[Senate Hearing 107-643]
[From the U.S. Government Printing Office]
S. Hrg. 107-643
NOMINATION HEARING FOR PHYLLIS K. FONG, WALTER LUKKEN, SHARON BROWN-
HRUSKA
AND DOUGLAS L. FLORY
=======================================================================
HEARING
before the
COMMITTEE ON AGRICULTURE,
NUTRITION, AND FORESTRY
UNITED STATES SENATE
ONE HUNDRED SEVENTH CONGRESS
SECOND SESSION
__________
JUNE 25, 2002
__________
Printed for the use of the
Committee on Agriculture, Nutrition, and Forestry
Available via the World Wide Web: http://www.agriculture.senate.gov
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COMMITTEE ON AGRICULTURE, NUTRITION, AND FORESTRY
TOM HARKIN, Iowa, Chairman
PATRICK J. LEAHY, Vermont RICHARD G. LUGAR, Indiana
KENT CONRAD, North Dakota JESSE HELMS, North Carolina
THOMAS A. DASCHLE, South Dakota THAD COCHRAN, Mississippi
MAX BAUCUS, Montana MITCH McCONNELL, Kentucky
BLANCHE L. LINCOLN, Arkansas PAT ROBERTS, Kansas
ZELL MILLER, Georgia PETER G. FITZGERALD, Illinois
DEBBIE A. STABENOW, Michigan CRAIG THOMAS, Wyoming
BEN NELSON, Nebraska WAYNE ALLARD, Colorado
MARK DAYTON, Minnesota TIM HUTCHINSON, Arkansas
PAUL DAVID WELLSTONE, Minnesota MICHEAL D. CRAPO, Idaho
Mark Halverson, Staff Director/Chief Counsel
David L. Johnson, Chief Counsel for the Minority
Robert E. Sturm, Chief Clerk
Keith Luse, Staff Director for the Minority
(ii)
C O N T E N T S
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Page
Hearing(s):
Nomination Hearing for Phyllis K. Fong, Walter Lukken, Sharon
Brown-Hruska and Douglas L. Flory.............................. 01
----------
Tuesday, June 25, 2002
STATEMENTS PRESENTED BY SENATORS
Harkin, Hon. Tom, a U.S. Senator from Iowa, Chairman, Committee
on Agriculture, Nutrition, and Forestry........................ 01
Allen, Hon. George, a U.S. Senator from Virginia................. 15
Lugar, Hon. Richard G., a U.S. Senator from Indiana, Ranking
Member, Committee on Agriculture, Nutrition, and Forestry...... 09
----------
WITNESSES
Brown-Hruska, Sharon, Burke, Virginia, Nominated to be a Member
of the Farm Credit Administration Board........................ 06
Flory, Douglas L., McLean, Virginia, Nominated to be a Member of
the Farm Credit Administration Board........................... 08
Fong, Phyllis K., Bethesda, Maryland, Nominated to be Inspector
General for the United States Department of Agriculture........ 03
Lukken, Walter, Washington, DC, Nominated to be a Commissioner of
the Commodity Trading Commission............................... 04
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APPENDIX
Prepared Statements:
Harkin, Hon. Tom............................................. 30
Brown-Hruska, Sharon......................................... 37
Flory, Douglas L............................................. 39
Fong, Phyllis K.............................................. 32
Lukken, Walter............................................... 35
Document(s) Submitted for the Record:
Baucus, Hon. Max............................................. 49
Cochran, Hon. Thad........................................... 47
Warner, Hon. John............................................ 44
Brown-Hruska, Sharon, Biography.............................. 79
Flory, Douglas L., Biography................................. 98
Fong, Phyllis K., Biography.................................. 50
Lukken, Walter, Biography.................................... 64
Questions and Answers:
Harkin, Hon. Tom to Sharon Brown-Hruska...................... 124
NOMINATION HEARING
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TUESDAY, JUNE 25, 2002
U.S. Senate,
Committee on Agriculture, Nutrition and Forestry,
Washington, DC.
The committee met, pursuant to notice, at 10:02 p.m., in
room SR-328A Russell Senate Office Building, Hon. Tom Harkin,
[Chairman of the Committee], presiding.
Senate Present: Senators Harkin, Allen, Dayton, and Lugar.
STATEMENT OF HON. TOM HARKIN, A U.S. SENATOR FROM IOWA,
CHAIRMAN, COMMITTEE ON AGRICULTURE,
NUTRITION, AND FORESTRY
The Chairman. Good morning, the Senate Agriculture,
Nutrition, and Forestry Committee will come to order. This
morning, I wish to welcome to the committee four nominees: Ms.
Phyllis Fong, Mr. Walter Lukken, Ms. Sharon Brown-Hruska, and
Mr. Doug Flory. If I could ask them all to come up and just go
ahead and take the table right here where your names are. I do
not know if the names are on the back, also, there, but I would
sure appreciate it.
I know that Senator Allen and Senator Warner wanted to be
here. I expect them to come sometime, but they are engaged in a
meeting right now, which they cannot leave, as well as Senator
Lugar, but they have advised me to go ahead with the hearing. I
will recognize them, when they arrive, for introductions, and
comments and statements that they might have.
Ms. Fong is nominated to be Inspector General for the
United States Department of Agriculture. The Office of
Inspector General was established legislatively in 1978 to
perform independent and objective audits and investigations
within USDA, not an easy job, but it is critically important
for ensuring the efficiency and effectiveness of programs so
that the American public and the U.S. Congress can feel
confident in the third largest civilian department in the U.S.
Government. Since 1983, Ms. Fong has been employed in various
positions at the U.S. Small Business Administration, including
Inspector General, a position she has held since being
appointed by President Clinton in 1999.
Also, before the committee today are the nominations of Mr.
Lukken and Ms. Brown-Hruska to be commissioners at the
Commodity Futures Trading Commission, the CFTC. The CFTC is an
independent agency that regulates commodity futures and options
markets with the goal of protecting market participants against
manipulation, abuse of trade practices and fraud, and to
protect the integrity of markets that are vitally important to
the agricultural and financial sectors of our economy. It is a
very important agency, and its activities are of serious
interest to this committee.
As most of us at this hearing know, Mr. Lukken has served
on the staff of Senator Lugar for the past nine years, first,
as a member of his personal staff, and most recently as a
member of the full Agriculture Committee staff. This room is
not strange to you, Walt.
Ms. Brown-Hruska is currently an assistant professor of
Finance at George Mason University School of Management. From
1990 to 1995, she served as an economist at CFTC.
Finally, the committee welcomes Doug Flory as nominee for
the board of directors for the Farm Credit Administration. The
Farm Credit Administration is extremely important to the
financial soundness and the integrity of the agricultural
credit system.
As an independent agency in the executive branch of the
U.S. Government, FCA is responsible for the regulation and
examination of the banks, associations, and related entities,
such as the Farm Credit Banks and Co-Bank, that collectively
make up the Farm Credit System, plus the Federal Agricultural
Mortgage Corporation, otherwise known as Farmer Mac. These
institutions serve critical components of agriculture, and thus
this committee has every interest in assuring effective
oversight. Furthermore, if these institutions fail, it is
likely that the organizations will look to this committee and
the taxpayers of the country for help. We take this nomination
very seriously, Mr. Flory.
Mr. Flory has a long history with the farm credit
institutions. Most recently, he served as a member of the
boards of both the AgFirst Farm Credit Bank and the Farm Credit
of the Virginias.
Again, I welcome all of the nominees to the committee and
look forward to hearing all of your testimony. I will leave the
record open at this time for any statements and introductions
to be made by any Senators who may arrive shortly.
I am required to swear in all nominees, please stand and be
sworn in. If I could ask you all to please stand.
[Nominees sworn en masse.]
The Chairman. I will ask each of you in order, starting
with Ms. Fong, do you agree that if confirmed, you will appear
before any duly constituted committee of Congress if asked to
appear, Ms. Fong?
Ms. Fong. Yes, I do.
The Chairman. Mr. Lukken?
Mr. Lukken. I will.
The Chairman. Ms. Brown-Hruska?
Ms. Brown-Hruska. Yes, sir.
The Chairman. Mr. Flory?
Mr. Flory. I will.
The Chairman. Thank you very much.
Now I would just turn in order for your statements, and in
the order in which I have them here. We have, first, Ms. Fong,
nominated to be Inspector General for the United States
Department of Agriculture. You all have statements. I
appreciate the fact that you submitted them. I was able to go
over them. Your statements will be made a part of the record in
their entirety. If you would like to sum them up, I would
appreciate that.
