w h o fi nally financed his first car or truck a nd says, “I never thought I would o w n one on m y o w n , n o w I can take th at n e w job that m y family really needs but it's 20 miles a w a y ." I have seen the regulatory process firsthand an d experienced the depth of an N C U A examination . I a m a committed adherent to the importance of safety a n d soundness considerations . O f all of the m e m b e r services w e provide at our credit union , I tell m y m e m b e r s daily that the most important m e m b e r service w e can provide is a strong , safe, sound , an d viable credit union . Il o o k forward to the opportunity to w o r k as a M e m b e r of the N C U A Board to use this perspective I have gained in the credit union trenches, while at the s a m e time applying the public policy perspective that I gained through 8 years as a State legislator. H av in g served as a M e m b e r of the Mississippi H o u s e of R e p resentatives for two 4 - y e a r t e r m s, from 1976 to 1984 , I have looked at issues from a public policy, regulatory, an d legislative point of view as well. L 2 1 L 13 I understand that not only credit union m e m b e r s have a stake in the safety and soundness of our Nation's credit unions, but so do the A mer ic an people . I look forward to w o rk i ng with this C o mm it te e and Congress, as a M e m b e r of the N C U A Board up o n confirmation , to continue to ensure the safety an d soundness of a growing credit union system for years to c o m e . Again , Mr. C h a i r m a n a n d M e m b e r s of the Co mm it te e , I a m h o n ored to be before you today for this confirmation hearing, a n d I will gladly a nsw er an y questions that you might have of m e . T h a n k you very m u c h . T h e C HA I R M A N . T h a n k you , Mr. Dollar . Ms. S e i d m a n has been n omi nat ed to be the Director of the Office of Thrift Supervision an d w e would be pleased to have s om eo ne of her caliber in this very important position. T h e position nee ds to be filled, as Senator Sarbanes pointed out . W e have been urging the Administration to decide on a n omi nee . Ellen S e i d m a n has served as Special Assistant to the President for Economic Policy since 1993. Before that , she w or k ed at the F e d eral National Mortgage Association as a Senior Vice President for Regulation , Research ,and Economics . S he has also wor ked in the De p a r tm e n t of the Treasury as a Special Assistant to the U n d e r Secretary for Finance . Ms. Seidman earned an M B A from George W as h in g t on University , a law degree from G eorgetown University L a w Center, and her undergraduate degree f r o m Radcliffe College. I think w e are fortunate that the President has chosen such a n able person as yourself. Ms. Seidman . S W O R N TESTIMONY OF ELLEN SEIDMAN O F T H E DISTRICT O F C O L U M B I A ,T O B E T H E D I R E C T O R O F T H E OFFICE O F THRIFT SUPERVISION Ms. S E I D M A N . T h a n k you very m u c h , Mr. C h a i r m a n . Mr. Cha irma n , Senator Sarbanes, a n d M e m b e r s of the C o m m i t tee , I a m honored to appear before you as President Clinton's n o m i n ee to head the Office of Thrift Supervision . I w a n t to thank you for h oldi ng this hearing. I also w a n t to th ank President Clinton a n d Secretary Rubin for their confidence in m e ; m y family - m y h u s b a n d , W al t Slocombe , and m y son , Will Slocombe — for all their support a n d patience; and Nic Retsinas , Jonathan Fiechter , and the staff at the Office of Thrift Supervision for their hard w o r k and go od spirits. A n d I w a n t to thank the Committee's Staff Director, H o w a r d Menell , for reminding m e of our years spent together at N e w Rochelle H ig h School . (Laughter .] M r . Ch a ir m an , the prospect of serving as the Director of O T S is h u m b l i n g a n d exciting. A s I spoke to m a n y Co mmi tte e M e m b e r s during m y courtesy calls, I w a s inevitably asked, "W h y do you w a n t this job ?” Quite simply, I think it is one of the best public service jobs in W ash in gto n today. Thes e are dy nam ic times in the financial services industry, a n d O T S a n d the institutions it regulates are playing a very important part in the industry's evolution. A s yo u know , the country's first Înternet “b a n k ” w a s a thrift, an d n e w companies are entering the 14 thrift industry, even as consolidation continues to reduce the total n u m b e r of institutions w hich a r e supervised by the O T S . A t the s a m e time ,thrifts continue their critical role as h o m e m ortgage lenders , with residential whole loans comprising over 50 percent of the industry's assets, and traditional h o m e lenders leading the in dustry in profitability. These have been good years for the thrift industry, but OTS's pri m a r y responsibility m u s t always be to m a k e certain the industry continues to be safe an d sound , no matter w h a t the economic condi tions . Depositors and taxpayers are counting on O T S to understand w h a t the risks are , to establish sound a n d sensible rules, an d to m a k e certain those rules are followed . In contrast to thrift regula tion of the 1980's, O T S has the statutory and regulatory tools, the resources,a n d the public a nd political support to accomplish this mission . M y responsibility, if confirmed , will be to support and e n hance w h a t h a s been accomplished, both leading and backing the agency's staff as they take sometimes difficult actions. T h e O T S m u s t also encourage the institutions it supervises to me et their responsibilities to m a k e certain that financial services are available on a fair and equitable basis in all communities the institutions serve. This is not only good for consumers a nd c o m m u nities, it is go od for business .I f communities have access to capital and are part of the financial mai ns tre am , economic development follows, as do jobs a nd profits for the businesses whi ch serve those communities. T h e challenges for the industry , and thus for O T S , are m a n y , but w h a t m a k e s th e prospect of leading the agency exciting is that e a c h challenge brings opportunities. Homogenization of different types of financial services a n d consolidation in the financial services i nd u s try can bring increased access to capital an d the advantages of greater scale, particularly in development a n d d ep lo ym en t of n e w products and the best n e w technology. Bu t these trends challenge m a n a g e m e n t and morale . T h e y challenge institutions to continue to effectively serve their customers an d their communities , a nd they challenge regulators to fully understand a n d effectively supervise a broader array of risks an d of activities. Technology, too, is the source of opportunities a nd challenges . Technology not only provides better tools for understanding t h e business b u t also the ability to serve c usto mers in n e w w a y s a n d m o r e efficiently. B u t technology's challenges are legion: preparing for the year 2000; protecting t h e security a n d privacy o f institu tions' systems a n d customers' accounts ; understanding the tools so that m a n a g e m e n t a n d regulators c an use t h e m rather than being trapped in a world of black boxes ; an d , finally, m a k i n g the benefits of technology available to all. Th at m e a n s being careful that credit scoring tools, which can clearly enhance productivity, a r e used to free u p underwriters t o analyze applications that don't fit the scoring systems precisely, rather than to restrict access to credit. A n d it m e a n s enhancing, not restricting, access to A T M ' s and electronic banking as those technologies b e co m e m o r e a nd m or e prevalent. Finally, there is the challenge of the ch ang in g legal structure. O n e cannot be nominated to b e the Director of O T S without being aw are that people have been talking about abolishing the O T S vi r a W e 16 Senator R E E D . T h a n k you , Mr. Dollar . Ms. S e i d m a n , you mention i n your statement that it w a s a thrift institution that w a s the first Internet bank . W i t h all these technological changes , I w on d e r if you might c o m m e n t on the role, going forward , of the C o m m u n i t y Reinvestment Act i n a very m u c h c h a n g e d circumstance ? Ms. S EI DM AN . T h a n k you, Senator. That's actually a n extraordi narily difficult question that w e allh a v e to w o r k o n very carefully, an d one that O T S has started to fully consider . T h e question of h o w the C o m m u n i t y Reinvestment Act applies to entities that don't exist in place, but only exist in cyberspace ,is one that w a s not thought of in 1 9 7 8 w h e n the Act w a s first passed . I fully believe those institutions hav e a full C R A obligation.T h e challenge to O T S an d the other financial services regulators is to figure out with those institutions the very best w a y tom a k e certain that they me et their obligation to their c o m m u n i t y , even if that c o m m u n i t y is a nationwide c o m m u n i t y. Senator R E E D .T h a n k you . I h a v e just one final point. Y ou r nomination has b e e n greeted with enthusiasm in m a n y quarters, particularly by Nic Retsinas, w h o would like to get back to the Federal Housing Administration . M s . SE ID MA N . I'm very ha p p y , if confirmed , to be able to free Nic u p . It's been an amaz ing service he's put in over the course of this last year . Senator R E E D . T h a n k you very m u c h . T h a n k you , Mr. Chairman . T h e C H A I R M A N . T h a n k you . Senator Faircloth . OPENING C O M M E N T S OF SENATOR L AU C H FAIRCLOTH Senator F A I R C L O T H .T h a n k you , Mr. Ch a i rm a n . Ms. S e i d m a n and Mr. Dollar , thank you both for being here. Ms. Se id m an , did you write a m e m o for the President regarding the meeting he held with a n u m b e r of bankers in M a y 1996 ? Ms. S EI D MA N . Yes , I did , sir. Senator FAIRCLOTH . While you w er e at the Wh ite H o us e , did you ever see this m a n y bankers gathered before the M a y meeting ? Ms. SE I DM AN . Senator , I w a s not at the M a y meeting , so I didn't see t h e m gathered then . Senator FAIRCLOTH .Y o u didn't go to the meeting ? Ms. SEIDMAN . N o , I didn't. Senator FAIRCLOTH . W h y not? Ms. S EI DM AN . I wasn't invited. Senator FAIRCLOTH . W h y not? Ms. SEIDMAN . I think itw a s above m y pa y grade. Senator FAIRCLOTH . Y o u r w h a t ? Ms. SE IDM AN . I w a s a staff person w h o w a s wo r ki n g for the N a tional Economic Council in connection with that briefing. I wrote m y briefing m e m o , an d h a d nothing m o r e to do with the event. Senator F A I R C L O T H . W h o selected the bankers w h o were to be there? Ms. SEI DMA N . I have no idea w h o selected t h e m . T h e Office of Public Liaison handled the entire matter . Senator FAIRCLOTH . In the m e m o you wrote, you said, w e d o have concerns about the specifics of Leach's reform proposal, whi ch 17 w ou l d greatly increase the Federal Reserve's role in financial serv ices policymaking at the expense of the Administration , generally , a n d the O C C , in particular. I f I wo u ld read the m e m o directly, there seems to have been an effort by the Administration to block financial services legislation, a n d to reserve those decisions for the O C C . T h e Administration a p parently w a n t e d to capitalize on that by raising m o n e y from the banking industry . W h a t do yo u have to say to that analysis ? Ms. S EIDM AN . Senator, it w a s t h e Administration's policy then , a n d it is the Administration's policy n o w , that financial services r e form is something that ought t o be done , a nd it ought to be done legislatively. W e h a d s o m e serious concerns with Senator Leach's proposal then , a nd w e have s o m e serious concerns with the propos als that are currently pending before the H o u s e . Nevertheless, w e firmly believe that financial services m o d e r n i zation is an appropriate subject for legislation,a n d that it is i m p o r tant that Congress have the opportunity to fully consider the m a n y ramifications of the whole financial services evolution , rather than just leaving it to mainly the marketplace , but also the regulators. Senator FAI RCLOTH . Well , your m e m o s ee me d tos a y that the r e form proposal w ould greatly increase the Federal Reserve's role in financial servicespolicy at the expense of the O C C . Ms. S E I D M A N . Senator, yes , that is, in fact, the position that w e took with respect to Senator FAIRCLOTH . “W e ,” being w h o ? Ms. SE IDMA N . T h e Administration — with respect to Mr. Leach's legislation. Th is isn't a n issue of whether Congress should have the r e s p o n sibility for m a k i n g the rules. In m a n y respects, it w a s a question of exactly whi ch regulatory body would have w hich particular kinds of responsibility . Senator FAIRCLOTH . All right. W h a t are your views on preserving the Savings & L o a n Charter ? M s . S E I D MA N . I firmly believe that it is important to maintain i n stitutions wh o se primary focus continues to be h o m e lending. Senator FAIRCLOTH . Ms. S e i d m a n , m y question w a s , do you think w e should preserve the Savings & L o a n Charter ? Ms. S E ID M A N . I believe w e c a n preserve the focus of the Charter in a n u m b e r of w a y s . I think the legislative debate that we're h a v ing, that is ongoing, will be a debate about whether it is only p o s sible to preserve that focus in a separate charter, or whether itc a n be preserved in a broader charter. Senator FAIRCLOTH .Y o u lost m e . Ye s or n o , I c a n understand. D o y ou believe w e should preserve the Savings & Lo an Charter ? M s . S EI D M AN . Senator,I believe w e should preserve the functions that are served by that Charter. Senator FAIRCLOTH . Bu t put its o m e w h e r e else ? Ms. S E ID M A N . W h e t h e r that Charter itself needs to be preserved is something that I think will be a continuing subject of debate in this Congress. Senator FAIRCLOTH . It is going to be a subject of debate in C o n gress, a n d you think there should be s o m e regulation, but yo u don't 18 think w e should preserve the Savings & L o a n Charter ; is that w h a t you're saying ? Ms. SE I DM AN . That's not w h a t I said . A s you know , the A d m i n i s tration sent two proposals to Congress, one w h i c h would have fully preserved the Savings & Lo a n Charter, a nd another which wou ld have m a d e available Senator FAIRCLOTH . W h i c h one did you support ? Ms. SEIDMAN . Senator , I supported both proposals. Senator FAIRCLOTH . Ms. Seid man , a real concern of m i n e is that a n u m b e r of companies are putting in applications t o charter s a v ings and loans, such as insurance c om pa ni e s. W h a t procedures do you plan to put in place at the O T S t o ensure that n e w savings a n d lo an charters are operated in a safe an d s o u n d m a n n e r , a nd that w e don't have a repeat of the savings an d loan crisis ? Ms. SE I D MA N . Senator , as I said in m y statement , I believe that at this point, O T S has m u c h better tools, regulatory authority, an d resources than the savings regulators ever h a d during the 1980's. T h e processes that are currently in place in order to determine whether n e w charters will be granted are processes that look care fully into the m a n a g e m e n t a nd capitalization a n d prospective b u s i nesses of a n e w S & L . W h e n I reach O T S , if confirmed , I will obviously be working very hard to m a k e certain that those procedures do continue to enable us to have a safe a nd sound industry, no matter w h o o w n s the indi vidual institutions. Senator FAIRCLOTH . That's all, Mr. C ha ir ma n . T h e C H A I R M A N . T h a n k you , Senator . Senator Kerry Senator K E R R Y. I don't h a v e any questions at this time . T h e C H A I R M A N . Mr. Dollar, I w ou ld like to c o m m e n d you on your very incisive a nsw er to Senator Reed's question about the case pending before the S u p r e m e Court concerning the scope of credit union m emb er shi p . I think you have given a firsthand illustration as to h o w a nd w h y you have h a d this m o v e m e n t from a very na rrow interpretation . That m o v e m e n t has helped the system as opposed to being an e x pansive intrusion . Indeed , at s o m e point, there m a y be a need to further clarify the scope of the mission of credit unions. B u t I certainly think that under certain circumstances, itis important to maintain the viabil ity of the institution, as it fulfills its mission . I favor the c om pe ti tive nature that has taken place . Y o u have given a n excellent response to the critics. I w a n t to t h an k both of the nominees . W e certainly look forward to m o v i n g the process in a very expeditious m a n n e r . Ms. SE ID M AN . T h a n k y o u ,Senator. Mr. D O L L A R . T h a n k you , Senator. T h e C H A I R M A N . I would like to call our second panel. W e will hear from E d w a r d Gramlich a n d Roger Ferguson , both of w h o m have been nominated to be M e m b e r s of the Board of G o v ernors of the Federal Reserve System . Mr. Gramlich is currently t h e D e a n of the School of Public Policy at the University of Michigan . H e has h a d a distinguished career, both in academia an d in G o v e r n m e n t, having been both a Professor 19 a n d C h a i r m a n of the Economics D ep art me nt at th e University of Michigan , as well a s t h e Deputy Director a n d Acting Director of the Congressional Budget Office. Early in his career , Mr. Gramlich w o r k e d for the Federal Reserve Board in the Research Division . M o r e recently, Mr. Gramlich w a s the C h a i r m a n of the Quadrennial Advisory Council on Social Security from 1994–1996 .Mr. Gramlich has received m a n y awards , an d has a very extensive list of publica tions to his credit. H e is a graduate of Williams College ,a n d r e ceived his Ph.D. from Yale University. Rog er Ferguson is currently a Partner an d Director of Research a nd Information Systems at M c K i n s e y & C o m p a n y . H e has also h a d a n impressive career as a securities a nd banking attorney in private practice a nd as a consultant to banks a nd financial institu tions. Mr. Ferguson has received both a law degree and a Ph.D. in Economics from Ha rv ar d University. H e h a s studied m a c r o e c o nomics , m o n e y and banking, international trade and development, and industrial organization . O n behalf of the C om mi tt ee, I a m pleased to welc ome you both , an d your families and friends w h o a re with us today. A t this point, before I turn to Mr. Gramlich , I'm going to ask you both to stand for the oath . [Witnesses sworn , en b anc.) T h e C H A IR M A N . D o you agree to appear and testify before any duly constituted C o mm i t te e of the Senate ? Mr. GR A ML I CH . I do . Mr. F E R G U S O N . I do . T h e CH AI R MA N . T h a n k you . Senator Kerry . O P E N I N G S T A T E M E N T O F S E N A T O R J O H N F. K E R R Y Senator K E R R Y . Mr. C h a i r m a n , thank you very m u c h . I w a n te d to say a few words about Roger Ferguson . Unfortunately , I can't stay for the hearing itself. Y o u have cited mo st of his accomplish m e nt s in your o w n introduction . I won't repeat all of t h e m , except to say that they are an extraordinary testimony to the background an d preparation that h e brings to this job . I believe that w e are very lucky to have s om eb od y of that quality coming out of a c o m p a n y with as strong a reputation as M c K i n s e y & C o m p a n y , with the b ac kg ro un d that he has as a securities lawyer , prepared to a s s u m e this responsibility. I wou ld also point out to the Co mmi ttee that he w a s b o r n here in Washington , and comes from a middle -income family. His father w a s a G S - 10 Federal employee a n d his mother a public school teacher. Together, they have raised an individual w h o , during the 1960's here , s a w the early days of the civil rights m o v e m e n t a nd s o m e of the disturbances in the city and took his o w n inspiration f r o m A n d r e w B r i m m e r , another Harvard -trained economist ,w h o is the first African -American to serve on the Federal Reserve Board . I think he's following in great footsteps an d will himself be able to serve as a terrific role m o d e l an d example to other yo u ng people and to their aspirations. I think it's wonderful to have h i m n o m i nated by the President,a n d look forward to his service. T h e C H A I R M A N . T h a n k you , Senator . Mr. Gramlich . 20 S W O R N T E S T I M O N Y O F E D W A R D M. G R A M L I C H O F VIRGINIA ,T O B E A M E M B E R O F T H E BOARD OF GOVERNORS OF THE FEDERAL RESERVE SYSTEM Mr. GRAM LICH . T h a n k you , Mr. C h ai r m an . Mr. C h a i r m a n and M e m b e r s of the Co mm itt ee , it is a pleasure to appear before you today as President Clinton's n o m i n e e to be a M e m b e r of the Board of Governors of the Federal Reserve S ys te m . If the Co mmi tte e an d the rest of the Senate approve m y n o m i n a tion , Ilook forward to serving in this im p or ta nt position.I promise to w o r k with the other M e m b e r s of the B oa r d , with Dr. Ferguson , a n d with the Com mit tee, to carry out the objectives that Congress has established for the Federal Reserve ,both for overall mo ne tar y policy and to assure the safety a n d soundness of our Nation's b a n k and p a y m e n t system . ing I h a v e in m y statement, M r . C ha ir ma n , a short biographical sketch which you have already s u m m a r i z e d ,so I will just ask that you insert that into the record , a nd let m e proceed an d talk about the Federal Reserve . T h e overall objectives which are faced by the Federal Reserve, listed in the Federal Reserve Act , are "m a x i m u m e m p l o y me n t, sta ble prices, a n d moderate long-term interest rates .” I would like to discuss each . In the long run , the most fundamental of these three objectives is stable prices. In the short run , there are m a n y factors, oil price shocks , exchange rate m o v e m e n t s , and so forth , that can influence price m o v e m e n t. B ut , in the long run , I believe, along with mo st other economists , that the fundamental responsibility for control ling a nation's inflation rate rests with its central b a n k policies. Since nominal interest rates equal real interest rates plus the rate of inflation , controlling inflation also controls n o m i n a l interest rates . Real interest rates c a n then be controlled by fiscal policy. M o d e r n day macroeconomic thinking suggests that w h e n economies are open to international trade a n d capital flows, monet ary policy becomes the k e y policy to stabilize e m p l o y m e n t, an d fiscal policy determines the overall saving rates a n d real interest rates . If the Federal Reserve is adequately guarding stabilization n ee d s , w hi ch I hope it will be w h e n I a m there , if I a m privileged to go there, fiscal policy is free to keep national saving rates high a n d real in terest rates low . This wo uld be m y idea of a desirable monetary / fiscal policy m i x . Finally, th e objective of “m a x i m u m e m p l o y m e n t ” brings u p the famou s tradeoff between inflation an d u n e m p l o y m e n t.A l o n g with most other economists, I believe that ultimately there is n o t m u c h of a tradeoff. S o m e u n e m p l o y m e n t rates are so low that, if contin ued , they will lead to steadily accelerating price increases. In the economic literature, the lowest sustainable rate of u n e m p l o y m e n t has c o m e to be called N A I R U , the N o n -Accelerating Inflation Rate of U n e m p l o y m e n t. I a m often asked whether I believe in N A I R U , but I think that this simple question glosses over a key policy issue, for it turns out to be rather difficult to me a s ur e and identify N A I R U . W h e n I first c a m e out of graduate school , the target u n e m p l o y m e n t rate w a s said to be about 4 percent . Later on , as inflation dramatically i n creased , the standard estimate shifted to about 6 percent. N o w , the 21 e c o n o m y has been operating for a whi le in the r a n g e of 5 percent u n e m p l o y m e n t, w i t h as y e t few signs of incipient inflation. Given all this uncertainty, one can believe in a loose sense in t he exist ence of N A I R U , b ut still find it hard to say h o w one w ould vote on mo ne ta ry policy in particular circumstances. I wou ld put myself in that category. H e n c e ,I would be an advocate of promoting m a x i m u m e m p l o y m e n t within t he Fed's long -term responsibility to control inflation. These conditions w o u l d guarantee a healthy e c o n o m y, a reasonable growth in the living standards over time , an d a realistic chance for workers at all income levels an d ethnic backgrounds to prosper. T h a n k y ou very m u c h , Mr. Cha irma n . I wou ld like to submit the rest of m y statement for the record , an d would be h a p p y to answ er a n y questions you might have . T h e C H A I R M A N . T h a n k you very m u c h , Mr. Gramlich . Mr. Ferguson . S W O R N T E S T I M O N Y O F R O G E R W. F E R G U S O N , JR . O F M A S S A C H U S E T T S ,T O B E A M E M B E R O F T H E B O AR D OF GOVERNORS OF THE FEDERAL RESERVE SYSTEM Mr. F E R G U S O N . T h a n k you , C h a i r m a n D 'A mat o . C h a i r m a n D 'A m a t o, M e m b e r s of the Committee , I a m pleased to appear before y o u today as President Clinton's nomi nee to serve on the B oa r d of Governors of the Federal Reserve Sy ste m , along with Professor Gramlich . Let m e also thank Senator Kerry for that kind introduction a nd statement about m y background. I a m mindful that the decisions of the Federal Reserve influence the economic well -being of all Americans through their impact on output growth , job creation, inflation, interest rates, an d the value of the dollar. T h e F e d also has important supervisory a n d r eg u latory responsibilities for the safety a n d soundness of the banking system , for the integrity of the pay me nts m e c h a n i s m , a nd for t he enforcement of the fair lending a n d other c onsu mer laws, including the C o m m u n i t y Rein vestme nt Act. If I a m confirmed , I pledge to w o r k with other M e m b e r s of the Board to craft a mone tary policy geared toward stable prices,m a x i m u m e m p l o y m e n t, and moderate long-term interest rates, the goals established i n the Federal Reserve A c t , a n d to faithfully execute the regulatory enforcement a n d oversight responsibilities entrusted by Congress to the Federal Reserve Board . A s did Dr. Gramlich , I have other statements here dealing with m y background. I will pa ss over those, as you an d Senator K e r r y have already given m e a background introduction . Let m e turn n o w to s o m e of the issues confronting the Federal Reserve. Price stability, I believe, should be a central goal of m o n e t a r y policy. There are m a n y reasons for according high priority to this objective . Inflation undermines social equity an d h a r m o n y in our diverse Nation . A s interest rates rise to compensate for inflation, m a n y families will find it increasingly difficult to qualify for a n d service loans for h o m e s an d cars. T h e wa ge s a n d salaries of s o m e workers d o not keep u p with inflation, a n d their standard of living falls. Inflation erodes the wealth of any small investors w h o s e a s sets are denominated in fixed dollar terms . In addition , with high 22 an d unstable inflation , managerial efforts often emphasize , and c o r porate profits derive from , taking advantage of rapid increases in the general level of prices rather than from producing a n d selling the products that consumers need .J o b creation eventually slows as businesses focus m o r e on financial rather than productive aspects of their operations . M a n y factors affect the behavior of prices in the short run , b u t in the long run , inflation on a sustained basis cannot occur unless mo netary policy a ccommo dates it. T h e Federal Reserve controls the Nation's m o n e y supply , and thus the F O M C effectively determines the level of inflation over the longer run . T h e Fed's responsibility is to be ever vigilant for early signs of inflation , and to choose poli cies that are designed to maintain a noninflationary environment that allows sustainable g row th and job creation . T h e effect of Federal Reserve policies on the e c o n o m y occurs with a very substantial lag. Therefore, I agree with the Fed's historic a p proach of reducing m onetary stimulus before the emergence of obvi ous and strong inflationary pressure . T h e second objective of the Federal Reserve is to keep the ec o n o m y growing as close as possible to its m a x i m u m potential output. T h e Federal Reserve is to seek the lowest rate of u n e m p l o y m e n t that can be achieved without risking the acceleration of inflation. M y goal, as a Governor of the Federal Reserve Board , would be to create an environment conducive to achieving a n d sustaining this low level of u n e m p l o y m e n t.T h e r e are m a n y reasons to avoid u n e m plo ymen t. Just as with inflation , u n e m p l o y m e n t has real h u m a n a nd economic costs. T h e toll of high u n e m p l o y m e n t, like that of a regressive tax , falls mo st heavily on groups in the w o r k force that are the least able to bear the burden .Additionally, full e m p l o y m e n t gives m o r e of our citizenry an opportunity to gain useful skills a n d work -related disciplines. In the short run, the Federal Reserve frequently faces a tradeoff between the goals o f low inflation and hi gh e m p l o y m e n t , but ulti mately price stability underpins sustainable output growth a n d job creation . If I a m confirmed, I will join the Federal Reserve at a time w h e n the macroeconomic fundamentals are exceptionally sound. A s s o m e others in this r o o m have noted , underlying inflation is the lowest it has been in m o r e than 30 years ,a n d the u n e m p l o y m e n t rate h a s declined to u nd e r 5 percent ,also the lowest in a generation . S i m i larly, growth in the output of goods an d services over the past year has been approximately 3.5 percent. M a n y economists are search ing for an explanation for this splendid performance. Unfortunately, e v e n in today's strong e c o n o m y, there are still segments of society in which jobs are not plentiful, and income d i s tribution remains skewed . T h e role of the Federal Reserve Governor n o w , as always, is to monitor every available economic indicator to m a k e ne ede d policy readjustments. This is a role that requires p rag ma tis m a nd b a l ance, not adherence to an imm uta ble set of preconceived notions. W it h current uncertainties, Federal Reserve Governors should be open to the possibility that underlying dynamics of the e c o no m y might be changing, but they should seek evidence for such develop me nt s and not act on the presumption of change. 