Hearing of the Senate Finance Committee - Nomination of Neal Wolin as Deputy Secretary of the Treasury

CHAIRED BY: SENATOR MAX BAUCUS (D-MT)

WITNESS: NEAL WOLIN

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SEN. BAUCUS: The committee will come to order.

The author Georges Bernanos said, "A thought which does not result in an action is nothing much, and an action which does not proceed from a thought is nothing at all." Today we have before us Neal Wolin, whom President Obama has nominated to be deputy secretary of Treasury.

Mr. Wolin, in your new role, you must be ready to both think and to act. These difficult economic times demand action. But as Bernanos said, this action must be based on thought -- creative thought, careful thought, deliberate thought. It must be based on thought that incorporates the lessons of the past and thought that envisions the potential of the future.

Mr. Wolin, you have shown yourself to be a thinker. You have spent several years in public service, both at the White House and as deputy general counsel and general counsel at the Treasury. During this time, you examined complicated financial, tax and economic issues.

You helped to guide Treasury through economic storms and economic growth. As deputy secretary, you must bring all this experience to the table. This experience must guide your thinking, and this thinking must guide your actions.

Your thoughts and actions will have a direct effect on how quickly our country recovers its economic strength. As deputy secretary, you will help oversee our financial recovery. You must ensure that these plans are sound. You must also ensure these plans are transparent. The American people deserve to know the purposes for which their taxpayer dollars are being used. And they must believe that their hard-earned money is being put to good use.

Your thought and actions would help to guide the Internal Revenue Service. We owe it to all Americans to ensure that all taxpayers pay their fair share of tax and file the returns in a timely manner. That's the only way we can begin to close the tax gap, which has been estimated at $345 billion every year.

During these challenging economic times, when demands on the budget are so great, the IRS must first collect all the revenues that are legally owed. We must pursue those who evade their taxes by improperly moving their assets offshore, and we should consider opportunities to reform the tax code in a fair and responsible way.

Your thoughts and your actions, along with those of this committee and this Congress, will help determine how we reform the tax code, no small matter. This week, as part of its budget, the administration announced several international tax proposals that would directly affect American multinational corporations. These proposals would change American companies' ability to defer tax on foreign earnings, the calculation of foreign tax credits, the classification of foreign businesses, and the use of offshore tax havens by individuals.

As these proposals demonstrate, our international tax system is complex. We must approach fundamental changes to our tax code with thought and with care. We need to ensure that our tax policies are fair and support American businesses. We must design these policies to encourage economic growth and create jobs that Americans need and deserve.

Your thoughts and your actions would help drive America's international economic policy. Finding global solutions to our global crisis is as important as ever, whether coordinating recovery and regulatory efforts or urging market-based reforms and sustainable growth.

Our economic relationship with China must top this international agenda. And its success will require sustained and energetic efforts by Secretary Geithner and at every level of the Treasury.

(You'll ?) also need to reassess our relationship with Cuba. As deputy secretary, you'll oversee the Office of Foreign Assets Control, otherwise known as OFAC. Despite Congress's clear intent to facilitate sales of American agriculture products to Cuba, OFAC continues to adhere to obsolete regulations and make it difficult for American farmers and ranchers to sell their products in a market just 90 miles from our shore.

Next week I plan to introduce a bill that will correct these policies and ensure that Montana's farmers and ranchers have reliable access to that market. And I hope you will work with me to further this important goal.

Mr. Wolin, the road ahead is difficult, but I believe that you will be able to navigate it. I expect you to do so with innovative and deliberative thought. Think before you act. It is my hope and belief that you -- your thought will result in successful and decisive action.

Mr. Grassley?

SEN. CHUCK GRASSLEY (R-IA): Well, thank you, Mr. Chairman.

I'd begin, Mr. Wolin, by repeating something that I said to Secretary Geithner during his nomination hearing. I told Secretary Geithner that his department possesses a great deal of power even in ordinary times, and that, in these extraordinary times, that position is even more powerful. So I repeat that, because the same holds true for everything you're going to be doing as deputy secretary. Mr. Wolin, if confirmed, you will potentially have a hand in everything Treasury does. Many of those policy areas are of special concern to this committee, but public debt, tariffs and trade, terrorist financing, as well as tax policy are all issues of great concern to the 23 of us on this committee.