Also, if you have family members that are here that you
would like to introduce for the committee, we would like to
recognize them, and we will do that in order as we introduce
each member or each of the candidates who are here. Before we
start, I would like to recognize my fellow Senator, Senator
Nelson, from Nebraska. If you have an opening statement or
anything like that, we just introduced the candidates for the
various positions, and we are just going to start with the
testimony of Ms. Fong.
Senator Nelson. Thank you, Mr. Chairman. I do not have an
opening statement. I am very anxious to hear what the nominees
have to say, so I prefer to listen to them at this point.
Thank you.
The Chairman. Thank you, Senator Nelson.
Ms. Fong, welcome to the committee. Congratulations on your
nomination, and please proceed.
STATEMENT OF PHYLLIS K. FONG, BETHESDA, MARYLAND, TO BE
INSPECTOR GENERAL FOR THE UNITED STATES
DEPARTMENT OF AGRICULTURE
Ms. Fong. Thank you, Mr. Chairman, and good morning,
Senator Nelson. I am honored to appear today as President
Bush's nominee to serve as IG at the Department of Agriculture.
I was raised in Honolulu, Hawaii, and I am a descendent of
immigrants from China. My great-grandparents came to Hawaii to
work in the sugar cane and pineapple fields and to provide
opportunities for their children. While those industries no
longer thrive, the love of the land and its fruit is still in
our blood.
After attending college in California and law school in
Tennessee, I embarked on a career in public service with the
Federal Government over 23 years ago. I am a career member of
the Senior Executive Service and, in 1999, I was nominated by
President Clinton and confirmed by the Senate to serve as the
IG at the Small Business Administration. My tenure at SBA has
been challenging and rewarding, and I trust that those
experiences have prepared me for the challenges that lie ahead.
SBA's mission is to help small businesses grow and thrive.
SBA does this by providing financial assistance, business
development and Government contracting opportunities. SBA also
provides disaster assistance to individuals and businesses who
are harmed by natural disasters.
Over the past three years, during my tenure at SBA, I
believe the IG's office has been very successful in
accomplishing its dual mission of promoting the effective
delivery of SBA programs and in addressing fraud. I am proud of
the efforts of the IG's professional staff, which have resulted
in more than $155 million in dollar results for the Government
and over 100 audit and inspection reports. Our investigations
have led to 163 indictments and 134 convictions of persons who
have sought to defraud the Government. This has been
accomplished with an appropriation level of about $11.5 million
and a staff level of about 107 people.
Numbers alone do not tell the whole story, however. Over
the past three years at SBA, we have undertaken a number of
projects that will ultimately make the SBA IG's office even
more effective. Briefly, these are:
Focusing IG efforts, through regular strategic planning, on
a few key things, rather than solely reacting to external
events;
We have moved beyond fraud detection to fraud prevention to
root out fraud before it occurs, to the extent that we can;
We have increased the use of interdisciplinary approaches
and projects that cut across the traditional audit and
investigative lines;
We have developed different types of approaches and
products that will help Agency managers address the issues that
are before them;
We have created an atmosphere of openness and communication
with the Hill and within the Agency;
Most important, we have fostered a tradition of personal
integrity, excellence, professionalism and respect for the
individual.
These approaches have worked well at SBA.
If I am confirmed as the IG at USDA, I will bring to that
job these lessons and skills. I will work very closely with you
and your staff, and with Secretary Veneman, to ensure that
USDA's programs are delivered effectively to those who are
their intended beneficiaries and that fraud is aggressively
investigated and addressed.
I look forward to working on these issues with the experts,
with you, your staff, the Department's program managers, and
the Department's OIG professional staff. I will bring to the
table an open and independent mind and a desire to help find
solutions to the challenging problems facing the Department. I
will also bring my experience as an IG to address those issues
that are common to all Federal entities; namely, program and
employee integrity, human capital management, accountability,
program performance and financial management.
Before I finish, I would like to introduce my spouse, Paul
Tellier, who has been very supportive of all of my efforts
throughout my career. I could not do this without him.
The Chairman. Welcome, Mr. Tellier.
Ms. Fong. That concludes my statement, Mr. Chairman.
Thank you.
[The prepared statement of Ms. Fong can be found in the
appendix on page 32.]
The Chairman. Thank you very much, Mrs. Fong.
Now we will turn to Walter Lukken, who is no stranger to
this room, nominated to be a commissioner of the CFTC.
STATEMENT OF WALTER LUKKEN, WASHINGTON, DC, TO BE A
COMMISSIONER OF THE COMMODITY FUTURES TRADING COMMISSION
Mr. Lukken. Thank you, Chairman Harkin.
Chairman Harkin, Senator Nelson, I am honored to appear
before you as President Bush's nominee to be a commissioner at
the Commodity Futures Trading Commission. I greatly appreciate
the President offering me this opportunity to serve the public.
In particular, I want to express my deep admiration to Senator
Lugar, for whom I have worked for almost nine years. I would
not have this opportunity, but for his support and guidance.
I would like to take this opportunity, first, to introduce
my wife, Dana; my parents, Wayne and Carol Lukken, which I
shamelessly mention are from Council Bluffs, Iowa, for the
chairman--
[Laughter.]
Mr. Lukken [continuing]. My wife's parents, Jerry and
Denise Bostic, from Morgan City, Louisiana, as well as other
colleagues and friends in the audience today. I truly value
their support throughout this nomination process.
The Chairman. Welcome, all of you.
In 1993, I began my career in Government service with
Senator Lugar as a legislative assistant handling financial and
tax matters. In the Lugar office, I learned not only the Senate
process, but also how fairness, integrity, and Midwestern
sensibilities can shape important policy decisions. Throughout
the years, I have tried to emulate these decisionmaking
qualities in my work, and I promise to bring such values with
me to the Commission.
In 1997, I began to cover issues relating to the futures
and derivative markets for Chairman Lugar on the Senate
Agriculture Committee. I was drawn to the futures industry
because of my educational background in law and finance,
because of the industry's growing importance to the U.S.
economy, and because of the thoughtful policy debates
surrounding it.
In 2000, I was one of the staff assigned to the Commodity
Futures Modernization Act, which was the most significant
reform of futures regulation in 25 years. My approach to
advancing this legislation involved openly engaging staff, both
Democrats and Republicans, as well as regulators and industry
members in an attempt to build a consensus among them. I
believe that this ``open door'' approach left those involved
with this legislation, even those opposed to it, with the
belief that the final product was developed in a fair manner.
If confirmed, I would use such an approach to assist the
Commission with its implementation of the act.
Despite several revisions of its statute throughout the
years, the primary mission of the Commodity Futures Trading
Commission has remained constant. The CFTC is charged with
protecting the public from fraud, preventing commodity price
manipulation, providing a price discovery mechanism for certain
commodities, and fostering open, competitive and financially
sound futures and options markets.
This mission remains as vital today as when the CFTC was
created. With the crisis of confidence in our financial markets
caused by corporate misdeeds and our global war on terrorism,
it is imperative that the commission be a diligent, but calming
force.
Like any good Hoosier, I like basketball analogies. Every
fan knows that a good referee can raise the level of
competition in a basketball game. The referee's presence
reassures both teams that the outcome of the game has been
reached in a just and fair manner. Likewise, appropriate
regulatory oversight and enforcement, especially during times
of economic stress, serve to revitalize markets by reassuring
the public and market participants that the rules of the game
are being followed.
However, it is equally important to understand that when
fouls are not being committed, referees and regulators should
allow the competition itself to determine the outcome.
Participants in our markets must have the freedom to compete,
to innovate, to take risks if our U.S. economy is to grow and
prosper. Free markets must determine winners and losers, not
regulators.
This is a difficult, but necessary, balance to achieve. If
confirmed, I will work closely with the other members of the
Commission to prevent and prosecute illegal activities while
understanding the need to minimize the regulatory footprint on
market innovation and competition.
Mr. Chairman, thank you for offering me this opportunity to
testify, and I welcome any questions.
[The prepared statement of Mr. Lukken can be found in the
appendix on page 35.]
The Chairman. Thank you very much. I like that analogy.
That is a great analogy, but why do you always beat Iowa all of
the time?
[Laughter.]
The Chairman. Now we turn to Sharon Brown-Hruska, Burke,
Virginia, nominated to be a commissioner of the Commodity
Futures Trading Commission.
Welcome.
STATEMENT OF SHARON BROWN-HRUSKA, BURKE, VIRGINIA, NOMINATED TO
BE A COMMISSIONER OF THE COMMODITY FUTURES TRADING COMMISSION
Ms. Brown-Hruska. Thank you, Chairman Harkin, Senator
Nelson.