23 I n addition, the Federal Reserve is an active supervisor a nd r e g ulator of b a n k holding companies a nd State m e m b e r banks. In this, the Federal Reserve, in cooperation with other agencies, is r e s p o n sible to preserve the safety a nd soundness of the entire banking system for the benefit of society. W e are living in an era of consoli dation in the banking industry, the gradual blurring of distinctions b e tw e e n ba nks a nd other financial institutions , an d the ongoing globalization of the financial sector. T h e role of the Federal Reserve G overnor with respect to banking supervision is to execute prudent j u dg me nt s to impose regulations on banks that ensure the safety a n d soundness of the banking system , that mirror the operation of a well -functioning m ar k et , that allow a reasonable pace of financial modernization , a n d that assure a full range of financial services for our citizens, our communities, and our businesses . T h e basic fr am e w o r k for banking regulation is set by Congress . I will note that I have other pages here which I wou ld like to hav e placed into the record . In conclusion , I wo uld like to thank you , Senator D 'A mat o , a nd the Co mm it te e for considering m y nomination . I would be pleased to respond to any questions you m a y have . T h e C H A I R M A N . T h a n k you very m u c h , Mr. Ferguson . Senator Faircloth . Senator FAIRCLOTH . T h a n k you , Mr. C h a i r m a n . I have a couple of very brief questions. M r . Ferguson, you attended P e m b r o k e College? Mr . F E R G U S O N . Yes , in Ca mb ri dg e. Senator FAIRCLOTH . In C am br id ge. O K . There w a s one in No rth Carolina, a nd I couldn't figure out h o w you m a d e that j u m p for w a r d from P e m b r o k e . Mr. F E R G U S O N . Unfortunately, not the one in North Carolina . Senator FAIRCLOTH . O K . I have a couple of questions. Ar e you in agreement with the constraints that C h a i r m a n G r e e n span has held on interest rates — his agreement to let t h e m rise if it's necessary to contain inflation ? D o you hold the s a m e views on restraining inflation that the Federal Reserve has followed in the last 3 or 4 years ? Mr. F E R G U S O N . I think the ans wer to that question is that I cer tainly believe that price stability is the primary goal. Senator FAIRCLOTH . That w h a t is? Mr. F E R G U S O N . Price stability is the primary goal that the F e d eral Reserve should be following; it is written into the law . I think if w e look at the response a nd the nature of the e c o n o m y today, it is clear that the Federal Reserve, along with Congress, has m a d e s o m e very wise decisions that have gotten us into the p o sition w he re w e have w h a t n o w appears to be very solid growth , relatively low u n e m p l o y m e n t, an d n o immediate signs of incipient inflation . I believe the Federal Reserve is certainly to be c o m m e n d e d for w h a t it has done thus far. Obviously, I w a s not in the r o o m at each F O M C meeting, so I can't c o m m e n t exactly on h o w I wo uld have voted in the past, but I woul d say the record indicates that wise decisions have been m a d e . 24 Senator FAIRCLOTH . W h a t is your visceral reaction to the q u e s tion : If w e h a d to m a k e a choice between inflation, mo ne tar y infla tion , or an increase in u n e m p l o y m e n t, whic h w a y wou ld y o u m o v e ? Mr. F E R G U S O N . As I h a v e said here, I believe, in the long run , those two things w o r k together, which is to say that I believe that price stability creates t h e underpinnings that allow the e co n o my to achieve sustainable growth . Se nat or FAIRCLOTH . In a w or d , yes or no , which w ou ld be your visceral reaction? Mr. F E R G U S O N . In honesty , Senator , I can't give you a w o r d , yes or no , on that, an d I understand w h y you're asking the question. I believe there are m a n y , m a n y factors that w ou ld have to go into the decision . W e have to be mindful that w e are trying to pu sh for m a x i m u m e m p l o y m e n t, consistent with price stability. Senator FAIRCLOTH . T h a n k you . Mr. Gramlich , I ask you the s a m e question . Mr. G R A M L I C H . Unfortunately, S enator Senator FAIRCLOTH . I just w a n t your visceral reaction, which is the m o s t Mr. G R A M L I C H . Unfortunately , I'm going to give the very s a m e answer . I think w e both believe Senator FAIRCLOTH . T h a n k you so m u c h . [Laughter.] I h a v e already heard it. So w e don't get an answ er to that. Mr. G RA M LI C H . Let m e try to add one m o r e sentence to that , if Imay . W e b ot h believe that, in the long r u n , if w e have stable prices, then those bec ome the a t m o s p h e r e for m a x i m i z i n g e mp l o y m e n t. I think we're both saying that stable prices would b e , in our view , the primary goal of central ba nk policy. T h e C H A I R M A N . Senator Re e d . Senator R E E D . T h a n k you , Mr. Ch a i rm a n . I w a n t to also tha nk the nominees . I have h a d the chance to me et with them , a n d they are both extraordinarily gifted a nd accomplished individuals, a n d fully prepared to deal with all the aspects of the responsibilities of the Federal Reserve. W h a t I think is particularly interesting and c o m m e n d a b l e is that their individual expertise mirrors the t w o major functions of the Board , macroeconomic policy - and Professor Gramlich is one of the r en ow ne d experts in A merica — and the regulation of the financial services industry. Mr. Ferguson , at Mc K i ns e y & C o m p a n y, w a s a n A meri can leader in advising financial institutions. Both individ ually a nd collectively, I think these are very wise nominees . I don't really h av e an y questions, but w o u l d like to assert the statement I m a d e in our meetings ,a n d that is that I think it is incumbent that w e maintain a moderate to low interest rate policy. I do , in fact, think that is helping our economic recovery. I think it also is filling in the gaps for a very constrained fiscal policy as w e reduce spending here in Washington . I have another point which I h a v e tried to m a k e, a n d that is that our greatest success in terms of balancing the budget a n d having confidence in the Am er ic an e co n om y rests o n relatively low interest rates over the next several years. Without those interest rates , our 25 budget plans, I think , will be shredded , a nd w e will not only face a mo ne ta ry an d economic crisis, but a political crisis again . I don't k n o w if you would like to c o m m e n t on those thoughts, but essentially, I would like to reiterate t h e m with you today . N o c o m m e n t is necessary . Mr. G R A M L I C H . I don't m i n d c o mm e n t in g . I said in m y statement that the w a y economists think about interest rates is that there are t w o components, the real interest rate and the inflation premium . T h e inflation p r e m i u m comes just from controlling inflation, as w e have been talking about . That's certainly one important w a y to ke ep interest rates moderate . T h e other w a y is by responsible fiscal policy. Matters such as reducing budget deficits play an important role there. I think Congress a n d the central b an k have followed a policy that actually does try to k e e p interest rates moderate, a n d I would like to keep doing that . I think w e have things on the right track , a n d w e shouldn't change it. Mr. F E R G U S O N . Let m e c o m m e n t . I think there is also an i m p o r tant implication in your observation . It is true t hat we're certainly having good times . S o m e people ha ve called it a goo d -time-e co n o my. B u t w e have seen n e w s a s re cently as yesterday that indicates that this is not happening for all components , all parts of our Nation . W e still have w h a t for m e , p e r sonally, is an embarrassingly high poverty level in this country. I referred briefly to distribution of income . S o m e of these things the Federal Reserve just cannot do anything about directly. T h e y fall m u c h m o r e u nder the ambit of perhaps fiscal policy. H ow ev er , as Professor G r a m l i c h has pointed out, a nd I have stated as well, certainly maintaining price stability and creating as m a n y op por tu nities as w e possibly can for job growth a nd job creation isa n i m portant objective of the Federal Reserve. Senator R E E D . T h a n k yo u very m u c h , gentlemen . I thank you , Mr. C ha ir m an . T h e C H A I R M A N .T h a n k you , Senator. Dr. Ferguson , I don't w a n t to prolong this, but you spoke about the importance of maintaining a policy of price stability. I u n d e r stand that. Y o u have also emphasized the importance of job growth an d job creation . W h a t exactly d o you think the Fed's role is in that regard ? I a m concerned w h e n I hear about emphasizing the Fed's rolei n growth . Could you be m o r e specific ? Mr. F E R G U S O N . Let m e be quite clear. T h e C H A I R M A N . I wou ld like that. Mr. F E R G U S O N . I a m a firm believer, for sure , in price stability, as I have said . I strongly believe, as does Dr. Gramlich , that is the underpinning wh ich allows the e c o n o m y to maintain sustainable growth . T h e response that I gave to Senator Reed's question talked m o r e broadly about a variety of other issues that are of concern person ally, but not as a policy matter . A s w it h m a n y citizens, w e are concerned that w e maintain s u s tainable growth . I think the role that the Federal Reserve can play there is certainly primarily in maintaining price stability. 26 T h e C H A I R M A N . W e are not looking at s o m e k i n d of activist policy or philosophy that's going to c o m e from the Fe d because yo u m a y ha ve a concern for t h e unevenness of the economic expansion , a n d I understand that . Everyone should be concerned with that. Mr. F E R G U S O N . N o , Ia m not suggesting activist policy; w h a t I'm suggesting is that the role that the F ed c a n play is one of m a i n taining price stability. I think that is consistent wit h maintaining sustainable growth . T h e C H AI R M AN . O K . I w a n t to than k the nominees . I believe the President has chosen two nominees w h o have extraordinary backgrounds, a nd have d e m onstrated a c o m m i t m e n t to helping this country. I hope that in their capacities as Governors of the Fed , they are successful in loaning their intellect an d their capabilities to this very important position . W e look forward to m o v i n g these nom inee s as quickly as possible to the floor for Senate confirmation . W e stand in recess . T h a n k you . Mr. G RA M L IC H . T h a n k you . Mr. F E R G U S O N . T h a n k you . [W h e r e u p o n , at 11 a.m., Tuesday , Sept ember 30 , 1997 , the h e a r ing w a s adjourned .) [Prepared statements, biographical sketches of the nominees , a n d response to written questions follow :) 27 PREPA RED STATEMENT OF SENATOR TH AD C O C H R A N ON THE NOMINATION OF DENNIS DOLLAR TO BE A MEMBER OF THE NATIONAL CREDIT UNION ADMINISTRATION BOARD Mr. Chairman , I am pleased to have the opportunity to speak in support of the confirmation of Dennis Dollar to the Board ofthe National Credit Union Adminis tration.Dennis is a longtime friend and a fellow Mississippian. Dennis has had a diverse career as a realtor,educator, Member ofthe Mississippi House of Representatives, and as President of the Gulfport V A Federal Credit Union.He would bring a great deal of knowledge and experience to the Board from these varied positions. In addition to his work , Dennis has found the time to participate in numerous other professional, civic, and charitable organizations, holding leadership roles in most of them . His long and distinguishedhistory of community involvement has earned him greatrespect and appreciation in Mississippi. I believe that Dennis' character, combined with his excellent understanding of credit unionissues and his broad range of experience,would make him an excellent addition to the N C U A Board . Mr. Chairman and Members of the Committee, I urge you to support Mr. Dollar's nomination. P R E P A R E D S TA T EM E NT OF S EN AT OR DANIEL PATRICK M O Y N I H A N ON THE NOMINATION OF LAURA S. UNGER TO BE A COMMISSIONER OF THE SECURITIES AND EXCHANGE COMMISSION It is m y pleasure today to support Laura S. Unger for confirmation to the position of Commissioner of the Securities and Exchange Commission (SEC ). Ms. Unger was born in New York City. After graduation from the University of Californiaat Berkeley in 1983, she returned to the city to attend New York Law School. It was during law school that Ms. Unger began her work with SEC matters.As a summer associate and law clerk at Moskowitz Altman & Frankel, she assisted in preparing documents and filings for private placements,initial public offerings, ex change listings, and annual and quarterly reports filed with the Commission. Ms. Unger went towork for theS E C asa staff attorney and moved to Washington in 1989. In thisposition she worked o n investigations and cases involving insider trading, financialfraud,and other violations of Federal securities laws. Ms. Unger's most recent experience working for Senator D'Amato, first as a SEC Congressional Fellow and then as Counsel, has added very valuable experience to Ms. Unger's repertoire and knowledge of the workings of the SEC . Ms. Unger currently serves as Securities Counsel to the Senate Banking Commit tee. She has gained a solid understanding of securities issues and helped craft a number of bills that have become law,including the National Securities Market I m provements Act of 1996, the Securities Litigation Reform Act of 1995,and the Small Business Loan Securitization and Secondary Market Enhancement Act of 1994. I thank the President for bringing Ms. Unger's name forward and I urge my col leagues to approve her nomination. ON THE NOMINATION OF PAUL R. CAREY TO BE A COMMISSIONER OF THE SECURITIES AND EXCHANGE COMMISSION Paul R. Carey is a young man of great intelligence and unwavering sound judg ment. M y enthusiasm for him is shared by many of my colleagues who have had occasionto work with him in his capacity as Special Assistant to the President for Legislative Affairs. The son of Ne w York's legendary Governor, Hugh L. Carey, Paul has lived most of his life in New York. Born in Brooklyn and raised in Albany, he received his Bachelor's degree in Economics from Colgate University. His professional career began with securities work for Donaldson, Lufkin & Jenrette in Manhattan and then with First Albany Corporation in Albany, New York. Paul Carey has an extraordinary knowledge of Government and how it works and how it is supposed to work. He has served as an Advisor to the President on bank ing and financialmatters, devoting a considerable portion of his time to matters di rectly related to the Securities and Exchange Commission. W e have a rare opportunity tobring a n individual of highintellect and flawless integrity to a position of critical importance. I commend the President for bringing his name forward and I urge the Committee to support his nomination. 28 P R E P A R E D S T A T E M E N T O F L A U R A S. U N G E R COMMISSIONER -DESIGNATE , SECURITIES AND EXCHANGE COMMISSION SEPTEMBER 30, 1997 Chairman D'Amato, Senator Sarbanes, and Members of the Committee, as a member of the Committee staff,it is an especially great honor to appear before you today to testify in connection with m y nomination by the President to be Commis sioner ofthe Securities and ExchangeCommission. I am also pleased to share the table today with m y able colleague, Paul R. Carey, the President's choice for the other vacant Securities and Exchange Commissioner seat, a fellow New Yorker,and an individual with whom I have had the pleasure of working. If confirmed, I look forward to sharing a table at the Commission with Mr. Carey. A s the Chairman knows, I joined his staff as a Congressional Fellow from the SEC almost exactly 7 years ago. Over the last years, Iha ve had the pleasure and privilege to work closely with the Chairman and Committee Members on a variety of issues. It has never been dull. I have had the opportunity to work on a number of important pieces of legislation and have enjoyed every moment of my tenure on the Committee staff. Working for the Chairman and the Committee at this challenging time in our fi nancial history has afforded me the opportunity to help shape the securities laws and to participate in important policydecisions concerning the efficiency and fair ness ofthe capital markets and the protection of investors. Should the full Senate confirm m y nomination, I look forward to continuing my work in this area as a Se curities and Exchange Commissioner. The Commission's mission is to administer and enforce the securities laws to pro tect investors and to maintain fair, honest, and efficient markets. In order to fulfill this mission,the SEC must consider the delicate balance between theinvestors and the marketplace. Without investor confidence, the capital markets will not flourish. However, too much regulation will make the markets an unattractive source of fi nancing to companies.If confirmed, I will work to ensure that the Commission's pro grams strike theappropriate balance. I feel extraordinarily honored to have been the President's choice for a seat on the Commission. As the Commission heads toward the 21st century, it will face a myriad of challenges, including issues involvingmarket structure,technology, inter nationalization,continued growth in the mutual fund industry, as well as financial modernization.Ifconfirmed, I welcome the opportunity to work on these issues and tobe a Member ofthe Commission as it prepares forthe new millennium. When I left the Securities and Exchange Commission 7 years ago to come to C a p itol Hill to work for Senator D'Amato, I promised I would return to the Commission . As hard as it will be to leave the Committee, the Committee Members, and all of m y colleagues on the staff, should the Senate confirm m y nomination, it is with great enthusiasmand anticipation that I will return to the Commission to serve as a Commissioner. If confirmed, I look forward to continuing to work with this C o m mittee and staff in m y new capacity. Thank you,Mr. Chairman . I look forward to answering any questions. 29 S T A T E M E N T F O R C O M P L E T I O N B Y PRE SI DE NTI AL N O M I N E E S Name:_Unger Simone Laura (First) ( Other) Dateof Positiontowhich nominated: Commissioner, Securities& Exchange Comin'n. nomination:9/18/97 (Last) Dateofbirth: 08/01/61 (Day) ( Month) MartialStatus: married (Year Placeofbirth: New York, New York Fullname ofspouse: Peter Van Buren Unger Nameandages ofchildren: Simone Taylor 9 months Dates attended Institution Education: Degrees received Datesof degrees Fort Lee High School 9/75 - 6/78 Redwood High School 9/78 - 6/79 U.C. Berkeley 9/79 6/83 B.A. 6/83 New York Law School 9/84 6/87 J.D. 6/87 H.S. Diploma 6/79 Honorsandawards: Listbelowallscholarships,fellowships,honorarydegrees,militarymedals,honorarysociety memberships,andanyotherspecialrecognitionsforoutstandingserviceorachievement. U.C. Berkeley Honor Society New York Law School Journal of International & Comparative Law SEC Quality Increase Award (1988) SE Performance Award (1989) 1 49-692 98 -2 30 Memberships: Listbelowallmembershipsandofficesheldinprofessional,fraternal,business,scholarly. civic,charitableandotherorganizations. Officeheld (ifany) Organization Dates see attached Employmentrecord: Listbelowallpositionsheld sincecollege,includingthetitleordescriptionofjob,nameof employment,locationofwork,anddatesofinclusiveemployment. see attached 2 31 MembershipsandOffices Organization Officeheld(ifany) Dates JuniorLeagueofNew York none 1983-1989 New YorkLawSchoolStudent BarAssociation Secretary 1987-1989 1989-present JuniorLeagueofWashington ChristmasTeaCo-chair 1/96-12/96 SilentAuctionCo-chair CateringCo-chair SilentAuctionCo-chair CharitiesCo-chair 3/94-12/94 1/95-12/95 1/96-12/96 1/97-present, Women inHousingandFinance none 1992-present, AmericanBarAssociation BusinessLaw Section,Committee onFederalRegulationofSecurities none 1993-present, ABA SubcommitteeonCivilLitigation andSEC EnforcementMatters none 1994-present, ABA SubcommitteeonSEC Administration,BudgetandLegislation none 1994-present. The DecadeSociety Employment Record OfficeManager,Pogue-Simone,New York City,8/83-5/84 Legal Assistant,Pogue-Simone,New York City,5/84-1786 Law Clerk/Summer Associate,Moskowitz Altman & Frankel,New York City,2/86-5/87 StaffAttomey,SEC DivisionofEnforcement,New York City, 1/88-4/89 StaffAttorney,SEC Division ofEnforcement,Wash.,D.C.,4/89-10/90 SEC Congressional Fellow,Office ofSenator Alfonse M. D'Amato,Wash. ,D.C., 10/90-4/92 Counsel,Senate Committee on Banking,Housing & Urban Affairs,Wash.,D.C.,4/92-present 32 Government experience: Published Writings: Political Affiliations and activities: ListanyexperienceinordirectassociationwithFederal,State,orlocalgovernments,including anyadvisory,consultative,honoraryorotherparttimeserviceorpositions. see attached Listthe titles,publishersand datesofbooks,articles,reportsorotherpublished materials youhavewritten. not applicable Listmembershipsandofficesheldinandservicesrenderedtoallpoliticalpartiesorelection committeesduring thelast10years. none 3 34 Political Contributions: Qualifications: Futureemployment relationships: Itemizeallpoliticalcontributionsof$500ormoretoanyindividual,campaignorganization, politicalparty,politicalactioncommitteeorsimilarentityduring thelasteightyearsand identityspecific amounts,dates,andnamesofrecipients. none Statefullyyourqualificationstoserveinthepositiontowhichyouhavebeennamed. (attachsheet) see attached 1.Indicatewhetheryouwillseverallconnectionswithyourpresentemployer,business firm,associationororganizationifyouareconfirmedbytheSenate. yes see attached 2.Asfarascanbeforeseen,statewhetheryouhaveanyplansattercompletinggovernment servicetoresumeemployment,affiliationorpracticewithyourpreviousemployer,business firm,associationororganization. no 3.Hasanybodymadeyouacommitmenttoajobafteryouleavegovernment? no 4.Doyouexpecttoservethefulltermforwhichyouhavebeenappointed? yes 37 2. PotentialConflicts ofInterest Potential conflictsofinterest might involve the following entities: Dreyfus Worldwide Money Market Fund Fidelity Contra Fund Fidelity Puritan Fund FidelityNew Millenium Fund Fulbright& Jaworski MBNA America Riggs Bank Vanguard 500 Index Trust Fund' 1 AcquiredJuly1,1997(afterclose ofreportingperiodforForm278). 