Of course, this is in addition to this committee's fundamental responsibility to exercise oversight over the Treasury Department. You probably are capable of the very steep learning curve that goes with this job, but it is one, and not much time to climb it. This committee's oversight responsibilities and public-debt concerns have converged in the TARP program, proving the need for strong oversight.

From its creation, the TARP program was originally sold to Congress by the previous administration as a tonic to heal our economy by purchasing troubled assets, but instead became a toxin to free enterprise, as money was arbitrarily distributed without much transparency.

A few months ago, some were saying that the $700-billion TARP program could actually make money for taxpayers. However, in January of this year, the Congressional Budget Office put a price tag on TARP of $189 billion. But by late March revised that number upward to $356 billion. I wouldn't be surprised to see this number climb in the future, but already taxpayers seem to be losing more than half of their investment in the TARP program.

The massive and growing cost of -- TARP program, combined with the cost of the economic stimulus package, have led to increased concern about the size of our deficit and our inability to budget responsibly.

A common response to these concerns is to blame the previous administration, and there is some validity to that. The last administration did create a perilous budget situation and left a large budget deficit behind. But despite that, we're expected to end the current fiscal year with a deficit of 1.7 trillion (dollars), according to our own Congressional Budget Office.

I think we can all agree that running large deficits is bad, but it simply does not follow that the remedy is to run even larger deficits. One-and-seven-tenths trillion (dollars) amounts to around 12 percent of GDP. To put that into perspective, the highest deficit level in the post-World War II period was 7.2 percent, 1946; and 6 percent, 1983. We aren't just pushing the envelope when it comes to running a large deficit, but we're going into what I would consider uncharted territory, and I'm not sure that we will be able to find our way back to fiscal responsibility. And I hope that reflating and inflation isn't the response to that, accomplishing that.

I raised concerns about deficits in my written questions to Dr. Krueger, who was confirmed Wednesday as Treasury assistant secretary on economic policy. His response read in part, quote, "At 12.3 percent of GDP in fiscal year 2009, the budget deficit does reach a very high level, but the administration projects that the growing economy and the end of temporary spending measures and other policy developments will cause the deficit to decline sharply going forward," end of quote.

Leaving aside the question of whether our recent spending spree will actually be temporary, I'm concerned that relying on the economy to grow us out of the deficit may not be realistic, given our approach to the federal government's revenues. As I've already said, federal revenues, or what most people would call taxes, are a large part of this committee's jurisdiction, and we are approaching a crisis.

In addition to the usual constellation of tax provisions that expire on an annual basis, at the end of 2010 most of the bipartisan tax relief enacted in 2001 and 2003 will expire. President Obama has indicated that he supports making many parts of 2001 and 2003 tax relief permanent, but this is not the case on lower rates on capital gains.

So I come to the conclusion that if we expect our economy to have any chance to grow us out of our deficit, we cannot penalize incentives for investment.

Furthermore, the stated willingness of the administration to raise taxes on taxpayers earning more than $250,000 a year could be a serious blow to small business.

Finally, any cap-and-trade tax would likely lead to massive increases in energy prices that would impact everybody, regardless of income level.

I'm very concerned that the nation's tax policy is being driven by a ravenous hunger for revenues rather than by a desire to promote economic growth. This hunger is itself derived from massive budget deficits, runaway spending and in many cases, as with the TARP program, is subject to a completely inadequate amount of oversight.

So it is imperative that you, as our next deputy secretary of the Treasury, assist Congress in conducting appropriate oversight into the TARP program, along with all other activities the Treasury Department's engaged in. This role was assigned to Congress by our U.S. Constitution, and the people I work for expect me to carry out that constitutional responsibility.

So I hope more serious thought is given to the short- and long- term budget and revenue pictures as well. I worry -- and I'm not the only one who worries -- that instead of solving the problems we now have, we are creating more problems that will take generations to solve.