I am grateful and honored to be here before you today as a
nominee to the Commodity Futures Trading Commission. I thank
President Bush for giving me the opportunity to put my
credentials and experience before you for your consideration.
With me today are my husband, Donald Hruska----
The Chairman. Welcome, Donald.
Ms. Brown-Hruska [continuing]. My mom, Mae Brown, my
brother and his wife, David and Susan Brown----
The Chairman. Stand up so we can recognize you.
[Laughter.]
Ms. Brown-Hruska [continuing]. My niece, Danielle Brown.
Our little boy, Jacob, is at home today. He is four.
The Chairman. Well, welcome to you all. Thanks for being
here.
Ms. Brown-Hruska. It is a particular honor for me to be
before the Agriculture, Nutrition, and Forestry Committee. As a
farm kid from White Hall, Virginia--surrounded by cornfields,
apple orchards, Herefords and Holsteins--the first vehicle I
drove was a tractor, my best friends were fellow 4-H Club
members, and my first job was in the local farm market. This
background was a gift of my father--my late father--who
continued to pursue farming, despite its lack of profitability
at the time, and my mother, whose parents homesteaded in
Saskatchewan, Canada.
When it came time to go to college, I received a
scholarship given by the Frank V. Armstrong Foundation. He was
the founder of the White House apple products. It is a business
local to my hometown of Winchester, Virginia. I followed my
older brother, whose FFA leadership had won him a scholarship
to Virginia Tech. In short, agriculture nurtured and supported
me and my family and contributes mightily to the well-being of
us all.
The Agriculture Committee's dedication and commitment to
the agricultural sector of the economy are so important and are
part of the reason I am so proud to be here before this
committee.
As an undergrad at Virginia Tech, I majored in economics
and international studies. After working for three years as a
public school teacher in the same county schools I had attended
as a child, I returned to graduate school to pursue a Ph.D. in
economics. This time, I followed my husband, who was completing
his degree, to Virginia Tech.
Futures markets had always been of great interest to me,
and I was fortunate that my dissertation chairman, Professor
Robert Mackay, encouraged me to focus my research on
derivatives markets and the relationship to the asset and
commodity markets that underlie them. That research interest
led me to the Commodity Futures Trading Commission, where I
worked in the Division of Economic Analysis for five years.
While in Government service, I found that contributing to the
study and analysis of futures markets and policy issues was
rewarding to me, and it was valued by the Commission and the
industry.
As a finance professor in the business schools of Virginia
Tech, Tulane University, and most recently, George Mason
University, I have taught courses on derivatives, risk
management, financial market innovation, investments, venture
capital, and international financial management. It is
rewarding to teach individuals and businesses about the
workings of financial markets and the uses and benefits of
financial instruments like futures, options, and other
derivatives.
I have published papers on futures volume and volatility,
market liquidity, hedging and financial market information.
Much of my work has highlighted how well these markets
function, how vital they are to the business and the economy,
and how regulation can, and has, contributed to ensuring that
these markets continue to perform their important functions of
price discovery and risk management.
As a finance professor and as an economist at the
Commission, I have seen firsthand how innovative and beneficial
the derivative markets are and how they can increase the
efficiency and performance of business and the economy. While
at the Commission, I spent much of my time employing economic
reasoning and investigation to evaluate rules and trading
practices to make certain that they were not anticompetitive,
fraudulent or manipulative. It was apparent to me then, as it
is now, that the Commission plays an important role in
fostering market integrity, financial integrity, and consumer
protection.
If confirmed by this committee and the Senate, I would work
hard to ensure that the Commission continues as a strong and
effective regulator, fulfilling its mission to guard the public
interest and making sure that the markets are efficient,
transparent and financially sound.
Thank you very much. I look forward to your questions.
[The prepared statement of Ms. Brown-Hruska can be found in
the appendix on page 37.]
The Chairman. Thank you very much, Ms. Brown-Hruska.
Now we turn to Mr. Doug Flory, of McLean, Virginia,
nominated to be a member of the Farm Credit Administration
Board.
Mr. Flory.
STATEMENT OF DOUGLAS L. FLORY, McLEAN, VIRGINIA,
NOMINATED TO BE A MEMBER OF THE FARM CREDIT
ADMINISTRATION BOARD
Mr. Flory. Thank you, Mr. Chairman and Senator Nelson.
This may be an unusual day to have two Hokies sitting
beside each other.
[Laughter.]
Mr. Flory. Both of us are Virginia Tech graduates.
My name is Douglas Flory, of Grottoes, Virginia, in the
heart of the Shenandoah Valley.
I am honored to be before you today, and on May the 9th,
President George Bush nominated me to serve as Director of the
Farm Credit Administration. This is a position of great
importance to those who live and work in rural America, and I
am humbled by the nomination, as well as the support, for this
position by my Senators, John Warner and George Allen, of the
Commonwealth of Virginia, and I am also honored and pleased
with the strong support of my representative, Bob Goodlatte,
and many other Senators, Congressmen, Virginia legislators and
agriculture commodity groups who have been very helpful to me
as a candidate for this nomination.
I especially want to mention the strong support of the
American Farm Bureau Federation, the National Cattlemen's Beef
Association, and the National Council of Farmer Cooperatives. I
have a few brief remarks, and then I would like to take any
questions that you might have.
As a seventh-generation Augusta County Virginian, I
continue a long family tradition of involvement in production
agriculture. My farm operation, Bunker Hill Farm, produces some
120,000 tom turkeys a year. I am also a 50-percent owner of a
general livestock grain and farm operation of approximately
1,300 acres, with 250 brood cows. As a part of this operation,
we run a performance bull-testing station for purebred Angus
breeders.
In my other nonfarm business life, I have been active in a
variety of businesses which were involved in agriculture in
rural Virginia. During my almost 40-year career, I was
assistant general manager of Rockingham Cooperative Farm
Bureau, a farm supply cooperative. I was vice president of
Dominion Bank of the Shenandoah Valley, which at the time was
among the largest agricultural banks in the United States. I
served as executive vice president, and chief operating officer
and board member of WRL Foods, a publicly traded poultry food
company.
During the past eight years, I was appointed by the 26th
Judicial Court of Virginia as receiver custodian for
agriculture and rural businesses. Additionally, I have served
as an elected farmer director of my local Farm Credit
Association for seven years and a director of AgFirst Farm
Credit Bank since 1994.
I have also enjoyed many important affiliations with
agriculture and financial institutions that have provided me
with very important insights and experiences. I have served on
both the American Bankers Association and the Virginia Bankers'
Association Agricultural Committees, I have been appointed by
four Virginia Governors to serve on Virginia's Agriculture
Credit Committee, Virginia's Agricultural Development Authority
and the Virginia Agricultural Council.
Mr. Chairman, I believe this background and experience
provided me with a very solid foundation to tackle the range of
issues required by a Farm Credit Administration director.
In preparing for this hearing, I reviewed earlier
nomination hearing transcripts for FCA board members. I was
struck by the comments of Senator Kent Conrad of North Dakota
during the confirmation hearing of the late FCA chairwoman,
Marsha Martin, in September 1994. At that hearing, Senator
Conrad stated, and I quote, ``The Number One priority for the
FCA board member is the safety and soundness of the Farm Credit
System, and that is the absolute responsibility of the Farm
Credit Administration.''
I want to assure this committee I take that admonition very
seriously, and I could not agree more wholeheartedly with
Senator Conrad. FCA has an enormous responsibility ensuring
that our farmers and ranchers, their cooperatives in rural
America, have access to constructive, competitively priced
credit. One way to ensure that credit availability is building
confidence with this committee, the House Ag Committee, the
executive branch and the farmers and ranchers of the Farm
Credit System, as well as those who purchase farm credit
securities on Wall Street. FCA must be a focused, arm's length
regulator, and I pledge to this committee that I will be that
kind of director if the Senate should confirm me for this
directorship.
Mr. Chairman, this concludes my remarks. However, I also
want to thank the committee staff who were very professional
and helpful, and I very much appreciated their help as I
prepared for this hearing.
I look forward to your questions, but I would like to
introduce my family--my wife, Avery, who has been extremely
supportive, and my daughter, Beth.
[The prepared statement of Mr. Flory can be found in the
appendix on page 39.]
The Chairman. Welcome to the committee. Thank you, Mr.
Flory.
My good friend and the ranking member of the Senate
Agriculture Committee has arrived. I know he was tied up in a
meeting and could not be here at the beginning, but I would
recognize Senator Lugar.
STATEMENT OF HON. RICHARD G. LUGAR, A U.S. SENATOR FROM
INDIANA, RANKING MEMBER, COMMITTEE ON
AGRICULTURE, NUTRITION, AND FORESTRY
Senator Lugar. Thank you very much, Mr. Chairman. I
apologize for my tardiness. The Republicans in the Senate have
been having a long caucus this morning.