40 P R E P A R E D S T A T E M E N T O F P A U L R. C A R E Y COMMISSIONER -DESIGNATE, SECURITIES AND EXCHANGE COMMISSION SEPTEMBER 30, 1997 Thank you, Mr. Chairman, Senator Sarbanes, and Members of the Committee. I am grateful to the President for nominating me to the Securities and Exchange Commission. I am also honored to appear before you today and appreciatethe C o m mittee's scheduling ahearing in such an expedited fashion. I a m especially pleased to be embarking on this endeavor at the same time as Laura Unger. I have had the good fortuneto work with Laura on many issues.Ifconfirmed, I a m enthusiastic about the contribution we can both make tothis Commission by our ability to work together. Before his elevation to the Supreme Court by PresidentRoosevelt,William 0 . Douglas served as the third Chairman of the SE — from 1937 to 1939. He described the missionof the S E C in very simple but compelling words: “W e are theinvestor's advocate.” It remains true to this day, and I believe it has been particularly evident during the tenure of Chairman Arthur Levitt. I am proud to note that m y relation ship with the Chairman dates back tothe 1970's when our fathersserved together as Governor and Comptroller of New York State.If confirmed, I look forwardto ex tending into thisgenerationthe shared honor of public service of our two families by joining the S E C with Chairman Levitt. I believe the SEC , in recent years, has been a model for the relationship that should existbetween the regulators and the regulated. This relationshiprequires both a healthy tension and a level of cooperation on a variety of issues. W e have improved thew a y our markets function and preserved the United Statescapital markets' exemplary standing throughout the world. As a result, I believe fairness and transparency in our markets have been enhanced, to the enormous benefit of investors. Many of the challenges that lie ahead are inthe relationship between our markets and those of other nations. Ongoing efforts to arrive at international accounting standards as well as cooperationon enforcement matters shouldpermit us to accom modate thegrowth of across-the-border transactions without diminishing investor protection. The integrity of our markets and the confidence thathas produced is owed in large measure to the vigorous enforcement efforts of the SEC . Markets are dramatically affected by the rapid development oftechnology, which presents both opportunities and risks that must be carefully monitored. Investors will also benefit from the SEC's “plain English” effort to m a k e disclosure documents clearer and easier to understand, as well as the Investor Education and Assistance Program which gives investors a forum in which they can get objective information. It takes vigilance and judgment to encouragecapital formation and vigorously maintain investor protection. This will be my principal concern if Ia m confirmed by this Committee and the full Senate as a Securitiesand Exchange Commissioner. I hope that I can look forward to working with this Committee and its staff on the many issues we will face together. Thank you. 41 S T A T E M E N T F O R C O M P L E T I O N B Y P R ES I D E N T I A L N O M I N E E S Paul Carey an Ion Commissioner United States Positiontowhich, Dateof ' Securities and Exchange Commission nominated: nomination: 18 62 Date ofbirth: 10 Placeof birth: Brooklyn, NY DAN (MONTO (TULO Full name of spouse: Marital status: Single Name and ages of children: Robert onto Name: Education: Dates attended Institution Skidmore College 9/81-6/83 Colgate University 2/84-6 /86 September 16, 1997 Degrees received N/A B.A. Economics Datesof degrees N/A 1986 Honorsand awards: Listbelowallscholarships,fellowships,honorarydegrees,militarymedals,honorarysociety memberships,andanyotherspecialrecognitionsforoutstandingserviceorachievement 1 42 Memberships: List below allmemberships and officesheld inprofessional,fraternal,business,scholarly, civic,charitableandotherorganizations. Orice held (ifany) Organization Ostes Gardiners Bay Country Club 1986-1988 Mashomack Preserve university Club of Washington, DC 1989-1992 1993-Present The Flax Trust Eastern Professional Ski Instructors Association Board Member Instructor Disabled Program 1989-1991 Irelands Children Development 1985-1991 Children's Hospital-Albany Development 1988-1991 1986-1993 Employment record: Listbelowallpositions held sincecollege,includingthetitleordescriptionofjob,name of employment,location of work,and dates of inclusive employment. February 1993 to Present Special Assistant to the President. June 1992 to Feb 1993 Northeast Finance Director The Democratic National Committee Washington, DC Northeast Finance Director Clinton for President Committee Little Rock, Arkansas The White House, Washington, DC Sept 1991 to June 1992 June 1988 to Sept 1991 Associate First Albany Corporation Albany, New York July 1986 to May 1988 Associate Donaldson, Lufkin & Jenrette New York, New York 2 43 Government experience: List any experience in or direct associationwith Federal,State,or local governments,in. cludingany advisory,consultative,honoraryorotherpart-time serviceorpositions. Special Assistant to the President for Legislative Affairs, February 1993 to Present Published writings: Ust thetitles,publishersanddatesofbooks,articles,reportsorotherpublished materials youhavewritten. None Political affiliations andactivities: List all memberships and offices held in and services rendered toall political partiesor election committees duringthe last 10 years. Clinton For President Committee Northeast Finance Director September 1991 to June 1992 Democratic National Committee '. Northeast Finance Director June 1992 to February 1993 44 Political contributions: itemize all political contributions of$500or more toany individual,campaign organiza. tion,political party, political action committee or similar entity during the last eight years and identity the specific amounts,dates,and names of the recipients. Lynn Yeakel for Senate, June 30, 1992, $500 Cinton for President Committee ,May 21, 1992, $616 DemocraticNational Committee, January 29, 1993, $5,937 Qualifications: Statefullyyourqualificationstoserveinthepositiontowhichyou havebeennamed. (atuch sheet) Futureemployment relationships: 1. Indicate whether you will sever allconnections with your present employer,business firm,associationororganizationifyouareconfirmedbytheSenate. I am presently employed as Special Assistant to thePresident. I certify that immediately upon taking the oath of office as Commissioner, I WITT resign from thTS DOSition. 2. As faras can be foreseen,statewhetheryou have any plans aftercompletinggovern. ment service to resume employment,affiliationor practice with your previous em . ployer,businessfirm,associationororganization. No 3. Has anybodymadeyou acommitmenttoajobafteryouleavegovernment? No 4. Doyou expecttoservethefulltermforwhichyouhavebeenappointed? Yes 45 Qualifications During my tenure as Special Assistant to the President , I have been an adviser on banking and financial services policy and legislation and have focused a considerable portion of my time to Securities and Exchange Commission matters . Additionally , I worked in the securities industry for most of my career prior to joining the public sector . I believe the combination of these experiences will provide me with a unique insight in the issues facing the SEC . 46 Potentialconflicts of interest: 1. Describe any financial arrangements or deferred compensation agreements or other continuing dealings with business associates,clients or customers who will be af. lected by policies which you will influence in the position to which you have been nominated. None 2. Listany investments,obligations,liabilities,orother relationshipswhichmight involve potentialconflictsof interestwiththepositiontowhichyouhavebeennominated. Westmoreland Grantor Trust (beenficiary interest in family residence held in trust form ) See attached. 3. Describe any business relationship.dealing or financial transaction (other thantax. paying)which you have had during the last 10 years with the Federal Government. whether foryourself,on behalf of a client,or acting as an agent,that might in any way constituteorresultina possibleconflictofinterestwiththepositiontowhichyou havebeennominated. None s 47 Potential Conflicts of Interest No member of my immediate family is an officer or director of any securities firm , investment company , investment adviser , registered public utility holding company or any of its affiliates , or of any company that has public security holders . Two of my siblings , however , are employed by Goldman , Sachs & Co. , a regulated securities firm . My brother Donald Carey is a Vice-president in the Municipal Finance Division's headquarters office , and my sister Helen Carey is a Vice-president in the Municipal Sales Division's headquarters office . 48 4. List any lobbying activity during the past 10 years inwhich youhave engaged for the purpose of directly or indirectly influencing the passage,defeat or modification of anylegislationatthenationallevelof governmentoraffectingtheadministrationand executionofnationallaworpublicpolicy. Since February of 1993 I have been a Special Assistant to the President for Legislative Affairs. 5. Explain how you will resolve any potentialconflict of interest that may bedisclosed by yourresponsestotheaboveitems. See attached sheet Civil,criminaland investigatory actions: 1. Give the full dc:ailsof any civil or criminal proceeding in which you were a defendant or any inquiry orinvestigation bya Federal,State,or localagency inwhich you were thesubjectoftheinquiryorinvestigation. See attached sheet 2. Give the full details of any proceeding, inquiry or investigation by any professional association including any bar association inwhich you werethe subject of the pro ceeding.inquiryorinvestigation. None 6 49 Explain how you will resolve any potential conflict of interest that may be disclosed by your responses to the above items . I have been furnished with a copy of 18 U.S.C. 208, as amended by the Ethics Reform Act of 1989 , and the Canons of Ethics for Members of the Securities and Exchange Commission , 17 C.F.R. 200.50 et seq ., both of which I have read . I understand that , as required by 18 U.S.C. 208 , I must disqualify myself from any particular matter that , to my knowledge , would have a direct and predictable effect on my financial interests or a financial interest imputed to me, unless a written waiver of such disqualification is issued pursuant to 18 U.S.c. 208 (b). Accordingly , I intend to disqualify myself from participation in any particular matter involving specific parties that has a direct and predictable effect on my financial interests or a financial interest imputed to me . In addition , I intend to participate in matters of general applicability , such as general policy considerations , rulemaking proceedings or legislation , except that , as required by 18 U.S.C. 208 , I will not participate when such a matter would , to my knowledge have a direct and predictable effect on my financial interest , or financial interested imputed to me . As long as either of my siblings is employed by Goldman Sachs , I will disqualify myself from any particular matter involving specific parties in which either of their respective divisions is involved if the circumstances regarding my participation would cause a reasonable person with knowledge of the relevant facts to question my impartiality , unless I have received authorization to participate . 5 C.F.R. 2635.502 . Finally , I intend to disqualify myself on a case-by-case basis , with respect to any other matter where , in order to avoid the possible appearance of impropriety , it appears desirable to me to disqualify myself , despite the lack of any actual conflict of interest or any requirement to do so . I understand that the financial interests that would be imputed to me are those of a spouse , dependent child , general partner , or any organization which I am serving as officer , director , or trustee or any person with whom I am negotiating for employment. 50 Give the full details of any civil or criminal proceeding in which you were a defendant or any inquiry or investigation by a Federal, State , or local agency in which you were the subject of the inquiry or investigation . On August 15, 1995 , in the normal course of carrying out its supervisory responsibilities of the Clinton for President Committee , Inc. (1992 ), the Federal Election Commission found reason to believe I violated a provision of the Federal Election Campaign Act of 1991 as a result of the Committee's failure to reimburse me in a timely fashion for expenses i incurred . However , after considering the circumstances of the matter , the Commission by letter dated September 12, 1995 stated its determination to take no further action and closed its file as it pertains to me . A copy of the Commission's letter is attached . 51 FEDERAL ELECTION COMMISSION WASMINCIONO September 12, 1995 Paul Carey 100 Now Haaponice Avenue , N.W. Washington , D.C. 20037 RE : MUR 4172 Paul Carey Doar MC . Caroy : on August 15 , 1995 , the federal Election Condinsion found 5 6 4 0 to believe that you violated 2 U.S.C.$ 4410!21 (1)(a ), a provision of the rederal Election Campaign Act of 1971. 16 anended , by making an exCURRivo conceibuéion to the clinton foe Prosidont Committee ("the Committee ). However , after considering the circumstances of this macter , the Commission also determined to take no further action and closed its file de it pertains co you . The Pactual and Legal Analysil , which corned . barne for the Commission's finding . 18'attached for your information . Please be advised that your total amount of contributions violated the contribution limitation ac ? U.S.C. § 441alallilla . The Commission remindo you that "advances' for the costs incurred in providing goods or services to , or obtaining goods or services . that are used by or on behalf of , a candidate or a political Committee are considered contributions . See 11 C.fin . s 116.5 (b). You should take steps to ensure that you aoTde by the contribucion 11mitation and this regulation in the future . The file will be aide public within 30 days after this matter has been closed with respect to all other respondents . You are advised that the confidenciality provisions of ? U.S.C. § 4379 (a)(12 )(a ) still apply wiën'respect to all respondents stil ! involved in this matter . If you have any questions , please contact poto G. Blumberg or Andre Pineda , thi ittorneys assigned to this matter , at (2021 219-3690 or (800 ) 126-9530 . Sincerely , D e n 1. Donald Danny V. McDonald Chaicman Enclosure factual and Logal Analysis 52 FEDERAL ELECTION COMMISSION FACTUAL AND LEGAL ANALYSIS RESPONDENT : Paul Carey MUR : 4112 This matter was gonerated by information obtained by the Foderal Election Commission ("the Commission") in the normal course of carrying out its supervisory responsibilities purouane to tho Federal Election Campaign Act of 1971 , as aaondod l"the Act "). 2 U.S.C. § 437glal (2). The intormation is based on contribucions made to the clinton for President Comaittee , Inc. "the Committee "). The Ace scates that no person may make contributions to any candidate and his or her authorized political committees with respect to any election for federal ollico which , in the aggregate , excoed $1.000 . 2 U.S.C. § 441a(a)(1)(1 ). The payment by an individual from his or her personal funds for the costs incurred in providing goods or services to, or obeaining goods or services that are used by or on behalf of a political committee is a contribucion . 11 C.F.R. 116.516 ). However , two exemptions exist . First , an individual may spend an aggregate of $1,000 per election for personal transportation expenses on behalf of a candidate without such expenditures counted a contributions . 11 C.F.R. $S 100.716 )( ) and 116.510 ). second . advances of personal funds will not be considered couco abulions if they are for the individual's personal transportation expenses or for the usual and noraal subsistence expenses of the individual who is not a voluntees , where such 53 -2 expenses are incurred while the individual is traveling on behalf of a candidate or a policical committee of a political party . 11 c.8.n. s 116.516 ); see also explanation and Justification for 11 C.F.R. S 116.5 (b ), 55 red. Reg. 26382-83 (June 17, 1989 ). If the individual's transportation and subsistence expenses are paid by porsonal credit card , they must be relabursed within 60 days atter the closing date of the billing statement on which the charge liest appears , or if a personal credit card was not woed . Wii..... 30 days after the date on which the expensos veco incurced . id . when an individual incuro expenses for the subsistence of others , a contribution occurs at the time the financial obligacion is incurred , regardless of when the payment is due or when the individual pays tho debe . 11 C.P.A. § 116.5 . See also Explanation and Justification of 11 C.F.R. S 116.516 ), 55 pod. Reg. 26382 (June 27 , 1989 ). The Coani6sion inconded section 116.5 to provide a limited exception to the general rules governing contributions for an individual's personal transportation expenses , and for usual and normal subsistence expenses of an individual who is not a volunteer . 11 C.F.R. s 116.5 . 55 red . Rag . 26382-3 (June 27, 1989 ). The Commission also adopted section 116.5 out of concorn that during critical periods in a campaign when an authorized committee 10 experiencing financiad difficulties , individuals nay alteape to circumvent the contribution limitations by paying committee expensos and not expecting ceiabutseaent foc substancial periods of tine , Explanation and Justification for 11 C.BA , § 116.5 . 55 pod . Reg . 26382-3 (June 27 , 1989 ): see also MUR 1349 54 -) (Connisbion found probable cause co believe the thae Reagan toc Presidene Connitte violated 2 U.S.C. s 141016 ) by waiting 81 days to reimburse a volunteer who paid $18,713 in expenses on behalf of the committee .). From September 1991 to July 1992 , Mr. Carey made expenditures for transportation , food , packing , taxi , and miscellaneous costs . since these expenditures were for himself ana for the subsistence of others . chese expenditures rosulted in contributions to the Committee . Il C.E.A. 116.516 ). because Me . Carey paid for his own travel and subs16tonco Cosco wien hoe personal credit card or by means other than his personal credit card . and because he was not reimbursed for those costs within 30 or 60 days , he made contributions to the Courite... Id. By making expenditures for the subsisconce of others , Mr. Carey made contributions to the Connittee at the time he incurred such expenditures . id. The above-stated expenditures ranged from $2.00 to $791.14 . on February 29, 1992 , Mr. Carey's excessive anoune reached its highest ac $5.358.1 Therefore , there is reason to believe that Paul Carey violator 2 U.S.C. S 4410call1 )(A) by knowingly asking contributions in excess of the coneribution liaitations . 1/ on February 29. 1992 , Mr. Carey's highest excessive enount zoached $6.350 . However , pursuant to 11 c.i.d. $ 100.71b /18). Mr. Carey was entitled to spend an aggregate of $1.000 per election for personal transportation expenses on behall President Clinton witnout such expendituros counced as contribucions . Thoretose . Ms. Carey's nighese excessive anount on february 29 , 1992 was $5.358 136,358 - $ 1,000 ). 55 P R E P A R E D S TA T EM E NT OF DENNIS D O L L A R MEMBER -DESIGNATE, NATIONAL CREDIT UNION ADMINISTRATION BOARD SEPTEMBER 30, 1997 Thank you, Mr. Chairman, and ladies and gentlemen of the Committee for the prompt hearing and the opportunity to meet with you on behalf of my nomination to serve on the Board of theNational Credit Union Administration. As the Chief Executive Officer of a credit union which can best be described as of smallto moderate size (the Gulfport V A Federal Credit Union has approximately $31 million in assets, right on the nationwide average of just under $30million) for the past 6 years, I have dealt with the day-to-day issues facing our Nation's credit unions. I have sat across the desk from the member of limited means who says, “I can't send m y daughter to college without this loan,” or “M y son will not have clothes for school unless my credit union can help me .” I have stood in the parking lot with thatproud member who finally financed his first car or truck and says,“Inever thought I would own one on my own , now I can take that new job that my family reallyneeds but it's 20 miles away.” I have seen the regulatory process firsthand, have experienced the depth of an N C U A examination,and a m a committed adherent to the importance of safety and soundness considerations. Of all of the member services we provide at our credit union, Itell m y members daily that the most important member service we can provide is a strong, safe, sound, and viable creditunion. I look forward to the opportunity to work as a Member of the N C U A Board to use this perspective Ihave gained in the credit union trenches, while at the same time applying the public policy perspective that I gained through 8 years as a State legislator Having served as aM e m b er ofthe Mississippi House of Representatives for two 4-year terms, from 1976 to 1984, I have looked at issues from a public policy, regu latory, and legislative pointof view as well. I understand that not onlycredit union members have a stake in the safety and soundness ofour Nation's credit unions, but so do the American people . I look forward to working with this Committee and Congress,as a Member of the N C U A Board upon confirmation, to continue to ensure the safety and soundness of a growing credit union system for years tocome. Again,Mr. Chairman and Members of the Committee, Ia m honored to be before youtoday for this confirmation hearing, and I would gladly answer any questions you might have of m e . Thank you very much . 56 S T A T E M E N T FO R C O M P L E T I O N B Y PRESIDENTIAL N O M I N E E S Name: Parl OTATIO Dennis Dollar VID Dateof Positiontowhich nominated: Board, National Credit Union Adais. nominalion:. August 1, 1997 Dateof birth: 22 August 53 Placeofbirth: Union, KS DAN OXO.STIO iro Fullnameofspouse Janie Maureen Sullivan Dollar Marital status: married Name and ages of children:_Christopher Ryan Dollar (age 16) Hindsay Blair Dollar (age 122 Education: Institution Mississippi Gulf Coast Community College University of Mississippi Dates attended 1971-1973 1973-1975 Degrees received A.A. B.A. Datesof degrees 1973 1975 2 7 Honorsandawards. Listbelowall scholarships,fellowships,honorarydegrees,militarymedals,honorarysociety memberships,andanyotherspecialrecognitionstoroutstandingserviceorachievement Outstanding Young Men of America, 1980-88 Who's Who In Mississippi, 1989 Who's Who On The Gulf Coast, 1990 Notable Americans, 1978 Selected as one of five outstanding credit wion CDO's lo "Most Duroretrugwol nationridt recogatttoo by Grethe Maicon fines, 1994 57 Memberships: Lis:belowalimembershipsandofficesheldinprosessional.fraternal,business,scholarly. civis.charitableandher organizaiions. Oriceheld (ifany) Organization (see attached sheet for additional) March of Dimes United Way of South Ms. Gulfport Job Corps Center Co-Chairso Chairman Community Covacil 1994 1993-94 1884-96 Gulfport Rotary Club Merber 1991-present Kids Voting-Mississippi Board Member 1994-95 Leadership Board Board Member 1991-present 1979-90 Boys and Girls Club Goodril Industries Einploymenirecord: Lis:belowallpositions heldsincecollege,includingthetitleordescriptionofjob,nameof employment.locationofwork,anddatesofInclusiveemploymerii. Mississippi House of Representatives, StateRepresentative,District 118, Elected state legislator io 1975 and re-elected 1979. Served 1976-84. Coast Mateciala Company:-Ready Mix Concrete:Sales, 1976–79.Gulfport, MS. Port City Real Estate, Real Estate Sales, 1979-81,Gulfport, MS. Tom Jennings Realtor, Real Estate Sales, 1981–86, Gulfport, MS. Phillips Junior College, Gulfport, MS, Teacher, Adoinistrator, 1984-91. First Baptist Church of Lyman, Gulfport, MS, Music/Youth Director, 1979:82. Big Ridge Baptist Charch, D'Ibervilee, MS, Music/Youth Director, 1983–89. Robinson Road Baptist Church, Gulfport, MS, Music Director, 1990–93. Big Ridge Baptist Church, D'Ibervild , AS, Music Director, 1993-present. Gulfport VA Federal Credit Valon, Gulfport, MS, President and CBO, 1991 present 2 58 MEMBERSHIPS (Continued) Mississippi Arts Fair for the lanciapped, Board Member, 1977–85 Mississippi Coast Chamber of Commerce, Board Member, 1991-93 Mississippi Credit Union Systea, Chair, Governmental Affairs Committee, 1993-95 Vaited Way of South Mississippi, Board Member, 1986–89 Gideons Laternational, Member, 1989-present Gulf Coast Baptist Association , Moderator, 1996-97 Big Ridge Baptist Church, Meuber, Music Director, Deacon, 1993-present Gulf Coast Mental Health Center, Advisory Board, 1976-82 59 Government experience: Puclished writings: Political affiliations andactivities: Listanyexperienceinordirectassociationwith Federal.Staie,oflocalEcvernments,in. cludinganyadviscry,consultative,honoraryoroiherpart-iimeserviceorpositions. Mississippi House of Represe tatives, Scate Representative, District 111 Gurtporto this, btected 19750 lonelected 1929. Served 1976-86, Listthetites,publishersanddatesofbooks,articles,reportsorothe:publishedmaterials youhavewritten. None Lisiallmemberships and offices held in and servicesrenderedtoallpoliticalpartiesor eiectioncommitteesduringthelast10years. Republican Douinee for 0. S. Congress from Stb District of Mississippi ia 1996. Meaber of Mississippi Republican Party. Served as State Convention delegate, 1996. 2 60 Political contributions: Qualifications: Itemizeellpoliticalcontribu:iorsof$500ormoretoanyindividuai.campaigncrganiza. lion,political party,political action committee or similarentityGuringthelasieighi yearsandideniitythespecificamcunts,dates,andnamesoftherecipients. Nope Statefullyyourqualificationstoserveinthepositiontowhichyouhaveteennamed. (artachshet:) Futureemployment relationships: 1. Indicate whetheryou willsever allconnoctionswithyour presentemployer,business firm,associationororganizationityouareconfirmedbytheSenate Yes 2. As faras canbeforeseen,statewhetheryou haveanyplansattercompletingsovero. mentservicetoresumeemployment,affiliationorpracticewithyourpreviouserst pioyer,businessfirm,associationororganization. Ihave no plans to resume employmeat vich the Gulfport VA Federal Credit Union after completing government service. 3. Hasanybodymadeyouacommitmenttoajobafteryouleavegovernment? No 4. Doyouexpecttoservethefullterm'orwhichyouhavebeenappointed? Yes t 61 Potentialconflicts ofinterest: 1. Describe any financial arrangemenis or delerrec compensacion agrotrients orother continuing dealings with business associates,clien:sor cusiomerswho willbe af. fectedby policies which you will Influence inthe position!owhichyou have been nominated. None 2 Listanyinvestments,obligations,liabilities,orotherrelationshipswhichmightinvolve potercialconflicisofinteresiwith thepositionionäichyouhavebeennominated. None 3. Describe any business relationship,dealing or financial transaction (otherthan tax paying)which you havehad duringthe last10yearswith the Federal Government, whetherforyourself,on beha!cta client,oractingas anagent,thatmight inany wayconstituteorresultinapossibleconflictofinterestwiththeposi iontowhichyou havebeennominated. None 49-692 98 -3 62 4. Lis:anylobbyingactivityduringthe past10yearsinwhichyou haveengagedforthe purposeofdirectlyor indirectly influencingthepassage,deleator modification of anylegislationatthenationallevelofgovernmentoradiectingtheadministrationand executionofnationallaworpublicpolicy. Nope i 5. Explainhowyouwillresolveany potentielconflictofinterestthatmay bedisclosedby yourresponsestotheaboveitems. N/A Civil,criminaland investigatory actions: 1. Givethefulldetailsofanycivilorcriminalprocesdinginwhichyouwereadetenderit oranyinquiryorinvestigationbya Federal,State,orlocalagencyinwhichyouwere thesubjectoftheinquiryorinvestigation Noge 2. Give the fulldetails of any proceeding,inquiryorinvestigation by any professional associationincludinganybarassociation inwhichyouwerethesublectofthepro ceeding,inquiryorinvestigation. None 63 DENNIS DOLLAR . lifelongresidentofGulfpors,Mississippi. AsteadedGulfportpublicschoola GraduatedGulfportEastHighSchool,1971. GaduatedMisalssippiGulf CoostCommunityCollegescha.)1973. GraduatedUniversityofMississippi ,(BA )1975. ElectedtoMississippiHouseofRepresentativesin1975 from HarrisonCountyatage22. Atthattime,the youngestmemberoftheHouseofRepresentativa Re electedtoMississippiHouseofRepresentativesin1979withoutoppositioa. . Declinedtorun forthirdterm in1983,opting lastead tomeettheofficeofSecretary ofSute. Narrowly deletedinthisbid. AppointedbyGovenorasamemberofthe1986 Commission ontheMississippiCoastitution.Alsoappointedto chairtheEducationCoonmitteeofthisconstitutionCommission, PresentlyservingasPresidentandCEO oftheGulfportVA FederalCreditValon,•$J1 milbon federally. charteredcreditunionwithover11,500membersrepresentingover150employergroupsontheMississippiGulf Coast.Charteredin1935ontheproundsofitsoriginalsponsor,theGulfportVAMedicalCenter,theGulfport VAFederalCreditValoohasthreebranchesinGulfporr,oneinBoySt.Louk,andonelaBiloxiandisthe1993 recipientoftheHarrisonCorantyEconomicExcellenceAwardusOutstandingSmallBusinessoftheYear;the 1994recipientoftheMississippiCreditValonLeagueMoodshotAwardforachievingthehighestpercentageof membershipgrowite;both the1993 and 1995 first-place recipieat($20-$50 million ssuesategory) ofthe Missisippi Don Marwell Social ResponsibilityAward recognizingcreditunions for their outstanding contributionstotheircommunity, sad the1995firstplacerecipient(520-550milion assetcategory)ofthe NationalDorrMaswellSocialRespoasibilityAwardrecognizingcreditunionsforthelsoutsundingcontribution totheircocamunity. RepublicandomineeforU.S.Conpreufrom SthDistrictofMississippiin1996,havingwon the Republican nominationwith80%ofthevoteintheSuperTuesdayprimary.Althoughdefeatedingeneralelection,received highestvotepercentageofanypreviouschallengeragainstseven-yearIncumbentDemocratcongressman. Pormer realtorsadeducator,havingservedasPresideotofPhillipsJuniorCollegefrom1986-89,aswellas otheradministrativecapacideswithinthe92campusPhillipsrystem. electedin"OutstandingYoungMenofAmerica,1980-1988 O S electedforWho'sWhoInMississippi,1989sadWho'sWhoOnTheGulfCoor,'1990 . S SelectedasoneoffireoutstandingcreditunionCEO'sin'MostOutstandingCEO nstioawiderecognitionby C editUnionTimes, prestigiouscreditunionindustrypublication,1994. . Cr mpaignCo-Chairman,MarchofDimes"WalkA.Thon,1994. . Ca rnpoigaChairman,UnhedWayofSouthMississippi,1993-94. . Ca hairmaa,MississippiCreditUnionSystemCorcameotalAffairsCommittee,1993-95. CommunityCouncil,GulfportJobCorpsCenter.LeadershipBoond,BoyssodGirlsClub. Graduate,LeadershipGulfCoostClassof1991-92.Member,GulfportRotaryClub. BoardofDtractors,MississippiGullour ChamberofCommerce(1991-93),VoltedWoyofSouthMississippi (1986-89),MississippiArtsFairfortheHoodicapped(1977-85), Goodwillladustries(1979-90),GulfCour MentalHealthCeater(1976-87),andKidsVacingMlosissippi(1994-95). Moderator,GulfCoustBaptistAssocistion.Member,GideonsInternatioosl. BaptistDeacon.PrescattyservingasMusic&YouthDirector,BigRidgeBepalaChurch,Alberville. MarriedtoformerJonteSullivanofGulfporty:Gulfportschoolteacher. Twochildren,Christopher,Is,and Lindsay,12 LEGISLATVEFACTSABOUTDENNISDOMAR Servedonthefollowinglegislativecommittees Education,Judiciary,PublicHealthandWelfore,Ilighwayand