Thank you for your willingness to serve the people of this country.

SEN. BAUCUS: Thank you, Senator Grassley, very much.

SEN. GRASSLEY: Thank you.

SEN. BAUCUS: Now I'd like to introduce our witness, but I see that we're joined with (sic) the honorable senator from Connecticut, Joe Lieberman, who would like to introduce our statement, and we're very honored to have you here.

Senator, why don't you proceed and introduce the witness?

SEN. JOSEPH LIEBERMAN (ID-CT): Thanks very much, Mr. Chairman, Senator Grassley and Senator -- (off mike) -- I'm honored --

SEN. BAUCUS: Joe --

SEN. LIEBERMAN: -- (as microphone switches on) -- there you go -- (chuckles) -- I'm honored, now audibly, to be here to introduce Neil Wolin to this committee.

He in turn will introduce his wonderful and, I might say, large family that is magnificently present today. In the role for which Neal has been nominated, deputy secretary of the Treasury, he's coming to the department, if confirmed, at obviously a most critical time in its history.

The Treasury Department is at the epicenter of our government's efforts to get our economy back on track, to get it creating jobs again and restoring national and international confidence in our markets.

Just yesterday afternoon the Treasury Department released the much-anticipated results of the so-called stress tests performed on some of the country's largest financial institutions. The good news is that most of the financial institutions have passed the stress test. I'm sure we'd all agree it's too earlier for them to go after Lipitor, probably particularly too early to -- perhaps they should never contemplate going back to the life of excess and overindulgence and lack of discipline that put them in the condition that they have been in.

The Treasury Department will play a major role in the coming year in managing our nation's finances, reducing budget deficits, bringing levels of public debt down to manageable levels and providing the material from which we here in Congress, with your leadership, can enact health care and, from other committees, energy and education reform.

Mr. Chairman, Senator Grassley, you've stated a series of challenges that the department faces. These are no small tasks. There is significant work to be done. And I am proud to say, based on personal knowledge of the nominee, that President Obama, Secretary Geithner, the entire country will be well-served by the impressive public and private-sector experience that Neal brings to this position.

I'd also add that there is a tendency among some to think that this department is dominated by people who -- this Treasury Department -- whose experience begins and ends on Wall Street and are separated from the lives of average Americans.

Neal Wolin's story is a classic American story. His grandparents were immigrants. His grandfather was a shoemaker, grew up in a home where, as our homes, he was instructed if you work hard, you can go far in this country.

His father is a lawyer. He himself worked hard, went to Yale College and got a master's at Oxford; and graduated from Yale Law School and almost immediately began a career in public service; served as special assistant to three directors of the Central Intelligence Agency, Will Webster, Robert Gates and Jim Woolsey; also as executive assistant to the national security adviser and then deputy national security adviser during the Clinton administration.

I think his national security background is an unusual -- but I think can be a vital asset in helping in many ways the secretary to respond to the twin responsibilities of working internationally within the financial community but also in combatting terrorist financing.

(Baby in audience cries.) This makes me feel at home. I've got a couple of grandchildren visiting this week. (Laughter.) Thank you for that.

In addition to his impressive record in public service, on -- and I apologize; I had failed to mention that he went from all that to becoming deputy general counsel in the Treasury Department from 1995 to '99 before being nominated by President Clinton and confirmed as general counsel of the Treasury Department, a position he held from '99 to 2001.

In 2001, he came to Connecticut, in which capacity I really got to know him better and more personally. Has worked at the Hartford Financial Services Group, serving first as executive VP and general counsel. But then, as has been the case throughout his career, Neal rose to become president and chief operating officer for property and casualty operations. That was a -- that's a significant operation. It gave him extraordinary management experience, which I think will serve him well in his leadership responsibilities at Treasury, if he is confirmed to be the deputy.