[Laughter.]
Senator Lugar. We have concluded our work. It had to do
with the length of time people can serve as chairman and
ranking members.
The Chairman. Are you OK? I do not want to lose you.
[Laughter.]
Senator Lugar. I am fine. I have already served well beyond
the limits that have been set up for others, but nevertheless,
it is a pleasure to greet each of the nominees. I have enjoyed
reading your statements prior to your giving them today.
Likewise, we have had the FBI checks and visited with them as a
part of our responsibilities.
I take special pleasure in mentioning one of the nominees.
I am very proud to recognize Walt Lukken, who has been
nominated to be a commissioner of the Commodity Futures Trading
Commission. He has been a valued part of our office for almost
nine years, and during the past five years has specialized in
the futures and derivatives markets for this committee.
I greatly trust his advice and counsel on these matters and
so many others. In this capacity, for this committee, he was at
the center of the passage of the Commodity Futures
Modernization Act of 2000, which modernized the regulation of
futures and derivatives markets. His leadership and integrity
during this debate greatly improved the final product.
During the 2-year legislative process that led to its
passage, Walt helped build a bipartisan coalition of Senate
offices, industry members and agencies in support of enactment
of these reforms. As a result of his efforts, he was nominated
by Wall Street Letter for Washington Impact Player of the Year
2000.
Walt would be a tremendous addition, in my judgment, to the
CFTC. I am inordinately proud to introduce him to the committee
and to commend him today.
I thank you, Mr. Chairman.
The Chairman. Thank you, Senator Lugar.
I recognized Senator Nelson earlier.
Senator Dayton, welcome to the committee. If you just had
an opening statement or something, then we are going to go into
the questions.
Senator Dayton. I would just say I worked for Senator Fritz
Mondale for two years. I spent about six months trying to get
one sentence out of him favorably toward me. I am impressed
that you receive that kind of praise.
[Laughter.]
Senator Dayton. I also made note here, Mr. Flory, that
anybody who can get appointed by four different Governors of
any State is commendable.
[Laughter.]
The Chairman. Thank you.
I have a few questions for each of you, and we will go in
order here just for five minutes or so each.
Ms. Fong, the IG's office is one that was established by
Congress in the 1970's to be an independent watchdog on the
departments to which they are attached. It is an interesting
position. I have often said the IG does not work for the
Secretary of any department, whether it is Health and Human
Services or the Department of Defense.
They are there, of course, appointed by the President, but
in an independent capacity, to advise both. This is where it
gets tricky, to advise both the department head, the Secretary
in this case, and us here in Congress as to their insights,
their evaluations of what is happening within that department
and to give us forewarnings of any problem areas that the
Inspector General might see, through audits and investigations.
You can issue subpoenas, indictments, fines, administrative
penalties. You have got a broad array of different actions--
since you have been an Inspector General before--available.
I am a firm believer in an independent office and also an
office where the Inspector General is not a passive player, but
where the Inspector General is actively involved in ensuring
that taxpayers' dollars are not wasted, making sure that we do
not have abuse, to make sure that different agencies under the
department are fulfilling their legal requirements of what they
are supposed to do.
With that, I would just ask you, again, your vision of the
Inspector General's Office, and do you envision playing an
activist role in that regard, in terms of the audits, and in
terms of investigations, and informing us here, especially in
the Senator Agriculture Committee, of keeping us advised and
informed of any problem areas or suggestions and advice that
you might have for us to do things that would, A, protect the
taxpayers' dollar; B, make sure that the laws that we have
passed here are adequately carried out?
Ms. Fong. Mr. Chairman, you have hit the nail on the head.
That is the challenge of the IG's job, to fulfill the mandate
under the IG Act to keep both the Congress and the
Administrator or the Secretary, as it may be, fully informed of
the challenges and the issues before the Department. That is a
very tough part of the job.
I commit to you that I will be an active IG. I have been an
active IG at SBA, and it is my view that, in order to carry out
the IG Act, an IG must proactively be on the front lines of the
issues. We must be out there identifying the issues as they
emerge, as they come to the surface. We must notify the
Congress, and the Secretary and her program managers, as to
what we are finding. We must be, a vigilant neighborhood
watchdog.
Some have characterized IGs as junkyard dogs, others have
characterized them as lapdogs. I view our role as being the
aggressive, assertive watchdog that protects the American
taxpayers' property and enhances the safety of the American
taxpayers' investment. If we see crime about to happen, we must
aggressively go after it. We must look for proactive ways to
deal with systemic issues that could prevent crime. When we see
management issues that are coming up, we must talk to all of
the interested parties so that we can work to achieve a
solution.
That is my vision for the IG's Office.
The Chairman. Ms. Fong, I appreciate that because there is
a serious concern that I have about the resignation of the last
Inspector General at USDA. From what I have learned, and I do
not know all of the details, but this committee is going to
followup, it may well be that he was asked to resign or even
forced to resign because he expressed concerns on behalf of the
public that did not sit well with the Secretary or the
administration related to the inspection of imported foreign
meat products. No one in the Congress cares more about the
protection of the public as it relates to food safety than I
and the members of this committee. As I said, I do not know all
of the details of this, but this committee will followup on
that.
I just want to have your assurance that you will be
independent and willing to stand up to the Secretary or to
Congress. Sometimes you have to stand up against us, too.
Ms. Fong. You are right.
The Chairman. Anyone else to say what you believe and what
your audits, investigations, your team feels needs to be said
on this or any other issue. I just want your assurance that you
are willing to stand up, even though it may be where someone
may ask for your resignation.
Ms. Fong. All of us IGs who are appointed by the President
understand that those are the conditions of the job, that we
serve at the pleasure of the President. Of course, he must
notify you if he wishes to remove one of us, but that aside, I
am willing to stand up, as you say, and bring to your attention
issues that I feel need to come to your attention. My role is
to bring to the table my independent, objective, professional
take on what is coming up.
The Chairman. I appreciate that very much, Ms. Fong.
Thank you, Ms. Fong.
I would recognize Senator Lugar.
Senator Lugar. Thank you very much, Mr. Chairman.
Ms. Fong, the IG at USDA is responsible for auditing and
investigating activities of more than 110,000 employees, with
an annual budget of $76 billion. Now this is in contrast to the
responsibility that you have had with 4,400 employees and $645
million, and while this type of transition is not
unprecedented, it is a significant undertaking.
I have asked this in the context of the fact that in June
1998, GAO issued a report that was critical, prior to your
tenure,--of SBA's Office of the Inspector General for
conducting very few audits of guaranteed vendors which may have
offered the opportunity for fraud in the view of the GAO.
Again, in your statement, you have recited, at least for
the record, some activities in which you have been involved,
but obviously you came into a situation in which the GAO report
had criticized lack of activity. Give us some idea of your
grasp of the enormity of this new responsibility.
Ms. Fong. That is a very good question, Senator Lugar.
I believe that I am ready, and I will tell you why. There
are three main reasons why my SBA experience has prepared me
for this job.
First of all, many significant substantive and programmatic
issues at SBA also exist at the Department of Agriculture and
SBA. SBA is a lending agency. We make guaranteed loans, we make
venture capital available to small businesses, and we provide
disaster assistance to nonfarm persons and businesses. In these
program areas, I believe that the issues in SBA and USDA
programs would be similar, and I will be prepared to deal with
them at the Department of Agriculture.
Second, there are a number of issues that cut across all
Federal agencies. These are the management issues, the ``boiler
room'' issues that affect how a Government agency runs. Key
examples include financial management, information technology
and cyber security, human capital resource management, (which
has become such a big issue for every agency), and
accountability and performance--do programs deliver to the
taxpayer what Congress included them to deliver. I have done a
lot of work on these issues at SBA, and I will bring my
experience and expertise to the Department of Agriculture,
which faces similar challenges.
Third, as you pointed out, the Department is much bigger
than SBA, and the Department's IG Office is much bigger than
SBA's IG Office. I believe, however, that my experience at SBA
in managing a work force of over 100 people with a multi-
million dollar budget and a mission that includes projects in
multiple disciplines investigations, audits, and inspections--
has prepared me for the management challenges that I will face
at USDA, and I am confident that I can lead the organization
and make it even more productive and effective than it already
is.
Senator Lugar. I would just followup with one question. The
Chairman has cited the previous Inspector General and the meat
inspection issues. Indeed, he came before the committee on more
than one occasion with regard to this and other issues. Have
you examined the issues the last Inspector General faced, as
well as other issues that may be out there in USDA that his
investigations, at least if not uncovering, have gone into in a
substantial way? In other words, do you have some idea of the
agenda that is there now, quite apart from things that you and
your staff may uncover?