HistwayFioraclayandthepowerfulWaysandMeansComanittee. Authoredbillswhichweretractedlavtolowtogroot18-year-oldstherigtusofcredis,protectrapevictimsfrom wadecennyabuseincourt,makedecalssmailableforthelictoseplatesofhnadicapped citizens,outlawchild pornographyinthewateandtheparte's1983touchesdrunkdetulinglow, InstrumentalindraftingandguidingthroughtheHouse EducationCommitteetheEducation ReformaActof 1982andtusreductionlegislationis1977aad1979. . BestknownforauthorshipofMinissippi1981OpenMeetinglowandthe1983PublicRecordsAct RecipientofMargaretDamonAwardfromtheAssociatedPressin1981for"courageandselflessnessinfighting toprotectforallpeoplethestatestobefeellaformed. DenisDollar 49-BSsch Sores Gulfport,MS39507 (601)864-0884(home) (601)868-9522(office) 64 P REP ARE D STATEMENT OF ELLEN SEIDMAN DIRECTOR -DESIGNATE , OFFICE OF THRIFT SUPERVISION SEPTEMBER 30, 1997 Mr. Chairman, Senator Sarbanes, Members of the Committee, I am honored to appear before you as President Clinton'snominee to head theOfficeof Thrift Super vision. I want to thank you for holding this hearing.I also want to thank President Clinton and Secretary ubin for their confidence in me ; m y family —m y husband, Walt Slocombe,and m y son,Will Slocombe - for their supportand patience; and Nic Retsinas, Jonathan Fiechter, and the staff at the OT S fortheir hard work and good spirits. And I want to thank the Committee's Staff Director, Howard Menell, for re minding me ofour years togetherat Ne w Rochelle High School. Mr. Chairman, the prospect of servingas the Director of OTS is humbling and exciting. As I spoke to many Committee Members during m y courtesy calls, Iw a s inevitably asked, “W h y do you want thisjob ?” Quite simply, I think it is one of the best public servicejobsin Washington today. These are dynamic times in the financial services industry ,and OTS and the in stitutionsit regulates are playing an important part in the industry's evolution.T he country's first Internet “bank”was a thrift,and new companies are entering the thrift industry, even as consolidation continuesto reduce thetotal number of institutions supervised by OTS .At the same time, thrifts continue their critical role as home mortgage lenders, with residential whole loans comprising over50 percent of the in dustry's assets, and traditional home lenders leading the industry in profitability. These have been good years for the thrift industry, but OTS's primary responsi bility must always be to make certain that the industry continues to be safe and sound,no matter what the economic conditions. Depositors and taxpayers are count ing on OTS to understand what the risks are, to establish sound and sensible rules, and to make certain those rules are followed. In contrast to thrift regulation ofthe 1980's,O T S has the statutory and regulatory tools, the resources, and the public and political support to accomplish thismission. M y responsibility, ifconfirmed ,will be to support and enhance what has been accomplished, both leading and backing the agency's staff as they take sometimes difficultactions. OTS must also encourage the institutions it supervises to meet their responsibil ities to make certain that financial services are available on a fair and equitable basis in all communities the institutions serve. This is not only good for consumers and communities, it is good for business. Ifcommunities have access to capital and arepart ofthe financial mainstream , economic development follows, as dojobs and profits for the businesses serving those communities. The challenges for the industry, and thus for OTS , are many,but what makes the prospect of leading the agency exciting is that each challenge brings opportuni ties.Homogenization of different types of financial services andconsolidation in the financial services industry can bring increased access to capital and the advantages of greater scale, particularly in development and deployment of new products and the bestnew technology. But these trends challenge management and morale. They challenge institutionsto continue to effectively serve theircustomers and their c o m munities. And they challenge regulators to fully understand and effectively super vise a broader array of activities and of risks. Technology, too, is the source of opportunitiesand challenges. Technology not only provides better tools for understanding the business but also providesthe ability to serve customers in new ways and more efficiently. But technology's challengesare legion: preparing for the year 2000; protecting the security and privacy of institu tions'systems and customers' accounts; understanding thetools so management and regulators can use them rather thanbeing trappedin a world of blackboxes; and, finally, making the benefits oftechnology available to all.That means being careful that credit scoring tools, which can clearly enhance productivity, are used to free up underwriters to analyze applications that don't fit the scoring systems precisely, rather than to restrict access to credit. It means enhancing, not restricting, access toATM's and electronicbanking as those technologies become more prevalent. Finally,there isthe challengeofthe changing legal structure.O n e cannot be n o m inated tobethe Director of OTS without being aware thatpeople have been talking about abolishing OTS virtually sinceitw as founded.The office needs full-time lead ership and direction so it canb e part ofdetermining its future and that of the thrift industry, and to implement thatfuture, whatever it may be , ina manner that pro tects depositors, the insurance funds, and taxpayers, and is sensitive and responsive tothe needs ofemployees. Thank you for the consideration of m y nomination. If confirmed , I look forward to working with you to meet the challenges of this new era . sto UT 093 HE 65 S T A T E M E N T F O R C O M P L E T I O N B Y PR E SI DE N TI AL N O M I N E E S Ellen Seidman Laat) (Fire Positiontowhich Director, Office of Th ri ft Supervision nominated: Shapiro (Other Name: Dateofbirth: 12/3/48 Day) ponor) MartialStatus: Married (Yean Dateof nomination:276797 Placeofbirth: New York, New York Fullname ofspouse: Walter Becker slacombe Name andages ofchildren: Benjamin William Slacombe (12) Sarah Cody Slocombe (Step-daughter)(29) Merrin Hayes Slocombe (Step-daughter) (27). Dates Education: attended Institution New Rochelle High School 1961-65 Radcliffe College 1965-69 University of Chicago 1967-68 Degrees roceived Datesof degrees AR 1969 Boston University 1970-71 Georgetown Univ LawCentr JFK School of Government 1971-74 1981 JD 1974 George Washington Univ 1984-87 MBA 1988 Honorsandawards: Listbelowallscholarships,fellowships,honorarydegrees,militarymedals,honorarysociety, memberships,and anyotherspocialrecognhionsforoutstandingserviceorachievemeni. Secretary's Award for Meritorious Achievement. OSDOT, 10/9/29 General Counsel's Award, US Treasury, 5/86 Special Achievement Award, US Treasury, 7/86 Treasury Department Award, 12/8/87 66 Memberships: List below all memberships and offices held in professional, fraternal. business, scholarly, civic, charitable, and other organizations. OE.ice neid Daces (if any) Organization WomeninHousing& Finance Women'sBarAssociation Women'sTransportationSeminar Emily'sList PotomacPedalersTouringClub BaltimoreBicycleClub DC JewishCommunityCenter WashingtonSavoyards UnitedCerebralPalsyorDC VAA DC Bar(inactive) Employment record: BdMember 1988(?)todate 1980(?)1019830) 1981(?)to1989(?) 19851?)todate 1976(?)todate 1989(?)todate 1989to1993(?) 1990(?)todate 1991(?)to1993 1986todate 1975todate List below all posicions held since college, including the title or description of job, names of employment, location of work, and jaces of inclusive employment. March 1993 topresent-Special AssistanttothePresidentforEconomic Policy;Executive Officeofthe President:Old ExecutiveOfficeBuilding,Washington,DC November 1991 toFebruary 1993-SeniorVice President,Regulation,Research& Economics:FederalNational MortgageAssociation: Washington,DC February 1991 toNovember 1991 -Vice PresidentforStrategic Planning& Critical Issues: Federal NationalMortgage Association;Washington,DC November 1988 toFebruary 1991 -Vice PresidentandAssistanttotheChairman;Federal National MortgageAssociation;Washington,DC November 1987toNovember 1988-DirectorofStrategicPlanning;FederalNational MortgageAssociation;Washington,DC March 1986toNovember 1987-Special AssistanttotheUnder Secretary(Finance);U'S DepartmentoftheTreasury;Washington,DC December 1981 toMarch 1986-Attorney-Advisor,Office oftheGeneralCounsel, and AssociateGeneralCounsel,ChryslerLoanGuarantee Board;US Departmentofthe Treasury;Washington,DC March 1979toDecember 1981 -DeputyAssistantGeneralCounsel forEnvironmental,Civil RightsandGeneral Law;US DepartmentofTransportation;Washington,DC 2A 2 68 Government experience: List any experience in or direct association with Federal, state, or local governments, including any advisory, consultative, honorary or other part-time service or positions. My federalgovernmentexperienceislistedaspartofmy employment record. Inaddition,during 1975,IservedonaDistrictofColumbiataskforcetodevelop the AdvisoryNeighborhoodCommissionsystemestablishedunderthehome rulelegislation. From 1975 to1977,IservedasanAdvisoryNeighborhoodCommissioner,fromdistrict6B07 on CapitolHill. Published wr!tings: Lise the title, publishers and dates of books, acticles, reports or othe: published materials you have written. "TheGovernmentSecuritiesActof1986,"ReviewofFinancial ServicesRegulation December 10,1986. Political affi liations and activities: List all memberships and offices held in and services rendered to all political parties of election committees during the last 10 years. Iam aregisteredDemocrat. Ihavenotheldofficeinnorrendered serviceto anypolitical partyorelectioncommitteeduringthelast10years. As noted inmy responsetothenext question,IhavecontributedmoneytotheDemocraticNational Committee andthe DemocraticSenatorialCampaignCommittee. ! 3 69 Political con t::butions: itemize all political cone:ibutions of $500 or more to any individual, campaign organization, political party, political action coimustee :: similar entity during the last eigh: years and identiSy the speciiis amounts, dates, and names of the recipients. Emily'sList-total of$950-on 1/30/89;9/22/89;4/7190;6/10/90;9/7/91;1/13193;and 1/4/97 Women's CampaignFund -total of$1,000-on4/21/89;10/23/89;2/24/91; 10/19/91;and 12/2/91 DSCC -total of$600 -on 10/29/89;10/22/90;2/24/91;2/22/92;and 11/5/94 DNC -S500on8/1/92 JosieHeath forSenate-totalof$600-on2/2/90;6/10/90;8/2/90;9/14/90;and 6/26/92 Qualifica tions: state fully your qualifications to serve :n the position. Co which you have been named. (attach sheet) Future employment relationships: 1. indicate whether you will seve: all connec:ions with your present employe:, business firm association, or organ:zation :: you are confirmed by the Senate. Iwillsevermy connectionwiththeExecutiveOfficeofthePresident. Iwillcontinueto remainemployedbytheUnited Statesgovernment. 2. As far as can be foreseen, state whether you have any pians aider compiering government service to resume employment, arciliation or prac:ice with your previous erapioyes, business Li.ms, association or organization. Ihavenoplanstoresumeemploymentwithanyoneaftermy governmentservice. 3. Has anybody made you a committent to a job after you leave government? No onehasmade acommitment tome ofajobafterIleavethegovernment. 4. Do you expect to serve the full term for which you have been appointed? IexpecttoserveforthefulltermforwhichIhavebeenappointed. 4A 70 Statementofqualification: Iam qualifiedtobethe Directorofthe OfficeofThriftSupervisionbyvirtueofmy educationand my governmentand business experiences. Inadditiontomy Bachelor's degree inGovernment,Ihavea lawdegreeanda Masters inBusinessAdministration in FinanceandInvestments. Ihavepracticed law,both inandoutofthegovernment. Much ofmy govemment serviceinvolved issuesrelatingtothe appropriatedegreeandmanner ofgoverment regulationofprivatebusinesses–therailroads,thegovermentsecurities industry,andmost recently,the bankingandthriftindustries. Duringmy yearsatFannie Mae,Iworkedextensivelyonthe measurementandregulationofriskinthemortgage industry,aswell ashow thatindustrycan bestserveallcommunities. Ialsoparticipated intheregulatorysystem fromtheperspectiveofaregulatedentity,complementingmy governmentexperience. Inmy currentposition,Ihave participatedinthedevelopmentof thisAdministration'spolicies toreduce regulatoryburdensonthe bankingandthrift industriesandtoencourage themtoextendtheprofitablereachoftheirservicestoall.My management experience includes lineresponsibilityforadepartmentwithdiverse responsibilitiesatFannie Mae. Inaddition,throughout my careerIhavemanaged interdisciplinaryand interagencyteams toproducehighqualityproductsinatimely manner. 4B 71 Potential con Flicts of interest: 1. Desc:ibe any financial arrangements or deferred compensat:... aczeements or other continuing dealings with business associates, c1:200s os customers who will be aifected by policies which you will inéluence in the position to which you have been nominated. Iam fullyvestedinafully-fundednon-contributorydesined benefit pensionplanatthe FederalNationalMongage Association. Ialso have money ina401(k)plan atthe Federal NationalMortgageAssociation.NeitherFNMA norIam contributingto theplan,anditis runbyFidelity,withfulldiscretionon my parttochooseinvestments. Idonotbelieveeither ofthesepensionplanscreatesanyconflictofinterest. Nevertheless,Ihaveagreedwiththe TreasuryDepartmentthatIwilltakeactionsdescribedinaletterdatedFebruary6,1997and attachedhereto asExhibitA toavoid anyappearanceofconflict 2. List any investments, obligation, liabilities, or other celationships which might involve potential conilicts of interest with the position to which you have been nominated. None 3. Desc:ibe any business relat:ons 29, dealing, or Sinancial 0:1..saction (other than taxpaying) which you have had during the last 10 years the Federal Government, whethe: for yourse:6, on behalf oi a client, or acting as an agent, that mighe in any way conscitute or result in a possibie conslice of interese with the position to which you have been nominated. As notedinmy employmenthistory,Ihavebeenemployed bytheUnited StatesGovernment formorethan4ofthepast 10years. Ido notbelievethisemploymentcreatesanyconflictof interest. 5 73 P R E P A R E D S T A T E M E N T O F E D W A R D M. G R A M L I C H MEMBER -DESIGNATE, BOARD OF GOVERNORS OF THE FEDERAL RESERVE SYSTEM SEPTEMBER 30, 1997 Mr. Chairman and Members of the Committee,it is a pleasure to appear before you today as President Clinton's nominee to be a Member of the Board of Governors of the Federal Reserve System .Ifthe Committee and the rest of the Senate approve m y nomination, I look forward to serving in this important position. I promise to work with the other Members of the Board, and with the Committee, to carry out the objectives that Congress has established for the Federal Reserve, both forover all monetary policy and to assure the safety and soundness of our Nation's banking and payment system . Background Were I to rejoin the Federal Reserve System , this would complete the cyclefor m e . After receivingm y Ph.D. inEconomics from Yale Universityin 1965, m y first professional job was with theresearch staff of the Fed. I served there for 5 years, being part of a new and at the time avant garde project to build an econometric model explaining the workings of monetary policy.This was a very heady project forayoung economist, and one that I think was very productive. A successor version of this model is stillin use at the Fed. I will never claim , nor did I then, that models could explain everything,butthe attempt to specify the workings ofmonetary policy in hard and cold termshas led to great insightson appropriate overall macroeco nomic targets formonetary policy and on strategies to achieve these objectives. I left the Fed in 1970 tobecome Director of the Policy Research Division at the Office of Economic Opportunity. Followingthat, I became first a Senior Fellow at the Brookings Institution, and later a Professor of Economics and PublicPolicy at the University ofMichigan .At Michigan, I have served for11 years as either Dean of the School of PublicPolicyor Director of the Institute for Public Policy Studies (the predecessor institution).I have alsospent 4 years as Chair of Michigan's Eco nomics Department and, while on leave,2 years back in Washington as Deputy and Acting Director of the Congressional Budget Office. Over this time, m y work has spread out widely from m y early econometric model days.I have both taught and written on macroeconomics,income distribution, State and local fiscal issues, benefit-cost analysis, education,a n d in recent years have delved intothe economics of professionalbaseball (Iwas Staff Director for baseball's Economic Study Commission) and Social Security (I was Chair of the Quadrennial Advisory Council on Social Security). While the particular topics are very different, there is a common theme to this work .Throughout my professionallifeI have believed in, and tried to promote, poli cies that are economically practical but still provide opportunities for human growth and advancement. The Social Security plan iproposed, for example,is the one that I feelbest preserves the important socialprotections now built intoSocial Security, but also provides for enough total saving that future benefits can beafforded eco nomically .At the C B O , I and others there argued for humane ways of cutting defi cits; at O E O ,for economically efficient ways of dealing with poverty. I strongly feel thatboth economic and social goalsare important. Sometimes one's advice must be weighted toward economic practicality, sometimes toward humanity. A good econo mist should know how to balance both objectives, which is what I have tried to do throughout my career. The Federal Reserve Turning now to issuesfacingthe Federal Reserve, the overall objectives ofFederal Reserve policy,listed in the Federal Reserve Act, are "maximum employment, stable prices,and moderate long-term interest rates." Let me discuss each. In the long run, the most fundamental of these objectives is stable prices. In the short run, there are many factors - oil price shocks,exchange rate movements,bad harvests — that can influenceprice movement. But,in thelong run, I believe, along with most other economists, that the fundamental responsibility for controlling a n a tion's inflation rests with its centralbank policies. It used to be feltthat inflation could be related in a very mechanical way to the rateof money growth. These days this linkage has become more complicated because ofthe impact of financial innova tion on holdings of variousmonetary assets. But while the relationships may have become more complicated, Federal Reserve policyis still the dominant influence in determining U.S. inflation rates in the longrun. I believe both that it is important to keep inflation under control, and that the Fed must play an importantrole in doing so. 74 Since nominal interest rates equal realinterest rates plus the rate of inflation, controlling inflation also controls nominal interest rates. Real interest rates can then be controlled by fiscal policy. Modern day macroeconomic thinking suggests that when economies are open to international trade and capital flows,monetary policy becomes the key policy to stabilizeemployment, and fiscal policy determines the overall national saving rates and real interest rates.If the Federal Reserve is adequately guarding stabilization needs, fiscal policy is then freeto keep national saving rateshigh and real interest rates low.That would be m y idea of a desirable monetary/fiscalpolicy mix. Previously, I have worked mainly on the fiscal side. At the Congressional Budget Office, Iw as a strong proponent ofdeficit reduction, as a way to raise national sav ing. In the Social Security Council,I was a strongproponent of policies to raise n a tional, and retirement, saving. Joining the Fed will give me an opportunity to work on this issue from the monetaryside,but Iwillretain an interestin fiscalrestraint as a key way to assure longrun low real interest rates. Finally, the objective of “maximum employment” brings up the famous tradeoff between inflation and unemployment. Along with most other economists, I believe that ultimatelythere is not much of a tradeoff — some unemployment rates are so low that, if continued, will lead to steadily accelerating price increases. In the eco nomicliterature, the lowest sustainable rate of unemploymenthas come to be called NAIRU — the Non -Accelerating Inflation Rate of Unemployment. While I am often asked whether I believe in NAIRU , I think this simple question glosses over the key policy issue, for it turns out to be rather difficult to measure and identify NAIRU . When Ifirst came out ofgraduate school, the target unemploy ment rate (we did not use the term N AIRU in those days) was said to be about 4 percent.Later on,as U.S. inflation became virulent, the standard estimate shifted to above 6 percent.Now , the economy has been operating for a while in the range of 5 percent unemployment,with as yet few signs of incipient inflation. Given all this uncertainty, one can believe in a loose sense in the existence of NAIRU , but still find it hard to say how one would vote on monetary policy in particular cir cumstances. I would put myself in that category. Part of the reason for this uncertainty could be that the manifestationsof infla tion are rather subtle. Chairman Greenspan in the past has defined stable prices as a set of economic circumstances where inflation, per se, plays little role in eco nomic decisions. The U.S. economy may be close to this point now .The soaring stock market may be one indication that the inflation monster has at least for now been tamed. Another suggestive indication is that the spread between long- a n d short term interest ratesis very narrow - there hasnever been much explanation for this spread, otherthan that bond markets have distrusted the centralbank's long-term commitment to stopping inflation. Right now , bond markets seem to have become more trusting of the Fed. There are still other advantages of stable prices, and it stands to reasonthat one of those is that NAI RU might decline a bit that is, in the end stable prices may even advance the goal of maximum employment. Hence, I would be an advocate of promoting maximum employment within the Fed's long-term important responsibility to control inflation. These conditions would guarantee a healthyeconomy, a reasonable growth in the living standards over time, and a realisticchance for workers of all income levels and ethnic backgrounds to prosper. Finally, the Federal Reserve has other significant responsibilities that extend b e yond overall monetary policy. It has important responsibilities for regulating the safety and soundness of the banking system,for promoting efficient payments sys tems, and for insuring fair and nondiscriminatoryallocations of credit. While I have studied these issues less than overall monetary policy, I see them as being particu larlyimportantright now . Regulatory issueshave become very complicatedwiththe rapid financial innovation now proceeding within the Nation's banking system .The Fed has to provide a regulatory environment that facilitates financial innovation, but yet preserves safeg Iwill work with the other Board Members to try to fashion à forward-looking, but safe,regulatory strategy. Mr. Chairman and Members of the Committee, I would be happy to answer any questions you might have. 75 STATE MENT FOR COMPLETION B Y PRESIDENTIAL NOMINEES Name: Gramlich Edward rositiontowhich nominatos: Governor. FederalReserve Board DaleulLinur: 18 M. Find 6 (Moner MartielStatus: married 39 love Datoof nomination: Placeofbirth:Rochester.NY Fullname ulspust: Ruth Brown Gramlich Nameandages ofchildren: Sarah Becker Gramlich 30, Robert Edward Granlich 28 Education: Dates attonded Inctuution Degrees received Datosof degrees Williams College BA 1961 Yale University .MA 1962 1965 yale Yale University Ph.D. Honorsandawards: Listbelowallscholarships,tellowships,nonoraryOagrees,militarymedals,honorarysociety memberships,andanyotherspecialrecognitionsforoutstandingserviceorachievement. ational Association of Business Economists. Abramson Award 1970 ssociation for Public Policy and Management, Vernon Award, 1987 ociety of Government Economists, Honorary Lifetime Member, 1994 conomics Trading Cards, 1995 ichigan Association of Governing Boards, Distinguished Faculis.Awarde 1994 1 76 Memberships: Listbelowallmombershipsandofficesheldinprotessional,traternal,business.scholarly. civic,charitableandotherorganizations. Otficeheld fitany) Organization Dates American Economic Association Vice President 1992 Association for Public Policy and Management Vice President 1979-80 National Tax Association Board of Directors 1988-91 Employmentrecord: Listbelowallpositionsheldsincecollege,includingthetideordescriptionofjob,nameof employment,locationofwork,anddatesofinclusiveemployment. Federal Reserve Board, Research Division 1965-70 Office of Economic Opportunity, Director Policy Research Division 1971-73 The Brookings Institution, Senior Fellow, 1973-76 The University of Michigan, Professor of Economics and Public Policy. 1976-97 The University of Michigan, Chair Economics Department, 1983-86 and 1989-90 The University of Michigan, Director, Institute of Public Policy Studies 1970-83 1991-9 The University of Michigan, Dean, School of Public Policve 1995-97 Congressional Budget Office, Deputy Director 1986 Congressional Budget Office, Acting Director 1987 2 7 7 Government experience: LisianyexperienceinordirectassoclauonwiinFederal,State,orlocalgovemments,including anyadvisory,consultauvamdonoraryorotherparttimeserviceorpositions. Federal Reserve Board Research Division 1965-70 Office of Economic Opportunity, Director Policy Research Div. 1971-73 Congressional Budget Office. Deputy Director 1986 Congressional Budget Office, Acting Director 1987 Published Writings: Political Affiliations andactivities: Listthetitles,publishersanddatesofbooks,articles,reportsorotherpublishedmaterials. youhavewritten. see attached.CY Listmembershipsandofficesheldinandservicesrenderedtoallpoliticalpartiesorelection committeesduringthelast10years. None 78 Political Contributions: Qualifications: Futureemployment relationships: Atomizeallpoliticalcontributionsof6500ormorctoanyindividual,campaignorganization, politicalparty,politicalactioncommittooorsimilarentityduringthelasteightyoarsand Identityspecificamounts,dates,andnamesofrecipients. None Statcfullyyourqualificationstoserveinthepositiontowhichyouhavebeennamed. (arachsheet sies next page 1.Indicalewhetheryouwillseverallconnectionswithyourpresentemployer,business firm,associationororganizationifyou areconfirmedbytheSenata. I hope to take an unpaid leave of absence from the University of Mic: 2.Asfarascanbeforescen,statewhetheryouhaveanyplansaftercompletinggovernment servicetorecumeemployment,affiliationorpracticewithyourpreviousemployor,bucinoss firm,associationororganization. I hope to take an unpaid leave of absence from the University of Michi: 3.Has anybudyinaveyouacurrutilment10ajoballeryouleaveyovernment? I hope to take an unpaid leave of absence from the University of Michi, 4.Doyouexpecttoservethetulltermforwhichyouhavebeenappointed? Yes 79 Beginning with m y firstprofessional job at the Federal Reserve in 1965,I have been interested in monetary and macroeconomics;. I have taught courses in macroeconomics at all levels over the years, in both Economics Departments and the School ofPublic Policy. In addition to the Federal Reserve Board,I also have much government experience,having had management jobs at the Office of Economic Opportunity and the Congressional Budget Office. I also chaired the widely -noted Quadrennial Advisory Council on Social Security from 1994-96 . 80 Potentialconflicts ulusterest. 1. Describe any financial arrangements or deferred compensaliun ay gernells ui ullier continuing dealings will business associales,clients or customers who willbe affected bypolicies whichyou willInfluence inthe position10which you have been nominated. None 2. Listany investments,obligations,liabilities,or other relationships which might involve potential conflicts of interest with the position to which you hAVA BARN nominated. At present , I own stock in Citicorp and in Salomon Brothers . I have been advised that these holdings could present a conflict of interest. 