In sum, Mr. Chairman, Senator Grassley, Neal Wolin brings -- would bring to this position an extraordinary intellect, remarkable public-service experience, great integrity, tremendous work habits, and what I take to be a -- an excellent capacity to work well with people in times that are stressful and times that are not, all of which should really enable him to serve our country at -- in exactly the way we need him to do that now. So I -- needless to say, I hope you will, after considering him fully, recommend him for confirmation to the full Senate. And I thank you for giving me this honor of introducing him to you this morning.

SEN. BAUCUS: Thank you, Senator, very much. That's a very complete, comprehensive introduction, which we deeply appreciate.

Mr. Wolin, it is now customary for anybody nominated to introduce his family. So we'd love to have you do so.

MR. WOLIN: Thank you, Mr. Chairman. My wife, Nicole Elkon, and my son -- our son, Ethan (sp) Wolin, behind me. My other son, Oliver (sp), I guess, has left. My parents, Doris and Harry Wolin, and my in-laws, Mimi Liebeskind and Andre Elkon. Thank you so much for letting me --

SEN. BAUCUS: Yeah, why don't you all stand so we can all give you a round of applause. Thank you for all your contribution here. (Applause.) Including Ethan!

Okay.

MR. WOLIN: Chairman Baucus, Ranking Member Grassley, Senator Cantwell, it's an honor to come before you today. I want to thank President Obama and Secretary Geithner for the opportunity they have offered me to serve in the department that is at the center of the administration's efforts to address this historic economic crisis.

If confirmed, I look forward to working closely with this committee, its staff and the Congress as the Treasury Department implements the president's economic program and as we work together to heal our economy, modernize the regulatory system and return America to the path of prosperity.

President Obama and Secretary Geithner have taken bold steps to revive our economy, stabilize the housing market and increase the flow of credit to families, entrepreneurs and small businesses. They are also committed to building a comprehensive regulatory framework that supports the dynamism of our economy while ensuring that the American people are not again forced to suffer the consequences of a preventable catastrophe.

I look forward, if confirmed, to helping Secretary Geithner keep the Treasury Department running smoothly during these extraordinary times. The Treasury Department is a complex organization, and its 12 bureaus and more than 100,000 employees deserve strong management support as they work tirelessly on behalf of the American people on issues as diverse as domestic and international economic policy, tax policy and administration, consumer protection, national security, law enforcement and more.

Please allow me to provide some brief background. I first entered public service during the administration of President George H.W. Bush, as special assistant to directors of Central Intelligence William Webster, Robert Gates and Jim Woolsey. Under President Clinton, I served at the National Security Council, and later as deputy joint counsel and general counsel at the Department of the Treasury.

In 2001, I moved to the Hartford Financial Services Group, first as general counsel and subsequently as president and chief operating officer of the company's property and casualty insurance operations, where the companies I led delivered strong, profitable results. I also had the privilege of managing the company's relationships with the thousands of small businesses and entrepreneurs who are the backbone of the property and casualty industry. Working with those entrepreneurs on Main Street was the part of the job I enjoyed most, and it reinforced my deep appreciation for small businesses and the challenges and pressures they face.

Having had the privilege of serving under presidents of both parties, and of managing large organizations in the public and the private sectors, I hope to put that experience to work once more in the service of the public during these challenging times.

American taxpayers must have confidence in the Department of the Treasury: confidence that decisions are transparent, that taxpayers' concerns are heard, and that Treasury officials are accountable to the American people and to their elected representatives. Above all, Treasury must maintain the highest standards of integrity and embrace the best values of public service. Seeing that happen will be my highest priority.

I recognize that American prosperity doesn't spring from the actions of the Treasury Department, but from the hard work and inspiration of millions of individuals and businesses. Treasury's place is not to micro-manage America's economy, but to help foster an economic climate within which the American people can flourish.

In closing, Mr. Chairman, Ranking Member Grassley, Senator Cantwell, it is my great hope to have the privilege of returning to the Department of the Treasury and offering my hardest work and best efforts to the president and the secretary, to the Congress and to the American people.

Thank you very much for considering my nomination. I'd be happy to take your questions.

SEN. BAUCUS: Thank you, Mr. Wolin, very much. I have three questions, which are obligatory, we ask of all nominees. The first: Is there anything you are aware of in your background that might present a conflict of interest with the duties of the office to which you have been nominated?