Ms. Fong. I believe that I am familiar with the key,
substantive issues that are facing the Department of
Agriculture. I have read many of the IG Office's reports. I
have been briefed by the Acting Inspector General as to the big
issues that are currently before the Office. I understand that
there is are a number of significant issues facing the
Department such as homeland security, meat safety inspections,
crop insurance, the HACCP system, as well as departmental
administration, financial management, civil rights, and a
number of other issues.
Senator Lugar. Thank you very much.
Thank you, Mr. Chairman.
The Chairman. Thank you, Senator.
Senator Dayton.
Senator Dayton. Thank you, Mr. Chairman.
I have some questions. Maybe I will alternately go with
you, Mr. Lukken, and then ask the same of you Ms. Brown-Hruska.
The Chairman. If you do not mind, I was going to go each
person separately.
Senator Dayton. Oh, I am sorry. I see. I am sorry. I missed
that part of it. All right.
Ms. Fong, what is the most, without violating obviously any
issues of confidentiality, what is the most controversial,
going back to what the chairman said, and I agree with him,
too, and you did as well, what is the most controversial or
most difficult decision you had to make in SBA, in terms of
coming forward with something or not?
Ms. Fong. I would say one of the most significant issues
that we worked on in the past two years involved the Small
Disadvantaged Business Certification and Eligibility Program,
which is a Government procurement certification program.
Congress authorized SBA to certify small businesses to
participate in this program.
Just to give you a general sense of it, we had a number of
whistle-blower complaints that were involved. Our people also
felt that the program was perhaps not running as efficiently as
it should have been. It involved 20 other departments and
agencies in the Federal Government, and funding from those
departments and agencies to the tune of multi millions of
dollars a year. Our office went in and did a number of audits
and investigations on different aspects of the program and at
the end of our effort, which took about a year, we came out
with some very hard-hitting reports that pointed out that the
program really was overstaffed and overfunded.
The other departments and agencies were being charged much,
much more than they should have been charged to participate in
this program. We projected that over the course of the next 5
to 10 years, if SBA implemented all of our recommendations,
there would be savings in the $12-million range per year,
stretching out for a long period of time.
There were also some personnel issues and some potential
criminal issues that we had to work with the Department of
Justice on for prosecution consideration. We also coordinated
with the Office of Special Counsel on the whistle-blower issues
and handled that very successfully, I believe. We were able to
protect individual rights, while still carrying out our audit
and investigative responsibilities.
Senator Dayton. Thank you.
One request, we clearly need a strong leader for the IG
office in the USDA. I had an experience just a couple of months
ago, Mr. Chairman, requesting information from the Department,
which presumably would have required the involvement of the
Inspector General, and after 10 weeks had lapsed, received,
well, indirectly through the chairman, a response that
basically said that nothing had been done in response to the
request.
I guess what I am looking from you as a commitment, not
that you will, as the chairman said, accede to every request of
Members of Congress, but that you will respond in a timely
fashion with what you intend to do or not do.
Ms. Fong. I will. It is my practice to respond to
congressional committee requests and individual member requests
very quickly, to at least let you know what we are doing--that
we are evaluating it, that we are taking it into
consideration--and to have a conversation with you about what
it is you need so that we can respond more effectively.
Senator Dayton. Thank you.
Thank you, Mr. Chairman.
The Chairman. Thank you, Senator Dayton.
We have been graced with the presence of our Senator from
Virginia, Senator Allen, and we welcome you here to the
committee, Senator Allen. I know you are here for the purposes
of an introduction, and I know you have a busy schedule, so we
would recognize you at this time for purposes of introduction.
Thank you, Senator Allen.
STATEMENT OF HON. GEORGE ALLEN, A U.S. SENATOR FROM VIRGINIA
Senator Allen. Thank you, Mr. Chairman, I appreciate that
courtesy, and thank you, Senator Lugar, Senator Dayton, and I
want to thank you all for scheduling this important hearing
today.
President Bush, Mr. Chairman and members of the committee,
has wisely nominated Doug Flory of Grottoes, Virginia, to serve
on the Farm Credit Administration board, and I am delighted to
be here with Doug and endorse him wholeheartedly.
Doug brings--and I am sure you have already read through
it--a wealth of experience which is important in this role. His
experience is in farming, as well as in banking and financing.
He has been involved in farming his entire life. He continues
to be involved in poultry, livestock and grain operations in
the Shenandoah Valley of Virginia. In addition, he has served
in a variety of roles, senior officer with Dominion Bank, also
executive vice president for WLR Foods for four years. He has
served as a director on several important Farm Credit
institutions over the years, including one in Virginia. He is
involved in poultry associations, banking, farm managers, rural
appraisers, all. This is exactly the type of person you would
want to have overseeing the Farm Credit Administration.
I wholeheartedly endorse his nomination. Hopefully, you
will be able, before the July 4th recess, to vote on this fine
individual.
I will also say that Senator Warner would love to be here.
I am not sure if he will make it or not. He is managing the
defense authorization bill on the floor at this time, but I
know that he would want me also to relate to you his strong
endorsement of Doug Flory, and I thank you all for this brief
interlude and opportunity to introduce a fine Virginian.
Thank you, Mr. Chairman.
The Chairman. Senator Allen, thank you very much for
gracing us again with your presence and for your strong support
of Mr. Flory.
You are right. He has a big resume, and he has been very
active, and I do not think we will have any problems at all. He
is the type of person that we do need on that board, and I
thank you for being here, Senator Allen.
Senator Dayton. Mr. Chairman, I would just observe that Mr.
Flory, in his remarks today, he had been appointed by four
different Governors of Virginia. I thought that was a
commendable ability to get along with a variety of different
perspectives--four points of view.
Senator Allen. Yes, and he----
Senator Dayton. I assume you were one of the four. I just
wanted to check on that.
[Laughter.]
Senator Allen. Thank you very much.
The Chairman. Thank you.
This is for both Mr. Lukken and for Ms. Brown-Hruska. The
agriculture futures and options markets now make up a smaller
share of the CFTC's fear of oversight than in the past. When
this first started back in the 1970's, when I first got here,
it was almost all agriculture. Now it is becoming a smaller and
smaller part. However, the honesty and integrity of those
markets are extremely important to the farmers, and ranchers,
and agricultural businesses in the United States.
I guess I just want both your assurances that you will make
certain that the CFTC devotes adequate resources and attention
to agriculture under its jurisdiction.
Mr. Lukken.
Mr. Lukken. Well, having worked on this committee, I guess
I know where my bread is buttered.
[Laughter.]
Mr. Lukken. Once I get down there at the CFTC, if
confirmed, I would be very diligent in making sure that
agriculture is looked after. I know the CFTC is doing a pretty
good job at that right now, in fact. There were recent
allegations regarding cattle futures manipulation, and the CFTC
did an excellent job, a thorough job of looking into those
allegations and providing a report on that, and they continue
to oversee and monitor those markets to give assurances to
those businesses and farmers who have to use those markets. I
fully understand the importance of these markets and will be
sure to look after them.
The Chairman. I appreciate that very much, Mr. Lukken.
Ms. Brown-Hruska.
Ms. Brown-Hruska. Thank you very much.
I have studied crop yield, insurance futures, and cattle
futures, and looked at a number of markets, agricultural
markets, in my research and when I was at the CFTC, and that is
where the rubber hits the road when it comes to price
discovery, and the importance of price discovery to the
underlying markets, to the underlying agricultural markets.
It is so important because the futures markets are the most
liquid market. It is where a lot of us look to find where the
prices are being determined, and so it is important to monitor
those markets, to put every resource that you have to surveil
and enforce the rules to make sure that there is no fraudulent
or anticompetitive activities taking place there. It is a top
priority for me.
Thank you very much.
The Chairman. I appreciate both your answers. Thank you
very much.
Senator Lugar.
Senator Lugar. Thank you, Mr. Chairman.
One of the major factors in the Commodity Future Trading
Act that was passed two years ago was the provision for swaps,
to give legal certainty, and we had lots of testimony over two
years about that issue.
Now, since the passage of that act, many questions have
arisen with regard to the amount of coverage, metals and energy
and many critics, given the crisis of energy prices and the
scandal surrounding Enron cite specifically the omission of
energy. Likewise a considerable debate occurs in academic
circles at over.
I would like the opinion of both of you as to what we ought
to do with regard to energy and metals legislatively.
Administratively, you can only deal with what Congress has
provided, but given your broad experience in this field can you
give us at least some pointers as to what ought to be good
public policy?