3. Describe any business relaliunsliip,dealiny ur financial transaction (ulher than lax paying)which you have had during the last 10 years with the FederalGoverment, wnemer for yourselt,on behalf ofa dlent,or acting as an agent,thatmight inany wayconstituteorresuh ina possibleconflictofinterestwiththe positiontowhich you havebeennominated. None 5 81 4.Ustanylobbyingactivityduringthe pasttenyearsinwhichyouhaveengagedinforthe purposeof directlyorindirectlyinfluencing the passage,deteat ormodificationofany legislation at the nationallevel of government oraffecting the administration and executionofnationallaworpublicpolicy. None 5. Explain how you will resolve any conflict of interest that may be disclosed by yourresponsestotheitemsabove. I have agreed to sell my Citicorp and Salomon Brothers Civil,criminaland Investigatory actions: stock if my nomination is confirmed . 1. Give the fuliderails ofanycivilor criminal proceeding inwhich you were a defendant orany inquiryor investigation by a Federal,State,or localagency inwhich youwere thesubjectoftheinquiryorinvestigation. None 2. Give tho fulldetailsof any proceeding,inquiry or investigation by any professional associaliunt including any was associalion in which you were the subject of the proceeding,inspuiryorinvestigulloni. None 82 April 1997 Curriculum Vitae E DW A RD M. GRAMLICH Dean,SchoolofPublic Policy 440 Lorch Hall The UniversityofMichigan Ann Arbor,MI 48109-1220 (313)764-9483 FAX:(313)763-9181 firstname.lastname@example.org 1720 Morton Avenue Ann Arbor, MI 48104 (313)665-5207 Bom :June 18, 1939;Rochester,NY Married, two children(bom 1966, 1968) SS number: 108-30-7255 Education BA,Williams College, 1961 M A ,Yale University, 1962 Ph.D. Yale University, 1965 FullTime Positions FederalReserve Board,ResearchDivision, 1965-70 OfficeofEconomic Opportunity,Director,PolicyResearchDivision, 1971-73 The BrookingsInstitution,SeniorFellow, 1973-76 The UniversityofMichigan: ProfessorofEconomicsand PublicPolicy,1976 , Director,InstituteofPublicPolicyStudies, 1979-83, 1991-95 Dean,SchoolofPublicPolicy, 1995 Chair,Economics Department, 1983-86, 1989-90 Congressional BudgetOffice: Deputy Director, 1986 ActingDirector, 1987 Temporary Positions Monash University, 1970 GeorgeWashingtonUniversity, 1974 CornellUniversity, 1975-76 StockholmUniversity, 1979 1 83 Other Professional Editorial Board: NationalTaxJournal, 1970-83 JournalofPolicyAnalysisandManagemeni,1980 EvaluationReview,1980-83 Journal of EconomicLiterature, 1981-84 Brookings Panelon Economic Activity, 1973-81 White House Summit Conference, 1974 NationalScienceFoundation,Economics Panel, 1973-75 AssociationforPublicPolicyand Management: PolicyCouncil, 1979-84 VicePresident, 1979-80 ProgramChair, 1981 EditorialSelectionCommittee, 1984, 1988, 1993 MinorityFellowsProgramAdvisoryCommittee, 1994 AmericanEconomic Association,VicePresident, 1992 Truman ScholarshipSelectionPanel, 1982-85, 1994 Ford FoundationAdvisoryCommitteeon SocialWelfare Policy, 1984-87 InternacionalSeminaronPublicEconomics,ExecutiveCommittee, 1986- . NationalTax Association,Board ofDirectors,1988-91 CongressionalBudgetOffice,PanelofEconomic Advisors, 1988-92 Ann ArborBlueRibbonPanelon CityFinances,Chair, 1991-92 Major LeagueBaseballEconomic StudyCommittee,StaffDirector, 1991-92 MichiganAssociationofGoverning Boards,DistinguishedFacultyAward, 1994 US SocialSecuritySystemQuadrennial Advisory Council,Chair,1994-96 SocietyofGovernmentEconomists,Honorary LifetimeMember, 1994 EconomistTradingCards: U M FlintSeries Prentice-HallSeries University ofMichigan Committees Committee on Economic StatusofFaculty, Chair, 1978-79 Economics DepartmentExecutiveCommittee,1977-80, 1982-83, 1988-89 Committee on UndergraduateFinancialAid,Chair, 1983-84 InstituteforSocialResearchExecutiveCommittee, 1983-86, 1989-92 PopulationStudiesCenterExecutiveCommittee, 1990-91 SpecialTaskForceonStatisticalSuppon, 1988-90 BoardofStudentPublications,1989-92 AdvisoryCommitteeon UniversityRelations, 1990 CostofHigherEducationTask Force,1989-90 Provost'sAdvisoryCommittee on Excellence,Chair, 1990-92 AdvisoryCommittee on University Budgets, 1992-93 InternationalInstituteGoverningBoard, 1994-97 Economic DevelopmentCouncil,1994-95 JournalismTask Force, 1995 Books Savings, Deposits, Mortgages, and Housing in the FRB -MIT -Penn Econometric Model, coeditedwithDwightM. Jaffee,HeathLexington, 1972 2 84 Educational Performance Contracting: An Evaluation of an Experiment, with Patricia P. Koshel,The Brookings Institution, 1975 Setting National Priorities: The 1975 Budget, with Barry M. Blechman and Robert W. Hartman,The Brookings Institution, 1974 Serring National Priorities: The 1976 Budget, with Barry M. Blechman and Robert W. Hartman,The Brookings Institution, 1975 Benefit-CostAnalysisofGovernmentPrograms,PrenticeHall, 1981 TaxReform : ThereMustBe a Better Way,with Paul N. Courant,NationalPolicyExchange, 1982 Control ofLocal Government, coedited with B. C. Ysander, Industriens Utredningsinstitut (Sweden), 1985 Federal Budget Deficits: America's Great Consumption Binge, with Paul N. Courant, Prentice Hall, 1985 A Guide to Benefit CostAnalysis,PrenticeHall, 1990 FinancingFederal Systems: The Selected Essays ofEdward M. Gramlich, Edward Elgar Publishing Limited,1997 IsitTime toReform SocialSecurity?,UniversityofMichigan Press, 1998 Journal Articles "The Behavior and Adequacy of the U.S. Federal Budget," Yale.Economic Essays, Spring 1966 "A Technique for Forecasting Defense Expenditures," with Harvey Galper, Review of Economics and Statistics, May 1968; reprinted inWilliam F. Butler,Robert A. Kavesh, and Robert B. Platt(eds.), Methods and Techniques of BusinessForecasting,PrenticeHall, 1974 "State and Local Governments and Their Budget Constraint,' International Economic Review ,June 1969 "AlternativeFederalPolicies forStimulatingStateand Local Expenditures,' NationalTax Journal,June 1968 (withalaterclarificationinJune 1969) "The Federal Reserve - MIT Econometric Model,' with Frank de Leeuw , Federal Reserve Bulletin,January 1968;reprintedin Proceedings ofthe Conferenceon theEconomic Outlook, Universityof MichiganPress, 1968; in Proceedings ofthe Business and Economic Statistics Section of the American Statistical Association, 1967; in John M. Dutton and William H. Starbuck (eds.), Computer Simulations ofHuman Behavior, Wiley, 1972; in Bobbs Merrill reprintseries, 1972;andinaJapaneseperiodical "The ChannelsofMonetary Policy: A FurtherReporton theFRB-MIT Econometric Model," withFrank de Leeuw, FederalReserveBulletin,June 1969;reprinted in JournalofFinance, may 1969; in William E. Gibson and George C. Kaufman (eds.), Monetary Economics: 3 86 h "Public Employee Market Power and the Level of Government Spending.' with Paul N. Courant and Daniel L. Rubinfeld, The American Economic Review, December 1979; reprinted in W. Patrick Beaton (ed.), Municipal Expenditures, Revenues, and Services: EconomicModelsand Their UsebyPlanners,Rutgers University Press, 1983 "A Procedure for Evaluating Income Distribution Programs," with Michael J. Wolkoff, Journal of Human Resources, Summer 1979; reprinted in Robert H. Haveman and Julius Margolis (eds.), PublicExpendituresandPolicyAnalysis, Rand McNally, 1982, 1983 "Stimulating the Macroeconomy through State and Local Governments," The American Economic Review, May 1979; reprinted in George Farkas and Emst Stromsdorfer (eds.), EvaluationStudiesReviewAnnual,Russell Sage, 1980 "Tax Limitacion and the Demand for Public Services in Michigan," with Paul N. Courant and DanielL. Rubinfeld, NationalTaxJournal,June 1979 "Macro PolicyResponses to PriceShocks," BrookingsPaperson EconomicActivity, 1:1979 "Why Voters Support Tax Limitation: The Michigan Case," with Paul N. Courant and Daniel L. Rubinfeld, National Tax Journal, March 1980; reprinted in Helen Ladd and NicolausTideman (eds.), COUPE Paperson PublicEconomics, 1981 "Why Do Voters Turn Out for Tax Limitation Votes?" with Daniel L. Rubinfeld and Deborah A. Swift, NationalTaxJournal,March 1981 "Micro Estimates of Public Spending Demand Functions and Tests of the Tiebout and Median Voter Hypotheses," with Daniel L. Rubinfeld, Journal ofPolitical Economy, June 1982 "Voting on Public Spending: Differences between Public Employees, Transfer Recipients, and Private Workers," with Daniel L. Rubinfeld, Journal of Policy Analysis and Management,Summer 1982;reprintedin ProblemidiAmministrazionePublica, 1983 "Models of Inflation Formation: A Comparison of Household and Economist Forecasts," JournalofMoney, Credit, andBanking,May 1983 "An Econometric Examination of the New Federalism ," Brookings Papers on Economic Activity,2:1982 "Migrationand Income Distribution Responsibilities," with Deborah S. Laren, Journal of Human Resources,Fall 1984 "EvaluationofEducation Projects: The Case ofthePerry Preschool Program ," Economics ofEducation Review, 1:1986 "TheDeductibilityofStateandLocalTaxes," NationalTaxJournal,December 1985 "Subnational Fiscal Policy," Perspectives on Local Public Finance and Public Policy: A ResearchAnnual, 1987 "Cooperation and Competition in Public Welfare Policy," Journal ofPolicy Analysis and Management,Spring 1987 (giventhe 1987 Veron Prizeforbestarticleinthejournal) 5 88 "A Report on School Finance and Educational Reform in Michigan," with Paul N. Courant and Susanna Loeb, American EconomicReview, May 1995; and in National Tax Association Proceedings. 1994; and in Thomas A. Downes and William A. Testa (eds.), Midwest Approaches to School Reform , Federal Reserve Bank of Chicago, 1995; and in Saul H. Hymans (ed.),TheEconomic Outlook for1995,UniversityofMichigan Press, 1995 "Differing Approaches for Dealing withSocial Security." Journal of EconomicPerspectives, Summer, 1996;and inAmerican Economic Review ,May 1996;and inLSA Magazine, Spring 1996. "Mending but not Ending Social Security: The Individual Accounts Plan," Benefits Quarterly,forthcoming;and inSt. LouisFederalReserve Bank, forthcoming. "ReflectionsofaPolicy Economist," TheAmerican Economist,forthcoming Major Reports (Principalauthor) "The Experiment in Educational Performance Contracting, Opportunity, 1973 Office of Economic "StaffAnalysis," inReportofMajor League Baseball's Economic Study Group, 1992 "Report of the Quadrennial Advisory Council on Social Security, Social Security Administration, 1997 Chapters inBooks "Measures ofthe Aggregate Demand Impact ofthe Federal Budget," inWilfredLewis (ed.), Budget ConceptsforEconomic Analysis, The Brookings Institution, 1968; reprinted in Staff Papers ofthePresident's Commission on Budget Concepts, Government PrintingOffice, 1968; and in Horst Claus Recktenwald (ed.), Finanztheorie, Neue Wissenschaftliche Bibliothek, 1969 " The Impact ofSavings Deposits on Mortgage Markets and Residential Constructioninthe FRB -MIT Model," with David T. Hulett, in Donald P. Jacobs (ed.), Savingsand Residential Financing, US Savings and Loan League, 1970;reprinted inNational Planning Association, Consumption Issues in the Seventies, 1970; and in Gramlich and Dwight M. Jaffee (eds.), Savings Depos Mortgages, and using in the FRB-MIT -Penn EconometricModel, Heath Lexington, 1972 *Public Service Employment and the Inflation Problem ," in Harold Shepard et al(eds.), ThePoliticalEconomy ofPublicServiceEmployment, Heath Lexington, 1972 "The Ethics of Social Experimentation," with Larry L. Orr, in Alice M. Rivlin and P. Michael Timpane (eds.), Ethical and Legal Issues ofSocial Experimentation, The Brookings Institution, 1975 "TheEconomic and Budgetary EffectsofIndexing theTax System, in Henry J. Aaron (ed.), Inflationand theIncome Tax,The Brookings Institution, 1976 "A Review ofthe Empirical Literature on IntergovernmentalGrants,"inWallaceE. Oates (ed.), ThePoliticalEconomy ofFiscalFederalism, Heath Lexington, 1977 7. 89 "Evaluating Anti-Recessioa Fiscal Assistance," Conference Report on Evaluating the 1977 EconomicStimulusPackage, Department ofLabor, 1978 "Future Research on Poverty and Income Maintenance," in Vincent T. Covello (ed.), Poverty and Public Policy: An Evaluation ofSocial Science Research, National Academy of Sciences, 1980 "State and Local Budget Surpluses and the Effect of Federal Macroeconomic Policies," JointEconomic Committee Print, 1979 "Relief Work and Grant Displacement in Sweden," with B. C. Ysander, in Gunnar Eliasson, Bertil Holmlund, and Frank Stafford (eds.), Studies in Labor Market Behavior: Swedenand the UnitedStates,IndustriensUtredningsinstitut, 1982 "Models ofExcessiveGovernment Spending: Do the Facts Support the Theories?"in Robert H. Haveman (ed.), Public Finance and Public Employment, Wayne State University Press, 1982; reprinted in Gramlich and B. C. Ysander (eds.), Control of Local Government, Industriens Utredningsinstitut, 1985 "The Roleof Tax Limitation Referenda in State Fiscal Policy," with Gary C. Woodard, in Harvey E. Brazer and Deborah S. Laren (eds.), Michigan's Fiscal and Economic Structure, The UniversityofMichigan Press, 1982 "The New Federalism ," with Deborah S. Laren, in Joseph A. Pechman (ed.), Setting NationalPriorities: The 1983 Budget,The Brookings Institution, 1982 "A Dynamic Micro Estimate of the Life Cycle Model," with Paul N. Courant and John P. Laitner,inHenry J. Aaron andGary Burtless(eds.), RetirementandEconomic Behavior,The Brookings Institution, 1984 "Government Services," in Robert P. Inman (ed.), Managing the Service Economy: Problemsand Prospects,Cambridge UniversityPress, 1985 *How Bad are the Large Deficits?"inJohn L. Palmer and Gregory B. Mills (eds.), Federal BudgetPolicyinthe1980s,The UrbanInstitutePress, 1984 "The Distributional Impact of Much Higher Unemployment: A New Look ," with Deborah S. Laren, in Lee C. Bawden (ed.), The Social Contract Revisited: Aims and Outcomes of PresidentReagan's Social WelfarePolicy,The UrbanInstitutePress, 1984 "A FairGo: The Fiscal FederalismArrangements," inRichard E. Caves and Lawrence B. Krause (eds.), The Australian Economy: A viewfrom theNorth,The Brookings Institution, 1984 "An Expenditure Tax: Has the Idea's Time Finally Come?" with Paul N. Courant, in Walter W. Heller (ed.), Tax Policy: New Directions and Possibilities, Center for National Policy, 1984 "Reforming U.S. Fiscal Federalism Arrangements," in John M. Quigley and Daniel L. Rubinfeld (eds.), American Domestic Priorities: An Economic Appraisal, University of CaliforniaPress, 1985 8 91 *Options for Social Security Reform ," in Saul H. Hymans (ed.) , The Economic Outlookfor 1996,UniversityofMichigan Press, 1996 *The Policy ImplicationsofGrowing loequality,"withMark Long,PolicyBytes,June 1996 Comments,Discussion,Revicws "Break,'Finanzund Geldpolitikin Umbruch 1969 "Shoup,"Journal of Finance,March 1970 "Silber,' Journal of Finance,September 1970 "Christ,'JournalofMoney,Credit,andBanking,May 1971 "Lee,'Econometrica,March 1972 "O'Brien,"NationalTaxJournal,March 1972 "Zamowicz,'JournalofFinance,December 1972 *Pechman,"BrookingsPaperson Economicactivity,2:1973 "Vogel,"JointEconomic Committee Print,7:1975 "Shoven-Bulow ,"BrookingsPaperson Economic Activity,3:1975;1:1976 "Hamermesh,"CreatingJobs:PublicEmploymentProgramsand Wage Subsidies, 1978 "Kasten-Greenberg-Betson,' Microeconomic Simulation Modelsfor Public Policy Analysis, 1980,and Income TestedTransferPrograms: The CaseForandAgainst, 1982 "Crandall,“Brookings Papers on Economic Activity, 2:1978 and Curing Chronic Inflation, 1978 "Holmlund-Bjorklund,' Studies in Labor MarketBehavior: Sweden and the United States, 1982 "Plotick,'HorizontalEquity, Uncertainty, andEconomic Well-Being, 1985 'Summarizing the Conference,“ FightingPoverty: What Worksand WhatDoesn' ?1985 "Burtless-Vroman,"IndustrialRelationsResearchAssociationProceedings, 1985 "Netzer,"TheEconomic ConsequencesofTarSimplification, 1986 "Solow ,'TheNegativeIncome TaxExperimentThenand Now , 1987 "Government growth theorists,"JournalofPolicyAnalysisandManagement,Summer 1989 "Tobin,"Money, Macroeconomics, and Economic Policy: Essays in Honor ofJames Tobin, 1991 "Moffitt,"A Future ofLousyJobs? 1990 "Haveman-Nathan,'Journal ofHuman Resources,Spring 1990 *Taxanalysts,”NationalTaxAssociationProceedings, 1989 'vonFurstenberg,'The GreatFiscalExperiment, 1991 "CongressionalBudgetOffice," TheNew PalgraveDictionaryofMoney andFinance, 1992 "Ladd," Journal ofPolicyAnalysisandManagement,Winter 1993 *Schultze,"Journal of EconomicLiterature,September 1993 "Zimbalist,"FederalReserveBank ofBostonRegionalReview,Spring 1993 *RateofReturn,'DetroitNews Op Ed,March, 1994 "Maskus-Pecuberti,"forthcomingvolume inhonorofRobert Stem "Cutler,'SocialSecurity: What Role fortheFuture?, 1996 *Blank,"Demand SideExplanationsofEarnings Inequality, forthcoming *Kodikoff,"FiscalPolicy:Lessons from EconomicResearch,forthcoming 10 92 P R E P A R E D S T A T E M E N T O F R O G E R W. F E R G U S O N ,JR . MEMBER -DESIGNATE, BOARD OF GOVERNORS OF THE FEDERAL RESERVE SYSTEM SEPTEMBER 30, 1997 Chairman D'Amato, Members of the Committee, I a m pleased to appear before you today as one of President Clinton's nominees to serve on the Board of Governors of the Federal Reserve System . I a m honored that the President has nominated m e to serve as a Member ofthe Board. I am mindful that the decisions of the Federal Reserve influence the economic well-being of all Americans through theirimpact on output growth,job creation, in flation, interest rates, and the value of the dollar. The Fed also has important su pervisory and regulatory responsibilities for the safety and soundness of the banking system ,for the integrity of the payments mechanism , and for the enforcement of the fair lending and other consumer laws, including the Community Reinvestment Act. Finally, the Federal Reserve Board has general oversight for the functioning of the 12 Federal Reserve Banks. If I am confirmed, Ipledge to work with other Members of the Board to craft a monetary policy gearedtoward stable prices, maximum employment,and moderate long-term interest rates, the goals established in the Federal Reserve Act, and to faithfully execute the regulatory enforcement and the oversightresponsibilities e n trusted by Congressto the FederalReserve Board. These are challenging andimpor tant tasks and I will devote my full energies to carrying out these duties to the best of my ability. Before commenting on some of the issues which confrontthe Federal Reserve, let me briefly describe m y background and qualifications for the position as Governor. I was born and raised in a moderate-income neighborhood ofWashington,D.C. I spent 12 years going to school in Cambridge, Massachusetts.M y collegean d grad uate education were received at Harvard University. I received m y undergraduate degree in economics in 1973, my law degree in 1979, and my Ph.D. in Economics in1981. I also studiedfor 1 year at Cambridge University in England. M y interestin the Federal Reserve is long-standing. It dates from the late1960's. At thattime, President Lyndon Johnson nominated Andrew Brimmer to be the first black Governor of the Federal Reserve System . As my interest in economics was emerging then, the nomination of Dr. Brimmer caught m y attention and captured my imagination. I am therefore particularly pleased to follow Andrew Brimmer and Emmett Rice as the third black nominee for the Board of Governors. I started my professional career as a securities and banking lawyer, representing major investment banks in their securities underwriting and merger activities,and commercial banks in their syndicated loan origination and project financing. In 1984,I leftthe law and went to McKinsey & Company as a consultant to banks and other financial institutions. As a consultant, I have worked on a broad range ofstrategic and operational issues relating to financial institutions. Furthermore, since 1991, I have served as the Director of Research and Informa tion Systems for McKinsey & Company. In that role, I a m responsible for nearly 400 professionals and have been immersed in the problems of attractingand devel oping a research staffsimilar to the staffin the Federal Reserve System .I have also had responsibility for some ofour firm's technology investments. I hope m y broad background and range of experiences have equipped m e with the analytical tools, the general problem -solving skills,and the exposure to particular problems needed in order to comprehend emerging trends in the domestic economy and the banking industry and to help in the formulation of monetary policy, bank supervision, and regulatory policies and oversight procedures for the Federal R e serve System . Let me turn now to some of the issues which confront the Federal Reserve. Price stability should be a central goal of monetary policy.There are many rea sonsfor according high priorityto this objective. Inflation undermines social equity and harmony inour diverse Nation. As interest rates rise to compensate for infla tion, many families will find it increasingly difficult to qualify for and service loans for homes and cars.The wages and salaries of some workers do not keep up with inflation and their standard of living falls.Inflationerodes the wealth of any small investors whose assets are denominated in fixed dollar terms. Times of inflation often become stressful to the leastadvantaged among us.In addition, with high and unstable inflation, managerial efforts emphasize, and the corporate profits derive disproportionately from , taking advantage of rapid increases in the general level of pricesrather than from producing and selling the products that consumers need. Job creation eventually slows as businesses focuso n the financial rather than pro ductive aspects of their operations. Inflation creates uncertainty and distorts price 93 signals, complicating business and household planning. Higher inflation diminishes incentives to save and invest in productive real and financial assets and increases theincentive to investin assets thought to be good “hedges”forinflation. Many factors, including fiscal policy, exchange rates,external shocks, and produc tivity shifts, affectthe behaviorof prices in the short run, but in the long run, infla tiono n a sustained basis cannot occur unless monetary policy accommodates it.The Federal Reserve controls theNation's money supply, and thusthe F O M C effectively determinesthe level of inflation over the longer run. The Fed's responsibility is to be ever vigilant for early signs of inflation and to choose policies that are designed to maintain a noninflationary environment that allows sustainable growth and job creation . This isa challenging task. The effectof Federal Reserve policies on the economy occurs with a substantial lag. Uncertainties concerning the strengthof key economic linkages make accurate predictions difficult. Therefore, I agree with the Fed's his toric approach of reducing monetary stimulus before the emergence of any obvious and strong inflationarypressure.Unfortunately,the timing and appropriate amount ofa change in monetary policy involve some guesswork and some risk taking. The second objective of the Federal Reserve is to keep the economy growing as close as possibleto its maximum potential output. The Federal Reserveisto seek the lowest rate of unemployment that can be achieved without risking accelerating inflation. M y goal, as aGovernor of the Federal Reserve Board, would be to create an environment conducive to achieving and sustaining this low level of unemploy ment. There are many reasons to avoid unemployment. Just as with inflation, un employment has real human and economic costs. A rough rule of thumb is that each percentage point ofunemployment,in excess of the natural rate, coststhe economy about 2 percent of G D P , roughly $140 billion. The toll of high unemployment,like that of a regressive tax, fallsmost heavily on groups in the work forcethat areleast able to bear the burden. There is a phrase that you may be aware of, “lasthired, first fired,” which describes the experience of some of our least advantaged citizens in the labor markets. Additionally, full employment givesmore of our citizenry an opportunity to gain useful skillsand work -related disciplines. This opportunity is lost in periods of high unemployment. In the short run, the Federal Reserve often faces a tradeoff between the goals of low inflation and high employment, but ultimately price stability underpins sustain able output growth and job creation. A monetary policy which pushes the economy beyond its potential forthe sake of current job gains is shortsighted and ultimately unfair to American workers. The recessionof the early 1980's illustrates the enor mous price that workers and businesses might pay tobring inflation under control after it builds up. IfI am confirmed, I will join the Federal Reserve at a time when the macroeco nomic fundamentals are exceptionally sound, but there is some uncertainty as to just how long this is sustainable. Underlying inflation is the lowest it has been in more than 30 years, and the unemployment rate has declined to under 5 percent, also the lowest in a generation. Similarly, growth in the output of goods and servo ices over the past year has been approximately 3.5 percent.M an yeconomists are searching for an explanationfor thissplendid performance of high employment,low inflation ,and rapid growth. Explanations include productivity increases spurred by technology investments, the globalization of production, and deregulation in a n u m ber ofindustries. Unfortunately, even in today's strong economy, there are segments of society in which jobs are notplentiful, and income distribution remains skewed . The role of a Fed Governor now , as always, is to monitor every available economic indicator in order to update and refine judgments of economicperformance and to make needed policy readjustments.This is a role that requires pragmatism and bal ance,not adherence to an immutable set of preconceived notions. With the current uncertainties, FederalReserve Governors should be open to the possibility that u n derlying dynamics of the economy might be changing,but they should seek evidence for such developments and not act on the presumption of change. The evidence of basic improvements in the longer-term efficiency of the economy is suggestive now . I hope that itbecomes clearerin the future. The Federal Reserve is,and should be, an active supervisor and regulator ofbank holding companies and State member banks. In this, the Federal Reserve, in co operation with other agencies,is responsible to preserve the safety and soundness of the entire banking systemfor the benefit of society. W e arelivingin an era of consolidation in the banking industry, the gradual blurring of distinctions between banks and other financialinstitutions, and the ongoingglobalization of the financial sector. The role of the Federal Reserve Governor with respect to banking super vision is to execute prudent judgments to impose regulations on banks that ensure 94 the safety and soundness ofthe banking system , that mirror the operation of a well functioning market, that allow a reasonable pace offinancial modernization, and that assure a full range of financial services for our citizens, our communities, and our businesses.The basic framework for banking regulation is set by Congress. W e cannot and should not attempt to substitute thejudgments of regulators for the judgments of individualbank management. Nor can w eprotect everybank from thecompetitive forces that are part of our free-market economy; some banks will make bad strategic decisions or have bad luck. However, the Federal Reserve must ensure that the misfortunes of individual banks do not become a contagion that spreads to the rest of the banking system .T o execute the assigned role fully, Fed eral Reserve Governors should continue to have a voice in the current lively discus sionon the pace and direction of deregulation.Similarly, the FederalReserve should speak clearly if and when it sees trends in the banking industry that, if left u n checked, can create the risk oferoding the stability of a large number of depository institutions. Finally, the roleof supervisor should be exercised so as to minimize the burden of regulation, maximize the flow of valuable information to the Federal R e serve Board ,and, if possible, accelerate the spread of sound practices throughout the banking industry. I am a strong believer in the independence of the Federal Reserve.A policy regi men geared toward long-term economic health must avoid the temptation to conduct policies that overheat the economy for short-term gains. Occasionally, the F O M C will have to undertake unpopular actions in order for the economy to maintain sus tainable growth. Congress wisely devised a system which enablesthe Federal R e serve to take the long view free from any undue influence. I believe that this system best serves the interests of the American people and ultimately enhances economic performance. I also appreciate the necessity for accountability on the part ofthe Fed to Congress and ultimately to the American people. Appropriate reports to Congress' oversight committees are an important part ofthe Federal Reserve's functioning in a democracy. Additionally, the entire Federal Reserve System must be good stew ards ofits resources. There should be no question that resources are used carefully. Federal Reserve independence comes with the expectation that the leaders of the System will husband its resources and will also be prepared to providethe proper accountings when called for. If I am confirmed, I pledge m y full cooperation in this process. In conclusion, I would like to thank you and the Committee for considering m y nomination. I would be pleased to respond to any questions you may have. 95 S T A T E M E N T F O R COMPLETION BY PRESIDENTIAL NO MINE ES Name: Ferguson, Jr. Walton (Middle) Roger (First) Positiontowhich nominated: Govemor ofFederalReserve Board Dateofbirth: 10 51 28 (Day) (Month) (Year) Dateof nomination: (Other) July 11.1997 Placeofbirth:_Washington,D.C. Maritalstatus: Maried Fullname ofspouse: AnnetteLaporteNazareth Names andages ofchildren: RogerWalton Ferguson III Son 6 years Daughter 2years CarolineLawson Ferguson Dates attended Degrees received Datesof degrees HarvardGraduateSchool ofArtsandSciences 9779-6/81 9/75-6/77 Ph.D. A.M. 6/81 6/77 HarvardLawSchool 9/77-6/79 9/74-6/75 J.D.