MR. WOLIN: No, Mr. Chairman.

SEN. BAUCUS: Do you know of any reason, personal or otherwise, that would in any way prevent you from fully and honorably discharging the responsibilities of the office to which you have been nominated?

MR. WOLIN: I do not, Mr. Chairman.

SEN. BAUCUS: Do you agree without reservation to respond to any reasonable summons to appear and testify before any duly constituted committee of Congress?

MR. WOLIN: Absolutely, Mr. Chairman.

SEN. BAUCUS: If you are confirmed.

MR. WOLIN: (Chuckles.) If I'm -- if I'm confirmed.

SEN. BAUCUS: Thank you. You're eager. That's good.

MR. WOLIN: (Laughs.)

SEN. BAUCUS: I'd like to ask a little bit about the president's recent announced several proposals to reform U.S. international tax, including changes to deferral -- you know, check the box and foreign tax credits.

Many in the business community say these changes will actually drive U.S. businesses offshore -- very detrimental to U.S. business. What do you believe the effect of -- those proposals will have on U.S. businesses, and the degree to which it'll tend to encourage U.S. business to move offshore?

MR. WOLIN: Mr. Chairman, thank you for that question. Very, very important issue. Mr. Chairman, I think the competitiveness of U.S. business is multi-factoral; that clearly the tax rates are one issue, but so is technology, the cost of health-care reform -- of health care and other issues as well.

The president, as he announced these proposals earlier this week, made clear that he's very committed to the competitiveness of U.S. business, but wants to make sure that the framework within which our tax code operates doesn't overly incent (sic) businesses to move jobs and business investment overseas. So Mr. Chairman, if I'm confirmed in this role, I would be very interested in working with you and the committee and your staff to try to get the balance right, to make sure that American business is both in a position to be highly competitive vis-a-vis the rest of the world, but also to make sure that the tax code doesn't create incentives to move jobs overseas or investment overseas.

SEN. BAUCUS: But what about these particular proposals? What do you think the effect -- net effect of those, standing alone, will have?

MR. WOLIN: I think, Mr. Chairman, that these proposals are, you know, not ones that take away deferral overall -- so that principle is left in place -- but make sure that the kinds of incentives that are solely based on the tax code to move jobs overseas are addressed. I think that within that context, as I said and as the president made clear, very important to address competitiveness issues. And that's something that I would want to work with you on, whether it's relating to issues about foreign tax credits or, for that matter, deferral of expenses.

SEN. BAUCUS: But again, do you think these proposals, standing alone, have a net effect of increasing American competitiveness overseas or decreasing it?

MR. WOLIN: I think, Mr. Chairman, that the net effect of these proposals is to try to make sure that businesses don't move jobs overseas. I think on a competitiveness basis, if you look at the president's program in its totality, with respect to what he wants to do with health care, making the R&E tax credit permanent and so forth, I think, you know, it is -- the competitiveness issues are clearly something that he's very, very much focused on.

SEN. BAUCUS: What is the effect of a couple of countries -- I'm thinking of the U.K. now -- changing from a worldwide system to a territorial system? What will the effect be in Britain, and what, on the margin, will the effect be in the United States? And why do you suppose Britain made that change?

MR. WOLIN: Senator, I think the effects are -- Mr. Chairman, I think the effects are ones that we'll have to see as they develop. The statutory corporate tax rates obviously in the United States are higher than they are overseas, but if you look at the effective rates, including all of the proposals that the president is putting forward, it's roughly competitive with most of the corporate rates in the OECD. Exactly how the British move to territoriality will resolve itself, I think, too early to tell.

SEN. BAUCUS: I think the answer to the question is that Britain thinks it will help Britain vis-a-vis other countries in the world and that's why they're making the change. And that's why countries are moving from worldwide to territorial. And it's basically why many American companies think that they're at a significant disadvantage where other companies have a territorial system and the United States is worldwide, which means that a U.S.-based company pays taxes twice, both in the other country as well as the United States, whereas countries that are territorial pay only one tax, and that's in the country where they're doing business.