Mr. Lukken, do you have a view on this?
Mr. Lukken. Obviously, Senator Feinstein has offered an
amendment on the floor to take care of this problem. The
intention behind the Feinstein amendment is a very good one.
One of the public policies that we aim to prevent down at the
Commission is commodity manipulation, and that is what possibly
was happening out in California. There were allegations that
several companies were moving energy around to manipulate the
price and that California residents may have suffered as a
result.
The CFMA did reserve for the CFTC authority to, use their
antimanipulation authorities to go after these type of abuses.
Last week, in fact, they issued three subpoenas to energy
companies trying to find documents, and they will prosecute
these violators, if that is what they find. I guess the
question is do we need more, and that is something that is
going to come out with investigations that agencies are having,
with the hearing that this comittee is probably going to have
in a couple of weeks. It is good process to let this sort of
work its way through and to understand a little clearer what
exactly the problem is to allow regulators to come to us and
say, ``This is the information we need, this is the information
we do not need'', and to solve these manipulation problems.
The beauty of the Commodity Futures Modernization Act was
we created a flexible, tiered structure for regulating. If we
determine that the tier is too low for energy, that they are
not being regulated enough, well, we have the option, as
policymakers, to increase that regulation, and the outline is
there to do that. If policymakers make that decision, we will
certainly abide by that.
Senator Lugar. Ms. Brown-Hruska.
Ms. Brown-Hruska. I would like to second everything he
said.
[Laughter.]
Senator Lugar. That was a pretty good answer.
Ms. Brown-Hruska. Yes, I thought it was great.
I am not yet familiar with all of the specifics of the CFTC
authority with regard to enforcing these provisions on
manipulation and antifraud in the energy and metal markets. I
know that there were some exemptions provided for them, but
there were also some parts of the regulation that remains.
More generally, though, I do believe regulators can, and
should vigorously investigate, collect evidence, build a solid
case and prosecute without reserve those who would commit fraud
or manipulation.
If you confirm me to serve on the CFTC, I would work
diligently to assist and support the individuals responsible
for surveillance and enforcement, to vigorously investigate and
prosecute those who would attempt to operate outside of the
rules.
With respect to the CFTC's authority in the OTC markets, I
believe that this is a crucial and important matter for
Congress to be considering. As I understand it, there are
multiple regulatory authorities who have responsibility to
oversee the participants in these markets.
The CFTC is the agency which has overseen the exchange-
traded derivatives markets for 28 years. It has a wealth of
expertise. They understand derivatives and the vital functions
of hedging and risk management, as do I. It is appropriate and
good that Congress is looking at this issue and working with
the regulatory agencies involved in their deliberations. For my
own part, I am looking forward to serving with Chairman
Newsome, drawing from his wisdom and leadership, the
perspective and experience of Commissioner Tom Erickson and
Commissioner Holum-Peterson. These are resources that I would
rely upon if I were confirmed to join them.
I look forward to working with the CFTC staff, Walt Lukken,
assisting Congress in making whatever determination you do as
regards jurisdiction and issues associated with these markets.
Senator Lugar. I thank you. I have one question that
follows, on Chairman Harkin's question with regard to
agriculture. I found, with regard to my own modest farm
operation, that knowledge about the markets, about options and
futures, forward sales, plus utilization of risk management
crop insurance legislation that this committee has passed is
absolutely essential for getting some rate of return out of my
investment on that farm. That is probably true for most farmers
in America and probably, in many cases, makes the difference as
to whether they have a reasonably small profit or none at all
or losses.
The risk management aspect is one thing that I stressed
during our farm bill debate, and I do not want to revisit all
of that debate, but it appeared to me that one of the ways that
we could be most helpful to farmers in the commodity title
would be through enhancing the risk management safety net
aspects so that many more farmers would participate, and the
safety net, in fact, would be more certain.
I am just curious about the CFTC as you see it of
attempting to help producers of all sizes in this country
understand the markets that you regulate, understand the
possibilities, as well as the dangers that are there. It
appears to me that this is one of the broad gaps in American
agriculture, among those who know and those who do not, and
that knowledge is power, and in this case the power to make a
profit, as opposed to a loss.
This is not entirely your responsibility. We all have that
responsibility, this committee, as candidates for election,
whatever fora we have. What do you foresee the CFTC might do to
enhance some knowledge in respect for these markets?
Mr. Lukken, do you have a view on that?
Mr. Lukken. I have always wondered about the disconnect
between trying to help--you have a useful tool for farmers and
the futures markets, that as we have struggled throughout the
years, we could never figure out why these were not either more
user friendly for farmers or why they could not use these
products to help manage risk, and just very few farmers seem to
do that.
It is one of my goals, when I get to the CFTC, is explore
this, whether it is a marketing issue, are we not presenting
the products correctly to them? Is it a regulation issue? Do
they not have the tools that they need? I don't know. I mean,
it is something that I will have to look into, but the CFTC has
an Ag Advisory Committee there that occasionally gathers, and
it is ag leaders, it includes USDA, the Risk Management
Division down at USDA, and so it has some pretty good thinkers
that can sort of think through these issues and try to come up
with ways to help farmers manage risk because, as you said,
this is something we struggled for a long time and hopefully we
can improve upon.
Senator Lugar. Ms. Brown-Hruska.
Ms. Brown-Hruska. Thank you.
Education is very important. It is something that I have
spent my life doing, and it is important for us to try to make
derivatives like futures and options and other things that are
available to farmers accessible, in terms of how they work and
how they can be used, and that is a job that the Commission can
perform in their public relations, and in their pamphlets, and
in their speaking opportunities. It is something that I would
certainly like to contribute to.
Senator Lugar. Thank you.
The Chairman. Senator Dayton.
Senator Dayton. Thank you, Mr. Chairman.
Mr. Lukken, Senator Lugar alluded to the decision made some
time ago regarding energy, taking energy out of the oversight
of the Commission. Given your experience over the last several
years, are there any commodities that you believe are included
now in the Commission's oversight that should not be or are
there any that are not that you believe should be included in
the oversight.
Mr. Lukken. The approach, when Congress looked at the CFMA,
was to try to really look at the public policies that back the
CFTC: manipulation, consumer protection and overseeing, the
retail public. Those markets that didn't deal with a product
that could be manipulated or didn't deal with retail customers,
we tried to have less regulatory structure for them. That
included financial swaps that large banks use, that the
financial instruments are so numerous they couldn't be
manipulated. It was the agreement of the President's working
group to exclude those from the CFTC's jurisdiction, although
there are many other banking regulators that may have
jurisdiction over them.
As you sort of think about that structure, and you could
sort of think of agricultural products and say, ``Here is
something that can be manipulated that farmers use, the retail
public is served, those deserve the highest level of regulation
we have,'' and you could think about energy somewhere in
between. Where we position that is the thing that policymakers
will be struggling with.
Congress looked at the energy exemption when it was
struggling with this back in 2000. It worked with the CFTC.
They wanted to add additional safeguards to the energy
provisions, and we provided those safeguards that were
ultimately enacted into the act.
Now there have been subsequent events. We may need to add
more safeguards, and that will hopefully come out in the
hearings and the investigations that we are having. It is just
a matter of where on that spectrum between the highly
manipulatable products and the ones that you can't manipulate
do you place these other types of products. Energies and metals
are the ones that are mainly named.
Senator Dayton. You mentioned before deferring to
policymakers, presumably Congress, in terms of some of these
decisions, this is an area where, frankly, we are going to have
extremely limited expertise and time to focus, and you are
going to have, hopefully, your entire pursuit will be this.
Given the complexity of them and the proliferation of them, I
hope that you will take an aggressive and active role in
bringing to our attention areas of deficiency, rather than
waiting for something to appear, as you say, in the headlines
of the paper.
Ms. Brown-Hruska, I notice that you were with the Division
of Economic Analysis for several years, and it says here that--
and this is back from 1990 to 1995--we are looking at some of
these areas, such as the anticompetitive nature of derivative
markets and the like. I am impressed that the Commission at
that stage was on the, I would say, the cutting edge or front
edge of some of these new financial instruments.
My question is, given the ingenuity with which these
instruments seem to be newly devised or varied, and often with
the intent, in part, at least, to have an instrument that
circumvents or avoids any kind of regulatory oversight. How do
you think the Commission can stay abreast of, stay current,
with these kind of cutting-edge developments, and again will
you be willing to bring to us areas where you think the
Commission should be involved that it is not at that time?
Ms. Brown-Hruska. Yes, It is very important. That is an
excellent point. There is such complexity that has come forth
from the over-the-counter markets especially, and at times it
appears that some of the goals are not that honorable: some are
developed to try to avoid taxes, and some are developed to try
to cook the books, and that certainly is inappropriate, and it
is something that I believe that the CFTC and other regulatory
agencies and Congress need to get to the bottom of. It is very
important.