(cum laude) 6/79 Education: Institution PembrokeCollege 9/73-6/74 Nodegreegranted HarvardCollege 9/69-6/73 A.B.(magna cum laude) 6/73 SidwellFriendsSchool 9/66-6/69 HighSchooldiploma Honorsandawards: 6/69 List below all scholarships, fellowships, honorary degrees, military medals, honorarysocietymemberships,and anyotherspecial recognitionsforoutstanding service orachievement. NationalAchievementAward B.A.Magna Cum Laude.Harvard University 1972Richard PerkinsParkerAward 1972-73 CFIA Undergraduate Associate and TravelingFellowship 1973-74 FrankKnoxMemorialFellowship 1 1 96 Memberships: List below all memberships and offices held in professional, fratemal,business,scholarly,civic, charitableand otherorganizations. Officeheld Dates Organization (ifany) HarvardAlumniAssociation FriendsofEducation(Trustee's CommitteeoftheMuseum of Modem Art) HarvardClubofNewYorkCity WykagylCountryClub LarchmontYachtClub St.John'sEpiscopalChurch New YorkMuseum ofNaturalHistory New YorkZoologicalSociety Museum ofModem Art New YorkBotanicalGardens NorwalkMaritimeAquarium New YorkScienceMuseum Greenburgh NatureCenter BadgerSportsClub,Inc. ElectedDirector Treasurerand ViceChair 1996topresent 1994topresent None None None None None None None None None None None None 1992 to present 1993 to present 1997to present 1989 to present 1992 to present 1992 to present 1991 to present 1997 to present 1993to present 1994 topresent 1993topresent 1995topresent Employmentrecord: Listbelowallpositions held since college,including thetitleordescription ofjob,name of employment,locationofwork,anddatesofinclusiveemployment. 10/84 -present.ConsultantandDirector ofResearch and Information Systems(Partner). McKinsey & Company,Inc.,55East52nd Street,NY,NY 9/81-9/84,Attomey.Davis,Polk &Wardwell,450Lexington Avenue,NY,NY 9/79 -6/80. Assistant Senior Tutor.LeverettHouse,Harvard University.Cambridge,MA 6/79-9/79,AssistantDirector,Program on Regulation,Kennedy School ofGovernment. Harvard University,Cambridge,MA 9/78-6/79.Assistant Senior Tutor.LeverettHouse,Harvard University,Cambridge,MA 6/78 -9/78,SummerAssociate.Davis,Polk &Wardwell.450 Lexington Avenue,NY,NY 9777-6/78.Economics Tutor and Pre-law Adviser.Leverett House,Harvard University, Cambridge,MA 6/77 - 9/77 Summer Associate.Debevoise,Plimpton,Lyons &Gates,NY,NY 9/76 -6/77.Economics Tutor and Pre-law Adviser.LeverettHouse,Harvard University. Cambridge,MA 6/76-9/76.Summer Intern,Intemational TradeCommission.Washington,DC 2 97 9775-6/76.Non-residentEconomics Tutor.LeverettHouse,Harvard University,Cambridge. MA 6/75-9/75,Summer Intem,ForeignAgriculturalService,U.S.D.A.,Washington,DC 6/74-9/74.Summer Intem.ForeignAgriculturalService,U.S.D.A.,Washington,DC 6/73-9/73,SummerIntem .CongressionalResearch Service.Washington,DC Goverment experience: Listanyexperienceinordirect associationwith Federal,State,orlocalgovernments,including any advisory,consultative,honoraryorotherparttimeserviceorpositions. Summerjobs: -DepartmentofAgriculture CongressionalResearch Services InternationalTradeCommission Published writings: Listthetitles,publishersanddatesofbooks,articles,reports orotherpublished materialsyou have written. Interview in OnlineUser,March/April 1997.Vol.3,No.2 "RealWealth.' TheMcKinsey Quarterly,1991,Number 4 Political affiliations and activities:List memberships and offices held in and services rendered to all political parties or election committeesduringthelast10years. RegisteredmemberofDemocraticParty 3 49-692 98 -5 98 Political contributions: Itemize allpoliticalcontributions of$500ormore toany individual,campaign organization,political party,political action committee or similar entity during the last eight years and identify specific amounts,dates,andnamesofrecipients. None Qualifications: Statefullyyourqualificationstoserveinthe position towhich you havebeen named. (attachsheet) SeeAttachmentA Futureemployment relationships: 1. Indicate whether you will sever allconnectionswith your present employer,business firm , associationororganizationifyou areconfirmedbythe Senate. Yes 2. Asfarascan be foreseen,statewhetheryou have any plans aftercompleting govemment service toresume employment,affiliationorpracticewith yourpreviousemployer,business firm, associationororganization. Ihavenocurrentplansto resumeemploymentwith my previousbusiness firm 3. Hasanybodymade youa commitmenttoajobafteryou leavegovemment? No 4. Do you expecttoservethefulltermforwhichyouhavebeenappointed? Yes 99 Attachment A M y trainingand experienceineconomics,law and management consulting qualifyme forthisposition. Ihave worked asasecuritiesand banking lawyer,representingsecuritiesfirms and banks intheirunderwriting and lending activities. Ihave alsoserved asa consultanttobanks and otherfinancial institutions. Inthatrole,among other projects,Ihave worked with money -centerand regionalbanks on payment system issues,regionalbank strategy,merger evaluationand postmerger integration,organizationalstructureand costreduction. Ihave alsoworked with afull-linebrokerage firmindeveloping an informationtechnology strategy. These consultingassignments have given m e adirectunderstanding of thedaily and longer termmanagement challengesfacedby banks and other financialinstitutions. Inaddition,forseveralyearsIhavebeen responsible forresearchand informationsystemsforMcKinsey & Company,a management consultingfirm . Through thatrole,Ihave both abackground ininformationtechnology and the management ofresearchprofessionals. Iwas an Associatewith Davis Polk and Wardwell,alaw firmlocatedin New York City,between 1981 and 1984. Ihave been withMcKinsey & Company,Inc.,amanagement consultingfirm ,since 1984 and became a shareholder ofthefirmin1992. Ireceived my B.A.ineconomics (magna cum laude)in1973,my J.D.(cum laude)in1979 and my Ph.D. ineconomicsin 1981. Allofthese degrees arefrom Harvard University. Ihave alsostudied at Pembroke College,Cambridge University. Inadditiontostudyingmacro economics,money and banking,and internationaltrade and development,I have alsostudied industrialorganization,theeconomic disciplinethatisthe basisforevaluating thecompetitiveeffectsofmergers and acquisitions. Thisbroad background preparesme toanalyze thewide range ofmonetary policy,regulatoryand managerial issuesconfrontingthe FederalReserve Board. 100 Potentialconflicts ofinterest: 1. 2. Describe any financial arrangements or deferred compensation agreements or other continuing dealings with business associates,clients or customers who will be affected by policieswhich youwillinfluenceinthe positiontowhichyouhavebeennominated. List any investments, obligations, liabilities or other relationships which might involve potentialconflictsofinterestwiththepositiontowhichyouhavebeennominated. Ihave been advised thatthefollowing could presentan actualorapparentconflictofinterest with my position as a Board member,my investments in First USA Inc.,Morgan StanleyDean WitterDiscover & Co. U.S.dollar increase warrants on Japanese yen,Compass GlobalPrivate Equity_Capital Fund. Compass Global Equities Fund. Compass Global Opportunities Fund, Compass Strategic Investments Fund, Income Arbitrage Partners Class A. Income Arbitrage Partners Class B and Partners IncomeFund and also Oppenheimer & Co. Arbitrage Partners LP: andmy position as a shareholderinMcKinsey & Company,Inc.,amanagementconsulting firm,and as Treasurer oftheMuseum ofModem Art'sFriendsofEducation Committee. Inaddition,a potentialconflictofinterestcould ariseas aresultofmy wife's employmentby Smith Bamey Inc. and her future stock interest inthe Travelers Group. In order to addressthese potentialconflicts ofinterest.Ihave agreed to recusemyselffrom certain mattersassetforth inmy letterto theBoard'sGeneralCounseldated July 15.1997. ( See answerto question 5.below.) 3. Describe any business relationship,dealing orfinancialtransaction(otherthan tax paying) which you have had during the last 10 years with the Federal Govemment,whether for yourself,on behalf of a client,or acting as an agent,that might in any way constitute or resultinapossibleconflictofinterestwiththepositiontowhichyouhavebeennominated. None 5 101 4. List any lobbying activityduring the past ten years inwhich you have engaged in forthe purpose of directly or indirectly influencing the passage,defeat or modification of any legislation at the national level of goverment or affecting the administration and executionofnationallaworpublicpolicy. None 5. Explain how you will resolve any conflict of interest that may be disclosed by your responsestotheitemsabove. Iwillselltheseinvestments and resign from McKinsey & Company,Inc.and from the Friends ofEducation. In addition, Iwill recusemyselffrom any particularmatter that could have adirect and predictable effect on my wife's employment with Smith Bamey, and from any particularmatter specificallyinvolving Smith Bamey oritsparent,theTravelersGroup,unless Ireceiveauthorization from the Board's Ethics Officer. I also have agreed that I will not obtain knowledge of the composition ofSmith Bamey's portfolio. Civil,criminaland investigatory actions: 1. Givethefulldetailsofanycivilorcriminal proceeding inwhich youwere a defendantorany inquiryorinvestigation bya Federal,State,orlocal agency inwhich you werethe subject ofthe inquiryorinvestigation. None 2. Give the full details of any proceeding, inquiry or investigation by any professional associationincludinganybarassociationinwhichyouwerethe subjectoftheproceeding, inquiryorinvestigation. None 6 102 R E S P O N S E T O W R I T T E N Q U E S T I O N S O F S E N A T O R ENZI F R O M L A U R A S. U N G E R Q.1 . T h e Securities Litigation Re form A c t of 1995 , as you are well aware , w a s passed to discourage frivolous Federal lawsuits result ing from the disclosure of “rosy” forecasts a n d corporate i n f o r m a tion. D o you feel, as S E C C h a i r m a n Arthur Levittd o e s, that it is too early to m a k e a definitive assessment of the Act's impact a n d effectiveness, a nd therefore urge Congress to wait until this impact can be determined ? A.1 . T h e Com mi ssi on staff's Report to the President and the C o n gress on the First Yea r of Practice U n d e r the Private Securities Litigation Refo rm Act of 1995 has identified several areas in w h i c h the Act appears to be working as intended an d others whi ch n ee d further analysis. Its preliminary findings are helpful in assessing whether the A c t is achieving its intended pu rp os e of curbing frivo lous litigation. Certain provisions of the Act appear to b e w o r k i n g as intended. T h e heightened pleading standards, along with the discovery stay, are m a k i n g it harder to bring securities class actions in Federal court, w he re the stay is strictly applied . T h e heightened pleading standards also s e em to have resulted in better drafted complaints. Plaintiffs are suing secondary actors, such as accountants a n d l a w yers , less frequently . Other provisions d o not yet appear to have h a d their intended e f fect. Apparently, the safe harbor for forward -looking statements has not yet resulted in m u c h additional disclosure. The lead plain tiff provision has not yet encouraged institutional investors to take charge of securities class actions. While the discovery stay is being applied strictly in Federal court, it appears that s o m e plaintiffs are filing parallel States cases to obtain discovery in a Federal case. Both the H o u se an d the Senate are planning to hold hearings on this issue later this mon th . T h e evidence presented at those h e a r ings should shed additional light o n whet her the Re for m Act is working as intended or w h e t h e r legislation is needed . Further, m a n y important provisions of the Reform Act have not yet been interpreted by the courts, including the appellate courts . T h e Ninth Circuit soon will hear t wo cases on the proper interpre tation of the pleading standards under the Ref orm Act. T h e o u t c o m e of these cases could significantly impact a n y evaluation of the effectiveness of the Act . Q .2 . State laws against securities fraud have served to co mp le m en t the enforcement of Federal laws . D o you believe that States should still b e allowed t he flexibility to design an d i mpl eme nt their o w n antifraud securities laws ? A.2 . W h e n Congress enacted the first Federal securities laws in the 1930's , the la ws were intended to supplement, rather than displace, the existing laws of the States . State laws have coexisted with the Federal securities laws for over 60 years now , a n d State regulators continue to play an important role in investor protection. State r e g ulators can identify an d respond quickly to local problems , supple men ting the Commission's enforcement program . Because State antifraud laws have played an important role to date, it s eems to m e that any decision to shift the balance between 103 State a n d Federal law should be m a d e only after careful study a nd consideration. For example, State antifraud law has played an i m portant role in individual (n on -class action) cases . In addition , cor porations are created under State law , a n d there very often is a n interplay between State corporate law a n d State antifraud laws. If C o n g r es s determines that the filing of securities class action fraud suits in State court undermines the R efo rm Act, this issue will r e quire careful consideration a nd a carefully crafted response. RESPONSE T O WRITTEN QUESTIONS OF SENATOR SARBANES F R O M L A U R A S. U N G E R Priorities Q.1 . W h a t do you believe the priorities of the Securities and E x change Co mm i ss io n should b e at this time ? W h a t developments in the marketplace should the S E C be responding to or preparing for ? A .1 . A s the C om mi s si on heads toward the 21st century , it m u s t be prepared to address a variety of issues, including those involving m a rk e t structure, technology , internationalization, the continuing grow th in the mu tua l fund industry, an d financial modernization . T e c h n o l o g y a n d M a r k e t Structur e Technology has a n d will continue to have t he m ost significant impact on the marketplace. Technology changes the w a y securities mar kets operate. A s a result, our regulatory f ra me wo r k m u s t be flexible en oug h to a cc o mm od a te these changes. Just recently, the C om m is si o n issued for public c o m m e n t a concept release on m ark et structure a n d the appropriate regulation of n e w trading systems. This concept release will enable the Co mm i ss io n to have input from ma r k e t participants in its review an d determination of h o w to e n sure that our regulatory sc he me remains viable well into the 21st century . T h e Y e a r 2000 conversion also should be a high priority for the financial markets. I understand that the C om mi s si on is monitoring the progress of SRO's , broker -dealers, a nd investment companies in their preparations a n d identifying a ny other critical actions the in dustry m u s t take to prepare for the year 2000 . Internationalization A s markets be c om e increasingly globalized , the S E C should c o n tinue to develop w a y s to e nha nc e international m e c ha n i s ms for ef fective m ark et surveillance a nd for cooperation in the investigation a n d prosecution o f cross -border fraud a n d m ar k et manipulation. In particular, the S E C should continue to forge strong relationships with its foreign counterparts. Maintaining the high standards of the U.S. m a r k e t s — including standards for accounting a n d disclosure — is critical to the contin u ed global preeminence of our markets . T h e C o m m is s i o n should be careful not to give preferential treatment to foreign companies over Am er ic an companies, a n d should focus its efforts on m a k i n g the markets m o r e accessible for all issuers, U.S. as well as foreign . G r o w t h in the M u t u a l F u n d I nd ust ry Investments in mu tua l funds have topped $ 4 trillion - a reflec tion of the strength a n d importance of the m u tu a l fund industry . 104 T h e industry has suffered no major problems in over t wo decades , a nd the C om m is si o n should w o r k with the industry to continue this excellent record . T h e Co mm iss io n should encourage fund investors to be c om e e d u cated ; to m a k e sure fund information , including risk , is c o m m u nicated clearly to investors; a n d to maintain the industry's record of compliance i n the face of the pressures of increasing competition . Financial Modernization In general, I believe that legislative action in this area is n e c e s sary . W e need an effective system of regulation that permits m a r ket innovation . W e also need to u pd at e financial regulation to fit the current marketplace a n d to prepare for further changes in the future. Financial services modernization should provide for true f u n c tional regulation which w ould require a financial services provider to conduct banking a nd securities activities in separate entities, subject to oversight by the specialized regulator of that function . It should also include a true “t wo -w a y street " that would permit se cu rities firms to o w n banks a n d banks to o w n securities firms. Private Ri g ht s of Ac t io n Q.2 . D o private rights of action for securities fraud serve a n i m p o r tant function in our securities markets ? D o they deter fraud ? D o they supplement the SEC's antifraud enforcement activities ? A.2 . T h e C om mi s si on has historically taken the view that private rights of action for securities fraud are an important supp lement to its o w n enforcement activities. T o the extent that the threat of litigation effectively deters fraud, private lawsuits woul d play a n important role because of the SEC 's limited resources . Private suits also enable defrauded investors to seek compensation . Fe d e ra l vs. State R e g u l a t i o n Q.3 . For over 6 0 years, w e have h a d both Federal an d State regula tion of securities offerings an d the securities industry. In s o m e r e spects, the dual regulation is complementary ; in other respects, it m a y be duplicative . Does State regulation perform an important function in the r e g u lation of securities? H o w should the duties of Federal an d State regulators be further defined ? A.3 . T h e National Securities M ar k et Im prov emen ts Act of 1996 (N S M I A ) significantly realigned the Federal -State partnership in securities regulation . In the N Š M I A , Congress recognized that the Federal G o v e r n m e n t h a d a stronger interest a n d expertise in regulating nationally traded securities a n d that these securities did not need the extra layer of State regulation . Congress also determined that the States play an important role in protecting investors. Consequently , the N S M I A split regulation so tha t States regulate smaller corporate offerings,broker -dealer licensing, a nd smaller investment advisers a nd the Federal G o v e r n m en t regulates larger corporate offerings, larger investment advisers, an d financial responsibility and record keeping for broker-dealers . I agree with this conclusion a nd think 105 the N S M I A strikes a balance that will benefit issuers a nd investors alike. The N S M I A w a s enacted just 1 year ago . In assessing whether the role of State a n d Federal regulators should be further defined , it w o ul d be helpful to observe the effectiveness of the N S M I A . Í w o ul d also w a n t to review the Commission's uniformity studies on capital formation a nd State licensing requirements w h i c h will be submitted to Congress shortly. Irrespective of whether additional changes should be m a d e to the State -Federal regulatory structure, the regulators an d the industry should w o r k together to achieve greater uniformity in these areas. S h a r e h o l d e r P ro p o s a l s Q.4 . D o the SEC's current proxy rules provide adequate opportuni ties for investors to bring important matters to the attention of their fellow shareholders ? W h a t steps should be taken to increase the ability of the shareholders to co m m u ni c a t e with corporate m a n agers a nd influence corporate policy through the proxy system ? Is it important to achieve a consensus between the shareholders a nd the m a n a g e r s on this issue ? A.4 . T h e C o m mi s s i on recently delivered its report on the results of a congressionally -m a n d a t e d s tu dy of shareholder access to proxy materials. T h e report includes a formal release proposing a p a c k age of a m e n d m e n t s, including a reversal of the Cracker Barrel posi tion.I intend to very carefully study these proposals to determine whe ther revised rules will provide sufficient opportunity for s h a r e holder communications. T h e proxy process is a n important m e a n s by wh ich investors in a corporation can m a k e their v i e w s k n o w n to m a n a g e m e n t a nd to other shareholders. It is very critical to strike a balance between investor communication an d man age men t's ability to conduct the corporation's business . Shareholders should have input in certain issues affecting the c o m p a n y in which they invest. H o w e v e r , m a n a g e m e n t should be a bl e to conduct the corporation's d a y -to-day business without substantial interference . I understand the C o m mission intended the proposals to be a solid, balanced approach . In m y view , consensus between m a n a g e m e n t a n d shareholders o n this issue wou ld be admirable but notnecessarily practical c o n sidering the differing objectives. RESPONSE TO WRITTEN QUESTIONS OF SENATOR D O D D F R O M L A U R A S. U N G E R Q.1 . D o yo u believe that frivolous a nd abusive private securities class actions could u n d e r m i n e public confidence i n the system of private rights of action ? I f the private securities class action system is abused ,please e x plain the possible negative consequences for a c o m p a n y that is the target of the abusive lawsuit. If a co mpan y m u s t use its time and m o n e y to defend against friv olous an d abusive private securities class actions, please d e t a i l a ny consequences o f such expenditures to c o m p a n y shareholders w h o are not plaintiffs in the frivolous or abusive litigation. A.1. The C om m is s i on has traditionally endorsed private securities class actions as a n important supplement to the Commission's e n 106 forcement efforts. T h e C om mi s si on has also recognized frivolous lawsuits as contrary to investors' interests. I believe that evidence of abusive and frivolous securities class actions sufficiently u n d e r m i n e d public confidence in the system of private actions to cause Congress t o enact the Securities Litigation R e f o r m Act of 1995. N o tably , the Private Securities Litigation Re for m Act subjects frivo lous suits to a ma nd at o ry sanctions inquiry. A frivolous suit could have a disruptive effect on the c o m p a n y targeted . Responding t o abusive litigation can b e particularly b u r d e n s o m e to start -u p ,high -tech companies — wh i c h are often targets of these lawsuits -because the defendant c o m p a n y is forced t o di vert resources to defend the lawsuit that wo uld otherwise be u se d for research a n d development or other business growth activities. Generally, a c o m p a n y defending such a suit wo ul d incur the cost of legal fees, as well a s m a n a g e m e n t time a n d energy spent in r e sponding to the lawsuit. Unfortunately, shareholders often pa y the litigation costs for a c tions that occurred before they ever o w n e d a stake in the c o m p a n y . Further, these s a m e shareholders are not entitled to a ny recovery from the litigation. This issue has been the subject of legal c o m mentaries and w a s discussed before the Reform Act of 1995 w a s adopted . A s the C o mm is s io n continues to monitor the Ref orm Act's implementation , this issue deserves further attention. Q.2 . T h e “ Year 2000 ” prob lem is one o f the biggest challenges fac ing all Federal financial regulators. Please explain your views o n the seriousness of this subject, your understanding of the role that your agency is playing in addressing a n d remediating this problem , a n d any suggested changes or improvements to that role that y o u woul d advocate if confirmed . A.2 . T h e U.S. securities markets a n d m a rk e t participants are d e pendent on computer sys tems - m a k i n g the Y e a r 2 0 0 0 problem p a r ticularly sensitive. M a n y applications used b y the industry are date sensitive, w h i c h c o m p o u n d s the potential impact of the Ye ar 20 00 problem on the financial markets. T h e C om mi s si on is monitoring the progress of the SRO 's, b r o k e r dealers , and investment companies in their efforts at remediation . T o accomplish this, the C om m is si o n has been receiving d ocu men ts from N a s d a q , the exchanges, and clearing agencies detailing their Ye ar 2000 efforts. T h e Division of M a r ke t Regulation has recently written these entities a ski ng for updates on this information , a n d informing t h e m that the Co mm i ss io n expects their participation in industry -wide testing in 1999 . T h e C omm is sio n is wor king closely with industry groups such as the Securities Industry Association a n d with the SRO's to monitor the progress of the broker -dealer c om m u n it y. T h e S I A has taken a lead role in getting information to its m e m b e r s on Y ea r 2000 a n d in coordinating industry -wide testing. T h e industry has also expressed concern about wh ether their for eign counterparties will b e prepared for Y ea r 2000. If confirmed, I would encourage the C om m is s io n to consider encouraging foreign mar ket participants to take part in U.S. industry testing in 1999 . The Commission is also working on m a k i n g its internal s ys te ms Year 2000 compliant. T h e C om m is si o n is reviewing all of its d a t a 107 bases , applications, sy ste ms, a nd user interfaces that are d e p e n d ent on dates an d taking th e steps needed to correct a ny problems found . T h e C o m m i s s i o n believes its electronic filing system , Elec tronic Data Gathering, Analysis, an d Retrieval system (E D G A R ), is already Year 2000 compliant. R E S P O N S E T O W R I T T E N Q U E S T I O N S O F S E N A T O R ENZI F R O M P A U L R. C A R E Y Q.1 . T h e Securities Litigation R eform A c t of 1995, as you are well awa re , w a s passed to discourage frivolous Federal lawsuits result ing from the disclosure of "r o s y " forecasts and corporate informa tion . D o you feel, as S E C C h a i r m a n Arthur Levitt does, that it is too early to m a k e a definitive assessment of the Act's impact a nd effectiveness, and therefore urge Congress to wait until this impact can be determined ? A.1. T h e Ref orm Act has been on the books for less than 