I strongly urge you to take a very, very close look at that. I do not know, to be honest, whether this is thought through as well as it could and should have been with respect to American competitiveness. And I urge you to, as I said in my opening statement, think before you act.

MR. WOLIN: Thank you, Mr. Chairman.

SEN. BAUCUS: I have many more questions, but my time has expired.

Senator Grassley.

SEN. ROBERT GRASSLEY (R-IA): Thank you.

I got a couple questions that's more on process than it is on policy. And if I got time, I'll get to a couple policy questions. I usually take two or three minutes to explain my philosophy about oversight. I'm not going to do that. But if you got any questions, other people can tell you.

As you may be aware, I am active in that area. The primary way I conduct oversight is to write letters asking detailed questions and requesting department documents. While Secretary Geithner has assured me that he will respond to my inquiries in full and timely manner, I would hope to get the same assurance from you. Can I have that commitment today?

MR. WOLIN: Yes, Senator, you have my commitment.

SEN. GRASSLEY: Thank you.

I've got three pages of recommendations I'm not going to read, from the special inspector general for TARP, on TARP transparency. I just want to read a few of them. Then I got some questions not just about the ones I'm asking, but the whole process of IG recommendations.

Treasury would require all TARP recipients to report on how they use TARP funds; mitigate significant fraud risk imposed by allowing participants in TALF to post mortgage-backed securities as collateral by security by security screen; reject collateral if underlying loan backing MBS is -- does not meet underwriting criteria; mitigate risk -- waste, fraud and abuse in PPIs -- PPIPs by imposing strict conflict-of-interest rules, et cetera, et cetera.

Mr. Wolin, the special inspector general for TARP in his most recent quarterly report made a number of recommendations, alluded to, to improve transparency, mitigate risk of loss tax payer dollars and reduce waste, fraud and abuse.

These seemed like good common-sense recommendations to me. Generally, do you agree? And if you don't feel comfortable making a flat-out statement, then answer in writing, but if you've looked at them and can answer that. Let me -- before you answer, do you agree -- can you tell me what you would do to make sure that the Treasury Department adopts those recommendations?

MR. WOLIN: Senator, I think that the special inspector general for TARP is an important partner of the department's in running that program. I think Secretary Geithner believes that very, very much. And I know he's viewed at the Treasury as a partner in that effort and senior Treasury officials -- including those running the TARP -- meet with him on a regular basis to work through the recommendations he has put forward and make sure that, with respect to some of the issues that you mentioned, Senator -- transparency, conflicts of interest, making sure that the programs are structured in a way that have integrity -- that he is a partner in all of those efforts.

SEN. GRASSLEY: You're probably acquainted enough with federal bureaucracy to know that a lot of departments have resistance to inspectors general.

I hope, with the president's commitment both at the campaign -- and I haven't seen him detract that from that since he's been president -- for more transparency in government, this is one more way to have transparency in government.

I would go on to -- about the cost of bailouts. In his latest report, the special inspector general indicates that the total projected funding subject to his oversight as of March 31st will be -- is 2.5 trillion (dollars). And that number doesn't appear to include any capital assistance Treasury expects to provide to those institutions who failed the stress test.

From January to March this year, the cost of the $200 billion TARP program rose from 189 billion (dollars) to 356 billion (dollars). Chrysler said that they don't intend to pay back their money. The fair market value of all three Maiden Lane LLCs that the New York Fed created to bail out Bear Stearns and AIG have dropped.

So Mr. Wolin, I'd like your opinion as to whether we will actually get back any of this money. I'd also like to know how Treasury expects to monitor the effectiveness of these programs. Are there -- this is the last part of it. Are there quantifiable benchmarks to determine the success or failure of these programs?