Senator Dayton. Do you think the Commission is equipped in
terms of staffing and expertise, to apprise itself, apprise the
members of the Commission on these new developments?
Ms. Brown-Hruska. Well, I know when I was there, I was very
impressed with the skill and expertise of the Commodity Futures
Trading Commission staff and with the commissioners at the
time. There was a great awareness of the innovation, and
especially a great understanding on how these instruments could
be used to manage price risk and to actually lower price
volatility that we sometimes see from spikes in supply and
demand in the underlying markets.
There is an understanding, and also there were a lot of
important cases, I recall, that came up where people were,
institutions were developing and using derivatives for ill
gain, and the CFTC went after them then, and the CFTC is
prepared to go after them now.
Senator Dayton. This is my final question, Mr. Chairman.
Just briefly, from each of you, the people who are most
interested in the Commission and its dealings are those who are
in the businesses, the industries that are being overseen. The
cacophony of responses is always less regulation, deregulate,
take Government strictures off of us and let the markets
dictate results and get out of the way. Those who are perhaps
exposed in those areas, although anybody who gets into those
kind of tradings should be well-advised that it is participant
beware, are not going to be heard from, and I am thinking
particularly of, say, the Enron pensioners and others who may
even unwittingly be pulled in.
Can you just give me, briefly, your role of the regulatory
responsibility of the Commission and what is appropriate
regulation in an era which emphasizes deregulation?
We will start with you, Ms. Brown-Hruska, please.
Ms. Brown-Hruska. Sure. Thank you, Senator. That is a very
important question, and regulators have an obligation to ensure
the economic and financial integrity of the markets and to be
accountable to the individuals and institutions who use the
markets and the citizens who pay their taxes.
I am sure that if I were confirmed by this committee and
this Senate, I would dedicate myself to upholding the values
that include protection of the public interest, and that
includes consumers, investors, hedgers. It is important to be
accountable to these individuals, and being accountable to the
people who are at that level and who pay their taxes means
being accountable to this committee and to the Senate.
I would be committed to the committee and dedicate myself
to upholding the important functions of economic integrity of
the market, and the financial integrity of the market, and
investigating to the full extent that is possible any
violations of the laws that are there.
Senator Dayton. Thank you.
Mr. Lukken.
Mr.Lukken. Senator Dayton, as you mentioned, there are many
times when the market incentives work against the public's
mission, whether that is consumer protection or manipulation,
and that is the time when we have to be the most diligent and
the most present. There are certainly times recently that we
have seen that, where certain misdeeds in the corporate
community have happened. Despite the claim that they were self-
disciplining themselves and the markets were working, they
obviously weren't, and so we have to be a diligent force now,
especially during times of economic stress, to be out there, to
make sure that the community knows that we are watching, we are
reassuring folks, and that when we find misconduct, to be
diligent and go after that, be aggressive, and I promise to do
that.
Senator Dayton. Thank you, Mr. Chairman.
The Chairman. If I might just followup on that just
briefly. CFTC, you can use subpoenas, you can go after things
after the fact, but one of the things, and I do not want to put
words in Senator Dayton's mouth, one of the things I am
concerned about is making sure that CFTC uses whatever
authority it has to prevent these things in the first place.
You mentioned, Mr. Lukken, this committee probably within the
next few days, after we get back from the 4th of July recess,
we will be having a hearing on derivatives, and especially what
happened in the energy area. We are gathering information on
that right now, and so CFTC will be, of course, part of that
hearing process.
I guess I just want to know if you believe that the CFTC
has the adequate ability to get information prior to something
happening; in other words, to get the kind of information on an
ongoing basis to sort of raise the red flag and say, wait a
minute, if you continue down this way, we are going to have
some real problems and to alert the public and to alert us here
in the Congress.
I have no doubt that CFTC has the authority and the power
to get it after the fact, and to issue subpoenas and do the
kind of things you have to do, but I am more interested in the
CFTC preventing the kinds of manipulations and lack of
discovery, price discovery in the first place. I guess my
question is do you think that you have enough authority to do
that in the CFTC?
Mr. Lukken. Well, it is a little difficult to know, before
I get down there, exactly what information they are currently
receiving, and so, for me, it is a little difficult to answer
that question. I promise that once I get down there, that is
hopefully what is going to come out of some of these
investigations that are ongoing in some of these hearings that
you will be having is to find out that type of information--are
you receiving enough beforehand? Can you prevent this type of
activity? If not, then maybe we need to change it. If so, then
maybe we can keep it the same. I mean, those are the types of
questions that hopefully will come out during these
investigations.
The Chairman. Yes.
Mr. Lukken. Congress tried to, in the CFMA, provide some
authority for the CFTC to do some beforehand in the energy
markets, especially for multilateral transactions, so Enron was
a bilateral facility, their trading mechanism, but there are
some multilateral energy derivative companies out there that
have to register with the CFTC, have to do certain reporting
requirements, have to record keep. There are all sorts of other
requirements on them, so that is going to have to be looked at
to see whether that is proper level or not.
The Chairman. Well, that is one of the things we are going
to be looking at when we go down this hearing.
Senator Dayton. If I could just followup on that, Mr.
Chairman. I certainly agree with you. You can put words in my
mouth any time if you find----
[Laughter.]
Senator Dayton. I do not expect you to identify ahead of
time that an Enron is proceeding in ways that it is. It would
be great if you could do so, but I mean there are just too many
companies, too many players. What you need to do is make sure
that the staff determines that these instruments are
structurally sound. I remember reading once a couple of years
ago some hotshot said to his colleagues, ``We don't sell these
instruments to the sophisticated investors, we sell them to the
unsophisticated investors.'' In other words, we contrive
something and try to get people who think they can make some
money quickly and do not understand what they are getting
themselves into.
Everybody is going to be involved in these markets. In my
view, as I said, you should have a big warning sign, there is
no gain without risk involved. The instrument itself needs to
be structurally sound and not a contrivance in such a way that,
and if it is being perpetrated on the public by some active
sales people, that is where you have to be really aggressive
and step in with both feet, and I hope you will consider that.
Thank you.
The Chairman. Mr. Flory, the New York Times has written a
series of stories concerning Farmer Mac, and I am sure you have
read those over, and they have been, if I might say, less than
flattering. Specific concerns raised include the independence
of Farmer Mac's board of members, the overcompensation of
executives, insider control of stock, inadequate capital and
reserves and questionable investment practices.
Now I understand that you have not had access to materials
that would allow you to specifically comment on this situation.
I am not asking this. I am just, nonetheless, these set of
circumstances provides a timely hypothetical and I just, again,
I want to know have you looked at those articles, are you aware
of them, and just, as a new board member, how you might
approach responding to those concerns, and this committee will
probably also be delving into those at some point down the
road.
Mr. Flory. Yes, Senator Harkin, I am aware of the public
exposure, the same as the rest of us around here who have read
the press. As you say, I have no access to current information
at the Board. I am very familiar with Farmer Mac's mission, and
it is extremely important, as it rounds out the credit needs of
the American farmer and rancher in rural America.
However, I will pledge to you and the committee that as I
become involved as a board member, if I am confirmed, that I
will move in that direction very fast and will have a great
interest in that.
The Chairman. Thank you, Mr. Flory.
Senator Lugar.
Senator Lugar. Thank you, Mr. Chairman.
Mr. Flory, several years ago during the savings and loan
crisis, farm credit came to a crisis. Often the two were
compared; the size of the crisis in farm credit was
substantially less but, nevertheless, many of the problems very
similar.
This committee likes to believe that our solution to the
farm credit crisis was a lot less expensive to the American
taxpayer. It was being suggested at the time that the
liabilities might go to $10 billion--and we have roughly
settled it for something less than $1.3--but, still, this was a
shock not only to farmers and bankers, but to the public as a
whole that all of this proceeded without either the proper
oversight or reforms.
Now, subsequently, we have had fairly smooth going, and
hopefully your tenure will be a part of that, but the Farm Mac
situation the chairman mentions is a warning signal on the
horizon that things are never particularly safe, and I
appreciate the chairman's thoughts. We may even do some
oversight during the waning weeks and months of this year.
As I read the press account, it reminded me of the
testimony we heard on long-term capital management a while
back. That is extraordinary leverage. Now that extreme case of
long-term capital sets a parameter at the outside, and Farmer
Mac, in its worst condition, could not be at least that
leveraged, but the charge is being made that the reserves
behind various investments are inadequate, substantially
inadequate, and that is going to cause some problems in markets
such as the ones we have now unless somebody does something
about it.