2 years . M a n y important provisions o f the Reform Act, such as its propor tional liability provision an d requirement of a m a nd a to r y sanctions inquiry for dismissed cases , have not yet been interpreted by the courts. O n c e appellate courts have an opportunity to interpret key provisions of the Ref orm Act, there will be m o r e information r e garding h o w well the Act is working, an d whet her it is achieving its stated purposes . I understand that congressional hearings on the R e f o r m Act are planned sometime this m on t h . Those hearings should provide a d d i tional information on whe ther the R e f o r m Act's intent is being achieved or whether additional legislation is needed . Q .2 . State laws against securitiesf raud have served to c om pl em en t t h e enforcement of Federal l aw s. D o you believe that States should still b e allowed the flexibility to design and imple ment their o w n antifraud securities laws? A.2 . Since the 1930's , State and Federal antifraud laws have c o m plemented each other and both are very important to investor p r o tection. A n y changes m a d e to this balance should be undertaken with caution . If Congress finds evidence that the purposes of the R e f o rm A c t are being u nd er m in ed by the filing in State court of securities class action fraud suits that were traditionally filed in Federal court, Congress m a y wish to consider whe ther a legislative response is needed . A n y m o v e to pr eempt State law in this area needs to be sensitive to critically important corporate governance issues , w h i c h are largely governed b y State law , a n d also needs to consider the important role played by State antifraud laws in indi vidual, non -class action cases . Q.3 . I understand that you have potential conflicts of interest as tw o of your siblings are employed b y G o l d m a n , Sachs & Co. H o w do you plan to keep an arm's -length distance from a n y decision yo u m a k e as Commissioner that will directly or indirectly impact G o l d m a n , Sachs & Co.? A.3 . A s you note, I have two siblings w h o are employed by G o l d m a n , S a c h s & Co. , a firm directly regulated by the Securities an d Ex c h an g e C o mm is s io n . Neither one has a n ownership interest in the firm . Nevertheless, I a m concerned about the appearance that I might lack impartiality were I to participate in matters w hich 108 would directly affect the specific departments in wh ich they w o r k . Therefore, w h e n ma tt e rs specifically involving those d e p a r t m e n t s c o m e before the C o mm is s io n , I will consult closely with the a g e n c y ethics officials to determine w h e t h e r there are a n y particular c i r cumstances that would cause m y participation in such matters to violate the Office of G o v e r n m e n t Ethics regulation regarding i m partiality in performing official duties , 5 C F R § 2635.502. U n d e r this regulation, I a m not in a " covered relationship " with the firm . I do have a “covered relationship ” with m y two siblings ,a nd w o u l d , consequently, not participate in an y matter affecting either of t h e m individually . In this regard, I have personally adopted a policy wh ich exceeds the requirements of applicable l aw an d regulations to avoid even an appearance of a conflict of interest. RESPONSE TO WRITTEN QUESTIONS OF SENATOR SARBANES F R O M P A U L R. C A R E Y Priorities Q.1 . W h a t do y o u believe the priorities of the Securities a n d E x change C om mi s si on should b e at this ti me? W h a t developments in the marketplace should the S E C be responding to or preparing for ? A.1 . T h e Co mmi ss ion is facing n u m e r o u s challenges a s it m o v e s toward the 21st century. It has the important dual role of e nc ou r aging capital formation a n d vigorously maintaining investor protec tion . Developments in the marketplace should be viewed with both of these goals in m i n d . A m o n g the most important are : (i) tec h nology's impacts on the m a r k e t s; (ii) the globalization of the securi ties mark ets; and (iii) the influx of n e w investors into our marke ts an d the protections w e m u s t provide to them . H o w the Co mm iss io n responds to technological change in the securities industry will be one of the most important issues facing the Co mm i ss io n as w e m o v e into the 21st century . A dvancing t e c h nology provides tremendous benefits a nd opportunities for both the investors a n d industry participants alike, a n d the Commission's actions should encourage a nd support innovation an d competition in this area . T h e Commission's regulatory f r a m e w o r k needs to be flexible enough to a c co mm o da t e these changes, and it ha s b eg un to re -examine securities regulation in light of advancing technologies. This is evidenced b y its interpretive releases on t h e electronic d e livery of m a n d a t e d disclosure d o cu me nt s such as prospectuses, a n d its willingness to exam ine its regulation of mar kets in light of the w a y s technology has changed the w a y s in w hich securities markets operate. At the s a m e ti me, the Co mm iss io n m u s t remain vigilant in monitoring the use of technology to assure that investor protec tions r e m a i n in place. T h e C om mi s si on m u s t also continue its e f forts on encouraging securities industry participants to address the Ye ar 2000 computer problem so that industry -wide Ye ar 2000 c o m pliance can be ensured . M a n y of the challenges to face the C o m m i s s i o n in the future are in the relationships b etwe en o ur markets a n d those of other n a tions. T h e Co m m is s io n should continue to open our exchanges to U.S. as well as foreign issuers . T h e Commission's ongoing efforts to arrive at high -quality international accounting standards, as well as cooperation with foreign regulators on enforcement matters, 109 should permit the C om m is si o n to a cc om mo dat e the growth of cross border transactions without diminishing investor protection . T h e increase in the n u m b e r of investors m ovi n g their funds from b a n k deposits to the mar kets, particularly mu tua l f u n d s , creates n e w challenges for the Co m mi ss i on .This heightens the need to pro vide as m u c h information as possible to recent or inexperienced in vestors to help t h e m adequately assess risk and reasonable rates of return . In addition , the integrity of our markets and the c o n fidence it has p r o d u c e d is owed in large me asu re t o the vigorous enforcement efforts of the S E C . Its enforcement initiatives, includ ing its surveillance of trading activities over the Internet, its efforts to c o mb a t fraud in the p e n n y stock a n d micro-cap markets , its c o operation with criminal authorities and other regulators, a n d its investor education p ro gra ms, m u s t be continued . Privat e Ri g ht s of A ct i o n Q.2 . D o private rights of action for securities fraud serve an i m p o r tant function in our securities markets ? D o they deter fraud ? D o they supplement the SEC's antifraud enforcement activities ? A.2 . T h e Commission's traditional position is that private rights of action for securities fraud a u g m e n t the Commission's enforcement activities. In m o r e recent years, the Commission's resources have not kept pace with the significant growth of U.S. a nd foreign m a r kets a n d o f investment c o m p a n y assets u n d e r m a n a g e m e n t. T h u s , private rights of action continue to be important. This system a l lows defrauded investors to obtain redress f r o m the perpetrators of fraud , something the C om mi s si on alone cannot always provide. I a m , however, sensitive to the concerns that h a v e been raised regarding abusive private litigation. A s you know , the President asked the Co mm i ss io n to monitor developments under the Private Securities Litigation R eform Act a n d t h e C om mi ss io n has recently issued a report to the President an d Congress on the Act's effect o n private securities litigation . These a r e serious issues that d e serve further study . If confirmed, I look forward to working with the Co mm it te e as this process m o ve s forward . F e d e r a l vs. State Re g u l at i o n Q .3 . For over 6 0 years, w e have h a d both Federal a n d State regula tion of securities offerings a n d the securities industry. In s o m e r e spects, the dual regulation is complementary; in other respects, it m a y be duplicative . Does State regulation perform a n important function in the r e g u lation of securities ? H o w should the duties of Federal and State regulators be further defined ? A.3 . T h e National Securities M a rk e t I m p r o ve m e n t s Act of 1996 a f fected a significant realignment in the regulatory partnership b e tw e en Federal a n d State securities regulators. B y continuing to preserve important functions for the States, Congress recognized that the States play an important role in protecting investors in our capital markets . I agree that the States perform a n important function . I understand that under the provisions of the Act, States c o n tinue to play an important role in smaller offerings a nd in licensing broker -dealers. Larger, national offerings by companies, a n d f inan 110 cial responsibility an d recordkeeping requirements for the b r o k e r dealers , are regulated only at the Federal level. While I will w a n t to study this further, at this point, this strikes m e as a very g oo d balance. I think w e need to see h o w this n e w realignment works before deciding whether, or h o w , th e duties of Federal and State r e g u lators should be further defined . I would like to see m o r e de v e l o p me nt s under the n e w approach before reconsidering w h a t Congress just accomplished . T h e Commission's studies on uniformity, both in the capital formation and broker -dealer areas, will be submitted to Congress soon . I look forward to reviewing these reports a nd m o n itoring this area closely in the future. S h a r e h o l d e r Pr op os a ls Q.4 . D o the SEC's current proxy rules provide adequate opportuni ties for investors to bring important matters to the attention of their fellow shareholders ? W h a t steps should be taken to increase the ability ofthe shareholders to c om m u n i ca t e with corporate m a n agers an d influence corporate policy th r ou gh the proxy system ? Is it important to achieve a consensus betw een the shareholders a n d the m a na g e rs on this issue? A.4 . T h e C om mi ss io n has recently proposed changes to its current proxy rules. T h e Commission's proposals are intended to balance the s o me t im e s conflicting concerns expressed by various partici pants in the process . It is premature for m e to h av e reached a n y conclusions on the proposals, a nd I intend to e xamine t h e m closely a nd to monitor their progress as the C om mi ss io n m o ve s toward the adoption of an y final rules. O f course , it is far better that a ny solution reflect a consensus a m o n g different participants — that is, a m o n g different types of i n dividual and institutional shareholders, as well as the corporations that receive proposals each year .I will monitor t h e progress of the proposals with great interest a nd the m a n n e r in wh i ch consensus can be reached . RESPONSE TO WRITTEN QUESTIONS OF SENATOR D O D D F R O M P A U L R. C A R E Y Q.1 . D o you believe that frivolous a n d abusive private securities class actions could u n d e r m i ne public confidence i n the system of private rights of action? If the private securities class action system is abused , please e x plain the possible negative consequences for a c o m p a n y that is the target of the abusive lawsuit. If a c o m p a n y m u s t use its time and m o n e y to defend against friv olous a nd abusive private securities class actions, please detail a ny consequences o f such expenditures to c o m p a n y shareholders w h o are not plaintiffs in the frivolous or abusive litigation . A.1 . W h e n e v e r the public perceives that lawsuits are brought for reasons other than the merits of the complaint- for example , to s e cure a “nuisance-value” settlement, or to harass or stifle a business competitor — the legitimacy of our system of civil justice can be brought into question. Similarly, if the public w e r e to perceive that investors with genuine complaints wer e effectively precluded from pursuing a fraud claim because of onerous procedural obstacles, 111 similar concerns about the legitimacy of the system could arise. T ha t is w h y it is so important to w o r k to achieve the appropriate balance in any legislation involving the public's right to bring suit. It is m y hope that the key provisions of the Private Securities Liti gation R e f o r m Act of 1995 will be interpreted by the courts in a m a n n e r that deters frivolous cases while still permitting meritori ous ones . It is well established that a frivolous securities class action can be disruptive a n d potentially costly to a c o m p a n y that is the target of the litigation. L ik e m a n y other types of civil lawsuits, these cases can involve bu rd en so me discovery requests that can absorb the time o f c o m p a n y m a n a g e m e n t and perhaps other key p er s o n nel . Unlike mo st other civil lawsuits , however, the potential d a m ages alleged in a securities fraud class action are a l mo s t always quite substantial, often a m o u n t i n g to tens of millions of dollars. T h u s, it can be argued that e v e n in a case w he re the c o m p a n y b e lieves it only has a small risk of losing, the small risk can b e offset by the fear o f a h u g e d a m a g e award ,a n d the c o m p a n y reluctantly agrees to settle. While settlements are and should continue to be an important part of the civil justice system , they should be driven by the merits of the case an d not by economics . Finally , I understand that there is an apparent an om al y built into our sy ste m of private securities class actions that w a s dis cussed at the time the R efo rm Act w a s being considered by C o n gress . T h e an oma ly is that there are often shareholders w h o will ha ve to shoulder a share of responsibility for a recovery an d other costs even though they acquired their holdings long after the al leged misconduct occurred . A s the C om m is si o n continues to e x a m ine the effects of the R efo rm Act on securities litigation , it should continue to take this issue into account. Q.2 . T h e “ Year 2 0 0 0 ” pr obl em is one o f the biggest challenges fac ing all Federal financial regulators. Please explain your views on the seriousness of this subject, your understanding of the role that your agency is playing in addressing a n d remediating this problem , a n d a n y suggested changes or improvements to that role that you wo uld advocate if confirmed . A.2 . I believe Year 2000 remediation is critical for the securities i n dustry, a n d that facilitating this process should be o n e of the C o m mission's top priorities. T h e U.S. securities markets are highly computerized, a n d ma r ke t participants — investors, broker -dealers, mar kets, clearing agencies - rely on computer systems for their o p erations as well. The Co mm is si on is taking this problem very seri ously . T h e Co mm is si on a n d otheragencies will report to the Senate B a n k i n g C om mi tt e e monthly on Y ear 2000 progress. I understand that the Co mm iss io n staff is closely monitoring the Y e a r 2000 efforts of regulated entities (such as N a s d a q an d other exchanges ) a n d has contacted a n d will continue to contact any of these entities that appears to be lagging. T h e C om mi ss io n also is working with the self-regulatory organizations to evaluate their m e m b e r s ' Ye ar 2000 efforts, and w i t h the Securities Industry A s s o ciation , w hich has taken a leading role in Ye ar 2000 remediation . T h e C om mi s si on has informed all markets a nd clearing agencies 112 that it expects t h e m to participate in industry -wide testing of sys te ms during 1999 . Despite the Commission's efforts, there will be problems . I u n d e r stand t h e C om m is si o n staff will w o r k with the industry a nd other agencies to develop contingency plans for different scenarios. I h a v e also heard s o m e talk of a “holiday ” D e c e m be r 31 or January 3 to fix an y unanticipated problems . T h e C omm is sio n is already very active i n this area - w h a t I wo uld change is to raise the profile of our efforts, a n d to w o r k even harder to bring foreign markets a n d counterparties to the s a m e level of a w ar e ne s s and effort. R E S P O N S E T O W R I T T E N Q U E S T I O N S O F S E N A T O R ENZI F R O M DENNIS DO LL AR Q.1 . D o yo u feel a credit union should be allowed to offer loans to businesses ? If they can m a k e loans to businesses , should they be able to keep their tax -e xe mp t status? A . 1. Credit unions ' commercial lending powers are n o w already e x tremely limited . Loans m a d e for commercial purposes constitute less t h a n 1 percent of total credit union assets. H o w e v e r , I strongly believe that credit unions should have the flexibility to provide small , business -purpose loans to individual credit union m e m b e r s . N C U A ' s regulations safeguard the insurance fund while m a i n t a i n ing this flexibility. În an y ca s e, credit unions' tax exem ptio n is not based on the n a ture of t h e services they offer, but on their structure as not -for profit financial cooperatives, o w n e d an d m a n a g e d by the consumer / m e m b e r s they serve. Instead of paying out profits to stockholders like b a n k s, credit unions return their earnings to their m e m b e r s . This structure, unique a m o n g financial institutions, remains the s a m e regardless of the services they offer. Finally, it is important to note that whatever the purpose of a loan , credit u n i o n s will never be able to lend to the general public. Rather , credit unions m u s t limit their services to consumers within their defined fields of mem ber ship . Q.2 . H o w will a S u p r e m e Court decision against credit unions (the A T & T case) affect the institutions ? A.2 . A t this time , it is very difficult to predict the o ut co me of a neg . ative decision. In the event of a negative o ut c o me, N C U A w ou ld consider regulatory changes in order to allow credit unions to e x p a n d beyond a single employer while still complying with the law . W e w ould also continue to urge that Congress a m e n d the Federal Credit Un io n Act to allow multiple e mplo yee group credit unions . T h u s , the effect of a negative Court decision wou ld depend on m a n y variables, including whether : (1) the Court orders credit unions to divest all of the select employee groups that they presently have ; (2 ) credit unions are permitted to continue to a d d n e w m e m b e r s from select employee groups that they presently have ; (3 ) bank s are successful in seeking to prevent N U A from providing so m e r e lief through regulation in this area ; a nd (4 ) Congress passes legis lation to overrule a negative decision . A significant proportion of Federal credit unions could be affected by the Court's decision . About half of all Federal credit unions have 114 RES PONSE T O WRITTEN QUESTIONS OF SENATOR BE NN ET T F R O M ELLEN SEIDMAN Q.1 . Recently , I invited the heads of all the major financial r e g u latory bodies to a hearing on h o w prepared w e are to deal w i t h the Y e a r 20 00 conversion . Since you h a ve been nominated to h ead one of these agencies, let m e pose s o m e of the s a m e questions to you . H o w prepared is O T S to deal w i t h the Yea r 2000 c h a n g e ? H o w p r e par ed are the firms that O T S regulates? Does O T S have adequate examination and supervisory authorities in order to monitor a n d ensure Y ea r 2000 compliance ?H o w serious a concern will this be to you in your n e w capacity as Director of O T S ? A.1 . Permit m e to an swe r the final part of the question first: T h e Ye ar 2000 conversion is an extremely serious, complex , an d dif ficult issue that will b e o f highest concern to m e should I be c o n firmed as Director of O T S . No t only is smooth conversion critical to the safety and soundness of the institutions O T S regulates, it is a serious issue for the global financial system . A s to the other parts of your question , m y response is based on t h e public testimony of O T S a n d on limited discussions I have h a d with O T S staff in c o n nection with m y current position a nd in preparation for m y c o n firmation hearing. In particular, I have felt it inappropriate to have any conversations with O T S supervisory or examination staff prior to confirmation a nd therefore have not h a d any such discussions. M y impression is that O T S , over the course of the last 2 years, has b e e n working to prepare both the agency a n d the institutions itregulates for as smoot h a transition a s possible. For exam ple , O T S com ple ted the assessment of its national systems a nd d evel oped a conversion plan , which is fully budgeted , by the end of 1996 . It is m y understanding that O T S expects all modifications to be completed during 1998 , allowing time for the testing that is e ss e n tial to a sm oot h conversion . W i t h respect to the institutions O T S supervises, the agency has been raising awareness of Y e a r 2000 conversion as a major strate gic an d business issue since 1996. Further, in M a y of this year, as part of the coordinated w o r k of allt h e depository institution r e g u lators participating in the Federal Financial Institutions E x a m i n a tion Council (F F I E C ), the O T S distributed to those institutions it supervises a policy sta tem ent , examiner questionnaire, and e x a m ination guidelines that highlight the risks p o s e d b y the conversion , the steps that need to be taken , and a n appropriate timetable that allows time for testing an d debugging , especially of inter-connected systems. O T S has recently put on its W e b site a spreadsheet-based checklist that helps institutions t o understand an d prioritize the steps that need to be taken , a nd to keep track of w h a t has been done a nd w h a t remains outstanding. I understand the agency w a s on schedule to complete off -site supplemental conversion e x a m i n a tions.T h e agency's goal - in coordination with that of the other F F I E C m e m b e r s — ist h a t all institutions should have completed the conversion of all critical systems by the end of 1998 , to allow for testing. In discussions with O T S personnel , they have indicated that they have adequate examination and supervisory authorities in all but one area - examination of service providers. M a n y small institu tions do not do the bulk of their systems w o r k in -hou se, but rather 115 rely on outside service providers. It is critically important that these vendors not only be fully compliant b y the year 2000 , b u t that their s y st e ms be tested in integration with the systems that reside in the thrift. Simple representations of compliance are insuf ficient to provide confidence that the financial system will not be adversely affected. In contrast to the other Federal banking r e g u lators, O T S does not have statutory authority to exam ine service providers, a n d m u s t instead rely on contractual arrangements b e t w ee n the individual thrift a n d the institution's service provider. This is at best inefficient an d at worst potentially dangerous. I b e lieve itis important that Congress m o v e quickly to enact legislation that will fix this flaw in agency authority. (It is m y understanding that O T S staff is working with Senate B an k i ng C om mi tt e e staff to draft legislation to resolve this matter .) In conclusion, I believe that — with the o n e potential exception of service providers - O T S is well positioned with respect to the year 2000. H o w e v e r , as the Basle Com mi tt ee on Ba n k in g Supervision recently pointed out in its technical paper for b a n k s o n Y ea r 2000 compliance, "the Ye ar 2000 issue is potentially the biggest ch al lenge ever faced by the financial industry. ... Unlike most a u t o m a tion projects that can be staggered as to schedule and delayed if problems are encountered , all critical renovations m u s t be a d dressed at once with no possibility for extending roll out deadlines .” In other wor ds , Ja nua ry 1, 2 0 0 0 will c o m e on time whether we're ready or not. It is extremely critical that O T S remain focused on this top priority a n d ensure that the institutions it regulates are equally focused . R E S P O N S E T O W R I T T E N Q U E S T I O N S O F S E N A T O R ENZI F R O M ELLEN SEIDMAN Q.1 . I a m sure yo u are a war e of the Federal H o m e L o a n B a n k r e form legislation w hich is included in the H o u s e Ba n ki n g reform bill, H.R. 10. D o y ou feel that voluntary m e m b e r s h i p w ould be det rimental to Federal thrifts ? A.1 .M e m b e r s h i p in the Federal H o m e L o a n B a n k Sy ste m provides thrifts— particularly small institutions— with an important source of liquidity a n d tools w it h w h i c h to better m a n a g e the relationship betwee n their assets and liabilities. This in turn helps t h e m safely perform their traditional function of portfolio lending for housing. In addition , the C o m m u n i t y Investment a n d Affordable Housing programs of the B a n k Sys tem are valuable tools for housing an d c o m m u n i t y development for low- a n d moderate -income families a nd communities . T h e vast majority of Federal savings associations value their B a n k S y s t e m me mb er sh ip . It is unlikely that few , if any , would a c tually leave the S y st e m . Nevertheless, the choice wh ether to belong to the Sy ste m should properly be the institution's, an d voluntary m e m b e r s h i p should b e a c o m p o n e n t of H o m e L o a n B a n k reform legislation . Q .2 . W h a t do you see as the greatest challenge facing Federal thrifts and h o w d o you propose to r e m e d y the problem ? A.2 . I believe the greatest challenge facing thrifts o v e r the long te rm is adapting to a changing financial services marketplace while 116 maintaining their individual a nd collective safety a nd so un dn es s in all economic conditions . O n a m o r e immediate basis , the Ye ar 2000 transition poses a serious challenge for all institutions . I view these challenges m o r e as opportunities than as pr ob le ms. B ut O T S has an important role in both . W i t h respect to adaptation to a changing marketplace, the agency m u s t m a k e certain it r e duces unne eded regulatory barriers to evolutionary developments. Last w e e k , for examp le, O T S took a step in this direction b y p u b lishing a proposed electronic banking rule that clarifies that thrifts m a y engage in any activity through electronic m e a n s that they can do in a m o r e traditional w a y . Moreover , the agency has started a series of seminars on small business lending, so that thrifts w h i c h are considering using the greater authority they received from C o n gress in 1996 have a better understanding of both the opportunities and risks . At the s a m e time , O T S m u s t m a k e certain its e x a m i n a tion a n d supervision staff is fully able to understand a nd e xa m in e for the risks of these n e w w a y s of doing business , a n d the agency m u s t be willing to m a k e difficult decisions to protect safety a n d soundness if things start to go awry . T h e agency m u s t also m a k e certain its processes fully support this endeavor. W i t h respect to the Y ear 2000 issue,this is an extremely serious, complex, a n d difficult issue that will be of highest concern to m e should I be confirmed as Director of O T S . N o t only is smo oth c o n version critical to the safety an d soundness of the institutions that O T S regulates, it is a matter of highest concern for the global fi nancial system . M y impression is that O T S , over the course of the last 2 years , has been working to prepare both the agency a n d the institutions it regulates for a s smooth a transition as possible. For example, O T S completed the a s s e s s m e nt of its national systems a nd developed a conversion plan , which is fully budgeted , b y the end of 1996. It is m y understanding that O T S expects all mod ific a tions to be completed during 1998 , allowing time for the testing that is essential to a smooth conversion . W i t h respect to the institutions O T S supervises, the agency has been raising awareness of Yea r 2000 conversion as a major strate gic an d business issue since 1996. Further, in M a y of this year , as part of the coordinated w o r k of all t h e depository institution r e g u lators participating in the Federal Financial Institutions E x a m i n a tion Council (F F I E C ), the O T S distributed to those institutions it supervises a policy s ta tem en t , examiner questionnaire, a n d e x a m ination guidelines th at highlight the risks p o s e d by the conversion , the steps that need to be taken , an d an appropriate timetable that allows t ime for testing a nd debugging,especially of inter -connected systems . O T S has recently put on its W e b site a spreadsheet -based checklist that helps institutions to understand a n d prioritize the steps that need to be taken , and to k e e p track of w h a t has been done and w h a t remains outstanding. I understand that agency w a s on schedule to complete off-site supplemental conversion e x a m i n a tions.T h e agency's goal — in coordination with that of the other F F I E C m e m b e r s — is t h at all institutions should have completed the conversion of all critical systems by the end of 1998 , to allow for testing. 117 RESPONSE TO WRITTEN QUESTIONS OF SENATOR SARBANES F R O M ELLEN SEIDMAN Q.1 . Last w ee k , an article appeared in T h e W all Street Journalt i tled "Brokers, Insurers Q u e u e U p for Thrift Charters ." According to the article, so far this year , t h e Office of Thrift Supervision h a s received 23 applications for n e w Federal thrift charters, including six fr o m insurance comp anies or fr om securities firms. T h e agency projects that it will receive a total of 32 charter applications this year, which is m o r e th an twice the n u m b e r it received 4 years ago. T h e article states, “ The applications, coming less t h a n a decade after the savings a nd loan crisis nea rly w i p e d out the industry, are fueling a resurgence o f interest in t he lowly thrift, once considered a backwater of A m e ri c a n finance.” O n e implication of this resurgence is that thrifts are n o w be g in ning to affiliate with other types of financial institutions a nd a r e forming m o r e complex a nd vast financial arrangements . These n e w arrangements m a y impose safety a nd soundness concerns of a m a g nitude that the O T S h a s not been presented with before. N o t only are n e w financial affiliations possible, but the unitary thrift h o l d ing c o m p a n y model permits a thrift to engage in unlimited affili ations with commercial enterprises. Is it your view that there are safety a n d soundness implications which are associated with a thrift's affiliations with other financial institutions ? A.1 . Affiliations be tween insurance or securities firms a n d thrifts are not n e w , but there clearly is an increase in interest in thrift ownership by such firms. Moreover , the changing financial services marketplace m a y m e a n that such affiliations will have qualita tively different characteristics in the future than they h a v e in the past. O T S m u s t be able to fully understand h o w these affiliations function and h o w the thrift an d its customers benefit or are put at risk from such affiliations, an d m u s t have in place a reporting and examination system that provides sufficient warni ng an d enforce m e n t action if any problems begin to arise. I regard this to be a top priority, not only with respect to the n e w charter applications, but also in connection with supervision a nd examination of existing thrifts. That said , however , it is important that the affiliation tran s actionprotections provided b y Congress in t he Financial Institu tions Reform , Recovery, a n d E n fo rc e me n t Act of 1989 (F I R R E A ) and the Federal Deposit Insurance Corporation I mp r o ve m en t Act of 1991 (FD I CI A ), an d the O T S rules an d regulations implementing those statutes, have greatly enhanced O TS's regulatory authority to m a n a g e the risks involved w h e n a thrift affiliates with a finan cial or a commercial institution . I n particular, based on the c a p italization a n d earnings of a thrift, O T S imposes restrictions to the extent to whi ch the thrifts m a y m a k e capital distributions (includ ing, b ut not limited to, dividends) to its holding c o m p a n y a n d i m poses w h a t appear to be very stringent transaction restrictions on a thrift's dealing with its holding c o m p a n y an d affiliates. In a d d i tion, if a holding c o m p a n y or affiliate is engaged in activities that would not be permissible for a b a n k holding c o m p a n y or affiliate, the thrift m a y not m a k e a n y loans or extensions of credit to the holding c o m p a n y or affiliate. In the event that the thrift's safety 118 and soundness appear to be threatened by the activities of a h o l d ing c o m p a n y or affiliate, O T S m a y exa mine the holding c o m p a n y or affiliate a n d take appropriate action to protect the safety a n d soundness of the thrift. Q.2 . It is m y understanding that the O T S has the statutory ability to set capital standards for the holding c o m p a n y of a thrift a n d its various financial affiliates. This statutory authority is the s a m e a u thority as that provided to the Federal Reserve. H o w e v e r, the F e d eral Reserve has chosen to exercise its authority over the holding companies of banks a nd the O T S has refrained from exercising its authority over the holding companies of thrifts. W h y is it not appropriate to exercise authority for determining the financial responsibility of the holding companies of the insured thrifts, particularly w h e n given this country's experience with the thrift crisis ? A.2 . Completely aside from wh ether O T S has statutory authority to i m p o s e capital requirements on unitary thrift holding companies (multiple thrift holding companies a n d thrift holding companies that also o w n banks are regulated by the Federal Reserve ), it is important to de te rm i ne whether imposition of such requirements would be either practical or effective to protect t h e safety a n d soundness of the thrift, an d whether other tools could better a c c o m plish the s a m e result. I understand that to date , O T S has found that focusing on the thrift, and on its interactions with both its holding c o m p a n y a n d its affiliates, has been a productive w a y t o examine a n d supervise thrifts that are m e m b e r s o f a unitary h o l d ing c o m p a n y . A s discussed in m y a nswer to the previous question, F I R R E A a n d F D I C I A , as well as O T S regulations a n d rules, place significant limitations on such interactions. In addition to the limi tations mentioned above, OTS's regulations provide that if a thrift becomes undercapitalized , it m u s t submit a capital restoration plan which , under F D IC I A , m u s t include a guarantee b y the holding c o m p a n y that will assure the thrift's performance of the plan . I a m , of course , open to considering whether holding c o m p a n y capital requirements m i g h t be an appropriate addition to the r e g u latory system for unitary thrift holding companies in general or for classes of institutions or situations. H o w e v e r, I think it is i m p o r tant in considering this issue to take into account that, unlike a b a n k holding c o m p a n y, a thrift holding c o m p a n y m a y not only be subject to a variety of capital regulations under other regulatory systems, but m a y be part of an industry in w hich capital structures typically include substantially m o r e equity an d less debt than is the case with b a n k s, b a n k holding companies, a nd thrifts. RESPONSE TO WRITTEN QUESTIONS OF SENATOR D O D D F R O M ELLEN SEIDMAN Q.1 . T h e “ Year 2 0 0 0 ” p robl em is one o f the biggest challenges f a c ing all Federal financial regulators. Please explain your views on the seriousness of this subject, your understanding of the role that your agency is playing in addressing a n d remediating this problem , a n d any suggested changes or improvements to that role that y ou would advocate if confirmed . 119 A. 1. T h e Yea r 2 0 0 0 conversion is an extremely serious, complex, a n d difficult issue that will be of highest concern to m e should I be confirmed as Director of O T S . N ot only is s m o o t h conversion critical to the safety and soundness of the institutions O T S r e g u lates, it is a serious issue for the global financial system . M y impression is that O T S , over the course of the last 2 years, has b e e n working to prepare both the agency a n d the institutions it regulates for as smo oth a transition a s possible. For example , O T S com plet ed the assessment of its national systems a nd dev el oped a conversion plan , which is fully budgeted , by the en d of 1996 . It is m y understanding that O T S expects all modifications to be completed during 1998 , allowing time for the testing that is essen tial to a s moo th conversion . T h e O T S has been raising awareness of Y ear 2 0 0 0 conversion as a major strategic and business issue since 1996. In M a y of this year,a s part of the coordinated w o r k of all the depository institu tion regulators participating in the Federal Financial Institutions Examination Council (F F I E C ), the O T S distributed to those insti tutions it supervises a policy statement , examiner questionnaire, a n d examination guidelines that highlight the risks p o se d by the conversion , the steps that need to b e taken , an d a n appropriate timetable that allows time for testing an d debugging, especially of inter -connected systems. T h e O T S recently put on its W e b site a spreadsheet -based checklist that helps institutions to understand a n d prioritize the steps that need to be taken , and to keep track of w h a t has been done and w h a t remains outstanding . I u n d e r stand the agency w a s on schedule to complete off-site supplemental conversion examinations. T h e agency's goal — in coordination with that of the other F F I E C m e m b e r s - is that all institutions should h a v e completed the conversion of all critical systems by the end of 1998 , to allow for testing. In discussions with O T S personnel , they have indicated that they h a v e adequate examination an d supervisory authorities in all but one area - examination of service providers. M a n y small institu tions do not do the bulk of their systems w o r k in -house, but rather rely on outside service providers. It is critically important that these vendors not only be fully compliant by the year 2000 , but that their sy s te m s be tested in integration with the systems that reside in the thrift. Simple representations of compliance are insuf ficient to provide confidence that the financial system will not be adversely affected. In contrast to the other Federal banking r e g u lators, O T S does not have statutory authority to exa mine service providers , and m u s t instead rely on contractual arrangements b e twee n the individual thrift a n d the institution's service provider. This is at best inefficient a n d at worst potentially dangerous . I b e lieve it is important that Congress m o v e quickly to enact legislation that will fix this flaw in agency authority. (It is m y understanding that O T S staff is working wi th Senate Ba nki ng Co mmi tte e staff to draft legislation to resolve this matter .) In conclusion , I believe that with the o n e potential exception of service providers — O T S is well positioned w it h respect to the year 2000. H o w e v e r , as the Basle Committee on B an ki ng Supervision recently pointed out in its technical paper for banks o n Ye ar 2000 compliance, "the Year 2000 issue is potentially the biggest chal 120 lenge ever faced by the financial industry. ... Unlike most a u t o m a tion projects that can be staggered as to schedule and delayed if problems are encountered, all critical renovations m u s t be a d dressed at once with no possibility for extending roll out deadlines .” In other words, Janua ry 1, 2 0 0 0 will c o m e on tim e whether we're ready or not. It is extremely critical that O T S remain focused on this top priority a nd ensure that the institutions it regulates are equally focused. R E S P O N S E T O W R I T T E N Q U E S T I O N S O F S E N A T O R ENZI F R O M E D W A R D M. G R A M L I C H Q.1 . W e ar e now entering one of the longest periods of economic growth since W or l d W a r II .H o w e v e r, w h e n this type of expansion occurs , there are always those w h o b eco me nervous. There are s o m e trends in the e co n o my that are not easily understood . For e x ample, personal bankruptcies have been on an u p w a r d trend e v e n though w e have been in an almost unprecedented period of e c o n o m i c growth and expansion . Associated with the increase i n b a n k ruptcies is the increase of delinquencies in s o m e categories of loans. W h a t are the reasons for these high n u m b e r s a n d w h a t can be done to curb these delinquencies a n d bankruptcies ? A.1 . I d o not believe that anyone has a satisfactory explanation for the rapidity of the increase in bankruptcies since early 1995. H o w ever , it is not unprecedented that personal bankruptcies rise d u r ing a n economic expansion. F o r example, personal bankruptcies m o r e than doubled between 1983 a n d 1989, also a period of vigor ous expansion . S o m e rise in bankruptcies an d loan delinquencies seem s to be a n inevitable consequence of the growth of debt that occurs in a n e x panding e c o no m y . This expanded debt leaves people m o r e vu lner able to serious injuries a n d health problems (or other factors that might cause bankruptcies ). Moreover , even w h e n the e c o n o m y is strong, s o m e people m a y borrow m o r e than t h e y c a n reasonably handle . Still, analysts feel that bankruptcies have increased lately by m o r e than such factors wou ld normally explain . Perhaps s o m e of the extra increase stems from the declining social stigma that n o w seems to be associated with bankruptcy.I n addition , liberal izations in State laws mi ght have played a role. It is not clear that there are desirable legislative options. A s long as sound macroeconomic policies create a stable environment w h e r e credit participants can realistically assess their o w n risks, lenders themselves are likely to adjust their standards to curb the uptrend in personal bankruptcies. Be y on d that, it is h a r d to think of s e n sible legislative alternatives. Q.2 . T o w h a t do yo u attribute this almost unprecedented gr owt h period in o u r e c o n o m y ? W h a t impact h a v e the projections o f the budget being in or near balance through the year 20 0 2 h a d ? D o y ou believe that a balanced budget a m e n d m e n t is needed to provide m o r e fiscal responsibility for the Federal G o v e r n m e n t ? A.2 . S o m e of the principal contributors to the healthy economic e x pansion seem clear.B o t h the public a n d private sector have done their part .I think the Federal Reserve h a s played a role , by sta bilizing prices a nd avoiding distortions. Fiscal policy has also been 122 There are m a n y variants of such a plan , but s o m e h o w or other the growth in benefits m u s t be scaled back a nd there m u s t be n e w saving for retirement . RESPONSE TO WRITTEN QUESTIONS OF SENATOR D O D D F R O M E D W A R D M. G R A M L I C H Q.1 . T h e “ Year 2000 ” pr oblem is one o f the biggest challenges fac ing all Federal financial regulators. Please explain your views on the seriousness of this subject, your understanding of the role that your agency is playing in addressing a nd remediating this problem , a n d a n y suggested changes or improvements to that role that y ou would advocate if confirmed . A.1 . T h e Year 2000 problem is indeed a major challenge for the fi nancial industry , in the United States a n d globally. It will be a matter of the highest priority for the Federal Reserve over the c o m ing m o nt h s . T h e F ed has a crucial responsibility to monitor the progress of institutions it supervises a n d t o take other appropriate actions t o ensure their Ye ar 2000 compliance. I believe that the Fe d a n d the other b a n k regulators have taken important steps to raise the issue within the ba nk in g c o m m u n i t y ,to set target dates for assessment a nd remediation , a n d to c o m m i t all institutions to completion b y m i d -1998 . A s the Nation's central ban k , with responsibility for maintaining financial stability, it is crucial that the F e d correctly assess the p o tential for problems and have plans in place to deal with them . I unde rstand that the F ed does plan to have its o w n systems ready for testing with customers by mid -1998, a n d that such efforts are proceeding. O n the international level, the Fed's w o r k within the Basle C o m mi t t e e on Ba nking Supervision resulted in last month's press release a nd pa per highlighting the global importance of the issue . I regard the Fed's efforts within the B I S and other in te r national bodies as extremely important to m a k e sure that global fi nancial markets are not disrupted . Oversight of project w o r k a n d clear co mm uni cat io n to the public are important components of the Fed's role. This matter will be high o n m y list of priorities once I take office. R E S P O N S E T O W R I T T E N Q U E S T I O N S O F S E N A T O R ENZI F R O M R O G E R W. F E R G U S O N , JR . Q.1 . W e ar e now entering one of the longest periods of economic growth since W o rl d W a r II. H o w e v e r, w h e n this type of expansion occurs, there are always those w h o bec ome nervous. There are s o m e trends in the e c o n o m y that are not easily understood . For e x ample , personal bankruptcies have been on a n u p w a r d trend e v e n though w e have b e e n in an almost unprecedented period of eco nom ic growth an d expansion . Associated w i t h the increase in b a n k ruptcies is the increase of delinquencies in s o m e categories of loans. W h a t are the reasons for these high n u m b e r s a n d w h a t can be done to curb these delinquencies a n d bankruptcies ? A.1 . T h e reasons for the recent increase in bankruptcies an d delin quency rates are m a n y a n d varied. Financial setbacks owing to a c cidents, illnesses, or other calamities, no doubt, lie behind m a n y bankruptcy cases. B u t society's attitudes toward bankruptcy ha ve 123 changed greatly over the years so that bankruptcy is no longer seen as a last resort to debt p a y m e n t problems, a n d that probably has boosted the n u m b e r of ba nkruptcy petitions,a s have the m o r e liberal asset exemptions n o w available to the bankrupt under State an d Federal laws . S o m e people m a k e mistakes and borrow m o r e than they should , a n d creditors tend to relax lending standards w h e n the e c o n o m y is strong,a c c o m m o d a t i n g riskier borrowers w h o ha ve a higher incidence of delinquency an d bankruptcy. H i g h levels of delinquencies in credit card loans during this p e riod o f solid economic performance is of concern a nd should b e monitored closely by regulators. Fortunately, the excesses in credit markets are usually addressed by the markets themselves , w h e n lenders respond to rising losses by tightening u p their lending practices. This is exactly w h a t has been h a p p en i n g in the credit card area over the past y e a r or so,a n d the results are beginning to s h o w u p in a leveling off in credit card delinquency rates this year; s o m e measures , in fact, suggest that these rates are actually declining. T h e credit m a r k e t c a n d o little to reduce the n u m b e r of bankruptcies caused by catastrophic events of one sort or another. H o w e v e r, I understand that there is a n effort u n d e r w a y to reform the B a n k r u p t c y Co de , which m a y reduce s o m e w h a t the n u m b e r of bankruptcy filings. Q.2 . T o w h a t do you attribute this almost unprecedented growth period in our e co n om y ? W h a t impact h a v e the projections o f the budget being ino r near balance through the year 2 0 0 2 h a d ? D o you believe that a balanced budget a m e n d m e n t is needed to provide m o r e fiscal responsibility for the Federal G o v e r n m e n t ? A.2 . T h e economic expansion whi ch began in th e spring of 1991 is n o w the third longest of the p o s t w a r period, and there are few signs of a ny im mi ne nt interruption in this remarkable perform ance . In an ec ono my as large a n d complex as ours , there are likely m a n y factors that have contributed to this period of steady growth . M a n y businesses have reorganized their operations a nd are invest ing heavily in capital eq uipm ent, especially high -technology e qu ip m e n t, that offers opportunities for considerable gains in efficiency, Moreover, the increased flexibility of labor markets in the United States has contributed to the substantial job creation that w e have witnessed in recent years — a performance that is u n m a t c h e d by a n y other major industrial country. Economic policy also has contributed to the favorable outcomes in recent years. Fiscal restraint by the Federal G ov e r n m e n t has al lowed resources to be shifted to private investment and ,i n part, has supported the current capital spending b o o m . Me an whi le, m o n etary policy has been directed at achieving and maintaining a low inflation en viro nmen t . T h e benefits of this policy are clear: There are fewer inflation -induced distortions, a m o r e smoothly function ing price system , a nd a m o r e stable economic environment that e n courages long-term planning by households and businesses . If the current budget projections, whic h s h o w the Federal budget m o v i n g into balance b y the year 2 0 0 2 ,c o m e to pass , w e can re ason ably expect several benefits. W i t h the Federal G o v e r n m e n t creating fewer d e m a n d s on the Nation's resources through the credit m a r kets , interest rates will likely be lower than they otherwise wo uld 124 have been .This , in turn , should stimulate capital spending b y bu si nesses , m a k e housing m o r e affordable for m a n y families,a n d ease the burdens on m a n y individuals of financing the investment in higher education that will be increasingly important for participa tion in our rapidly changing e co n o my . I do not believe a balanced budget a m e n d m e n t to the Constitu tion is necessary . Although the task w a s daunting, the efforts by Congress and the Administration this last year to reach agreement on legislation that will produce over time a balanced budget strike m e a s a fundamentally m o r e sound approach to dealing with fiscal matters. In addition , I believe it w o u l d be very time consumi ng to draft and pass a constitutional a m e n d m e n t that responds to t h e various contingencies that wou ld have to be considered in m a k i n g future fiscal policy a matter of constitutional law . F r o m a personal perspective, I believe that legislative effort would be better spent in achieving the goals set forth in last year's legislation and in planning for future challenges to maintaining a sound fiscal policy. RESPONSE TO WRITTEN QUESTIONS OF SENA TOR D O D D F R O M R O G E R W . F E R G U S O N , JR . Q.1 . T h e "Year 2000” p robl em is one o f the biggest challenges fac ing all Federal financial regulators. Please explain your views on the seriousness of this subject, your understanding of the role that your agency is playing in addressing a nd remediating this problem , and any suggested changes or improvements to that role that you would advocate if confirmed . A.1 . T h e Y ear 2000 issue is an en orm ou s challenge for the banking industry. T h e resolution of this problem requires focused a n d c o n certed attention on the part of regulators, senior level b a n k officers, a nd technical personnel. B y s o m e estimates, U.S. commercial banks will spend about $ 7 to $ 10 billion to deal with this issue. T h e m a g nitude of the resources , both personnel a n d financial, required to resolve this problem m e a n s that m a n y b ank s will find that b e c o m ing Ye a r 2000 compliant will force a delay in other important stra tegic endeavors . T h e Year 2000 issue is a n enterprise-wide business problem that calls fort he c o m m i t m e n t of senior officers in ban ks as well a s s u p e rior project m a n a g e m e n t skills to implement a technical business solution. It is also a problem that will require solutions that cross from financial institutions to their vendors , correspondents, an d customers , with w h o m the institutions often h a v e automated link ages and interdependencies . Complicating the challenge of t h e resolution of the Year 2000 issue are other projects, such as the Eu ro a n d domestic mer ger an d acquisition activity, that are placing significant competing d e m a n d s on scarce technical resources . Finally, for m a n y U.S. financial insti tutions with international operations, this is also a global inter dependency problem crossing nationalboundaries. M y understanding is the Federal Reserve S yst em has developed a nd is executing a comprehensive plan to ensure its o w n Ye ar 2000 readiness. I believe the Federal Reserve is giving the Y ea r 2000 its highest priority,c o m m e n s u r a t e w it h its goal of maintaining the stability o f t h e Nation's financial m ar k e t s an d pa ym e nt s systems, preserving public confidence, an d supporting reliable G o v e rn m e n t 125 operations. All Federal Reserve computer program changes , as well as system a nd user-acceptance testing, are scheduled to b e c o m pleted by year -end 1998. Critical financial services systems that interface with customers will be Year 2000 ready by m i d -1998 , p e r mitting approximately 18 m o n t h s for customer testing. In its role as supervisor and regulator, the Federal Reserve has u ndert aken a comprehensive p rogram to promote increased a w a r e ness , establish targets a n d b en ch m ar ks for the industry, develop industry -wide status assessments , and utilize proactive supervisory pressures . Financial institutions are expected to have identified mission critical applications by the end o f the third quarter of 1997 , an d p r o g r a m mi n g c h an g es should be largely completed an d testing well u n d e r w a y b y D e c e m b e r 31 , 1998. T h e Federal Reserve will have e x a m in e d every b a n k subject to its jurisdiction by m i d -1998 a n d it has a variety of supervisory tools that can be used to encourage in stitutions to achieve Yea r 2000 compliance. M y initial perspective is that the Federal Reserve has u n d e r taken a rigorous effort to ensure that it an d the institutions for whic h it has responsibility will be Year 2000 compliant. H o w e v e r , in a challenge of this m agni tude, there is certainly r o o m for change a nd i m pr ov e me n t. For example , if I a m confirmed, I would advocate that the F e d eral Reserve, perhaps in conjunction with private industry -wide o r ganizations, identify institutions that h a v e done a particularly good job in becoming Y ea r 2000 compliant so that those leading institu tions might serve as models o f better practice in this area .I would also encourage the senior Federal Reserve staff and officials to have direct a nd ongoing contact with senior officers, both line an d technical support, at major institutions in ea ch Reserve District to assure that senior m a n a g e m e n t understands that this problem is of a strategic nature , an d not merely a technical issue. Finally, I wou ld expect the Federal Reserve supervisory staff to follow u p its Yea r 2000 examination pro gram with a focus on those institutions that are likely to h a v e trouble becoming Year 2000 compliant an d then w o r k with them , in groups or individually, to determine the sources of their difficulties a nd to assist t h e m in identifying cre ative solutions. In all of this, the m a i n goal is for the Federal Reserve to be a supervisor that adds to the solution , not one that substitutes its ju dgm ent for that of senior m a n a g e m e n t at an y b a n k .