I appreciate that you are studying it. You have not been
into the private details and so forth. Hopefully, you and the
other commissioners will be there very rapidly. This committee
probably should be there. We need to wrestle this one to the
ground before it gets out of hand, and I say that as somebody
who was here at the beginning of Farmer Mac.
We saw the need in order to get to every small town, small
county, remote place in America that said we are being left
behind in terms of farm credit, and we heard that call, and
there is great sympathy in this committee for saving every
family farm, wherever it may be. Farmer Mac was one of the
responses to that call, but it may have moved away from at
least that initial purpose at least as we envisioned it, and if
so, perhaps we can help you in forming remedies.
I do not have a further question, but I thought I would
take the advantage of this hearing to make a comment so that
you will understand, the gravity the chairman and I feel about
this and that apparently you share.
Let me just state that in the Farm Credit Administration,
from time-to-time, without getting into all of the private
comments the board members make to any of us, there seems to be
an occasional lack of communication among some of the
principals who are involved. I hope that you, as a person who
has had some longevity in Government, serving under four
governors, may facilitate people talking to each other in a
better way. I just say this as an outside comment, as one who
has listened to a number of people and tried to facilitate this
dialog.
Clearly, it is important, that you all share the same data.
You may demarcate responsibilities, as the case may be, and
organize your affairs, but nevertheless the committee would
like to have confidence that everybody is on the same page,
whether we are talking about Farmer Mac or whatever else may
come along the trail, because ultimately all of you are
responsible.
I thank you for indulging me on these editorial comments,
but they may be pertinent to your service.
Mr. Flory. Thank you, Senator Lugar, and they are.
The Chairman. Thanks, Senator.
Senator Dayton.
Senator Dayton. Thank you, Mr. Chairman.
Mr. Flory, you have a resume here that would seem to
prepare you extraordinarily well for this position because you
have really been on the operating side of agriculture, as well
as the financial side. Your farm itself, Bunker Hill, going
from beef cattle, sheep, hay, now to turkey, primarily,
certainly, you have had to identify the changing trends and
fortunes and misfortunes involved in the agriculture economy,
and as Senator Lugar was referring, in terms of the credit side
as well.
Can you give, from your perspective, an assessment of where
we are today in terms of the whole structure of agriculture
finance. Are we relying too much on credit versus--well, a
profit might be nice, I am sure, but are we past the danger
zone?
Mr. Flory. Senator Dayton, I believe this committee and
others that have dealt with, and most recently the Farm bill,
in my view too many farmers, and producers, and ranchers across
the country are too dependent on our Government programs and
not dependent enough on our markets and our market-driven
economies in agriculture.
That is a concern to me, and as time goes on, it would
appear to me that there should be public policy and hopefully
some market arrangements that will at least remedy some of
that. That, in itself, leaves some concern to me, and I know
others, that if, for some reason, the support levels are not
there, that we could have--and I certainly hope it would not be
the kinds of things we had in the 1980's--but at least some
stress in agriculture.
To further comment, all of those who provide credit to
agriculture, be it Farm Credit System, be it commercial bankers
of the savings and loans and FSA. We all learned some good
lessons out of the 1980's. We are better prepared, we are
better capitalized, we have insurance funds in place to assist
us, but at the same time we also need to remain very diligent
as we move forward and look at the risk points out there, and
that is a big concern to me.
Senator Dayton. I agree with your comment about the
reliance on the Government programs. Of course, Government
programs have also proliferated in their numbers and their
complexities. I just realized in the last couple of years,
sitting on this committee and going through this farm bill, how
intricately aware and knowledgeable farmers have to be on just
a whole variety of these programs.
Is there any way, and maybe this would be something that
you could come back to us in a year or two, but that we could
consolidate and simplify some of these financing different
entities? Do you have any suggestions or words of wisdom on
that account?
Mr. Flory. That is a very tough question. Each financing
entity, whether it be Farm Credit or commercial bankers or FSA,
all have a mission--and Farmer Mac, also--they have a very
definite mission in providing agricultural credit throughout
the United States. In some instances, they compete with each
other. In other instances, and hopefully, as we go down the
road, they will complement each other in working together to
supply that credit that is needed for agriculture, and most
particularly, as we go through the generational change of
ownership of farms with young farmers and beginning farms. That
is the most important area we have.
Cooperation, and I am one that believes that we should work
together, all of those both private and public institutions
that are providing credit need to work hand-in-hand in being
certain that we supply the family farmer and the commercial
farmer adequate credit.
Senator Dayton. Thank you.
Thank you, Mr. Chairman. We have, in my opinion, four very
well-qualified nominees. Thank you.
The Chairman. I concur with that. We have four very well-
qualified nominees.
We thank you for being here, for your testimony, for your
service. For the family members and others who are here, you
should be very proud of these nominees for their dedication to
public service, and with Senator Lugar, I hope we can move
these nominees at a relatively rapid pace.
Senator Lugar. Mr. Chairman, may I ask just one more
question in Mr. Flory's presence? The temptation overwhelms me.
The Chairman. Sure.
Senator Lugar. Getting back to my modest farm operation
again----
[Laughter.]
Senator Lugar. I am delighted that the value of my acreage
seems to be rising each year, at least this is what people who
are involved in farmland surveys at Purdue University, quite
apart from the private market, tell me. I am pleased about that
because if the operating profit seems too small, the capital
gain tends to offer some returns, some future for me or for my
heirs.
Now the problem with all of this comes back when
occasionally a country banker will say there is certain
formation here of what you might call a bubble effect. In other
words, here you have a situation in which obviously you are not
making a whole lot of money, given the assets that you have and
the net worth that you claim for all of this. Yet, at the same
time, your land keeps rising every year, and as country bankers
we get worried about this kind of collateral.
Just to make your point. If, for example, the Congress
should take a shift at some point and say, by and large, farm
program costs--we did not mean it this way--but somehow they
just got out of hand. Prices kept coming down because of
oversupply, not only in this country, but worldwide; therefore,
the disparity, to keep everything afloat, got larger and
larger, and finally people said enough is enough, and so they
began to shear off some of the funding.
Now, if you are a country banker sitting out there and that
begins to happen, and you have already had some modest fears
about the rising land value and your collateral, why you might
overreact. In other words, you might say this is it, we are
going to have to batten down the hatches at this point.
Whereupon, a lot of farmers would find it very difficult to get
the credit that they had been accustomed, and therefore what
was a mildly disquieting situation becomes really a rampant
panic in that process.
What kind of guidance can Farm Credit Administration give
not to legislators, we have made our decisions with regard to
the farm programs for a while, but to farm owners, about the
land value situation? Do you make comments from time-to-time
about land values and how we stabilize the situation given the
vagaries of political discussion about farm policy? I ask this
in seriousness because it appears to me, if there is one large
cloud on the horizon of your responsibilities, it might be this
one. If there is enough of a shift, in terms of sentiment with
regard to farm payments, people may begin to have some qualms
about the collateral and therefore about the credit they
extend.
Mr. Flory. Senator, there are several aspects that we need
to always be very aware of. First of all, Farm Credit is one of
the major suppliers of credit throughout the United States, and
they are a single-industry lender. They have one mission, and
that is to supply farmers, ranchers and rural America and
farmer co-ops loans, and they have done it through good times
and bad, with the caveat that during the 1980's there were some
real stresses among folks, and I hope we have learned some
lessons.
Commercial bankers, particularly my experience with those
that are in very rural areas, have the same philosophy. That is
their bread and butter. They need that loan portfolio, they
need those farmers' deposits in order to be a viable bank. I
just think the land values will always be something that we
must be aware of and how they are being affected publicly and
privately, and they are the underpinning for the value of the
farm assets out there, and we have got to make certain that
they stay valuable within reason.
I started in banking early on, and we were balance-sheet
lenders. During the 1970's we had, out of necessity, became
cash-flow lenders. If we continue to keep our eye on cash-flow
and make certain that we can pay the bills, then the farmer,
and rancher and the co-op will be very strong, and we will have
less problems back at the Agency.
Senator Lugar. Thank you.
Thank you, Mr. Chairman.
The Chairman. Thank you, Senator Lugar.
I thank all of the nominees for being here. Again, I thank
you for your public service, and we hope that we can expedite
getting you on board as soon as possible.
The committee will stand adjourned.
[Whereupon, at 11:31 a.m., the committee was adjourned.]
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A P P E N D I X
June 25, 2002
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DOCUMENTS SUBMITTED FOR THE RECORD
June 25, 2002
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QUESTIONS AND ANSWERS
June 25, 2002
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