MR. WOLIN: Senator, Secretary Geithner, I think, has spoken forcefully about the importance of making sure that these programs are structured in a way that protects, absolutely as much as possible, the taxpayer's interest. I think that exactly how these financial institutions and other TARP recipients do is something that we will have to see, but the programs are structured in such a way that we have clarity about how lending is going by those institutions. The Treasury has put up a website, for example, financialstability.gov, that puts out monthly reports with respect to the spending levels by -- the lending levels, excuse me, by category of these financial institutions. That kind of transparency and the kind of accountability that comes with it is something that I know the Treasury Department is very much focused on. And I expect that that will be something that the Treasury will continue to work on. And if confirmed, I would certainly want to be very much involved in that effort.

SEN. GRASSLEY: Thank you, Mr. (Wolin ?).

SEN. BAUCUS: Thank you, Senator.

Senator Cantwell.

SEN. MARIA CANTWELL (D-WA): Thank you, Mr. Chairman. And I want to underscore your comment made earlier about thinking through these issues of America's competitiveness and making sure that the policies that are put forth really do consider the full spectrum of how businesses are working in today's global economy.

But Mr. Wolin, first of all, congratulations on your nomination. It's great to have your family with you today. I'm sure they're very, very proud of you, and I know that we urgently need people over at the Department of Treasury.

But I also want to bring up the fact that the TARP legislation required Congress to receive a report from the administration by April 30th on changes that they would like to see -- or changes necessary on the regulatory side of the equation. We still haven't gotten that report. And my concern is -- I want to try to understand where you are on this issue, on the regulatory side, what you support or don't support. Because I obviously think we need more transparency as -- in addition to, obviously capital adequacy and forcing regulation against fraud.

But we had a previous instance where former Securities and Exchange Commissioner Arthur Levitt, Secretary for the Treasury and current National Economic Council Chairman Larry Summers -- or that's when he was -- and Federal Reserve Chairman Alan Greenspan all opposed the Commodities Future (sic/Commodity Futures) Trading Commission attempts to regulate over-the-counter derivatives. And basically, they all supported a 2000 law that blocked nearly all regulation of derivatives.

Now, I understand you were general counsel at Treasury when then- Secretary Summers endorsed that legislation.

Since then, Mr. Levitt has called it a -- basically, a regulatory system that failed to adapt to the new financial instruments. And I know that Mr. Greenspan told Congress that he, too, now believes that deregulating the credit default swaps market was a mistake.

So would you agree that exempting the default swaps and other derivatives has turned out to be a huge mistake?

MR. WOLIN: Senator, there's no question that the derivatives markets -- credit default swaps and the other instruments that you refer to -- require substantially more robust regulation. It's something that I understand the Treasury is focused on right now. And if confirmed, I would absolutely be engaged in working on that more robust regulation of those markets -- both the dealers who deal in those instruments, but also the markets themselves.

SEN. CANTWELL: So was it a mistake?

MR. WOLIN: I think -- I think there was no question but that, you know, these are markets that need to be regulated, and to the extent that they didn't -- that that did not do that, we've certainly learned that lesson.

SEN. CANTWELL: Okay. I just want to be clear, because there's certainly a lot of different opinion floating around. In fact, the previous nominated Treasury nominee for your position, Mr. Cohen, recently told a crowd in New York, "As far as I'm concerned -- I am far from convinced there was something inherently wrong with this system."

So I want to get it clear. There's a few people in the administration who still can't say that it was a mistake, and these are the same people, I think, who are slow-walking, thinking that we're all going to forget about the regulatory reform that is needed. And I can assure you, we're not going to forget what is needed. And my patience is running out with the administration having to take five months to say that some of these things ought to be regulated, and how they ought to be regulated. So --

MR. WOLIN: Senator, I don't want to be unclear at all. There's no question but that these markets need better and more robust regulation. And if confirmed, I would look to be part of that effort.

SEN. CANTWELL: Okay. So do you think that all the derivatives and credit default swaps should be moved onto regulated exchanges?

MR. WOLIN: Senator, I think -- this is not something I've been involved in, but I certainly support the testimony that Secretary Geithner gave in his confirmation hearing with respect to, you know, moving standardized instruments onto clearinghouses, onto regulated markets and so forth.

SEN. CANTWELL: Yes, I'm not clear where the secretary really is on that issue, because in a private conversation after the hearing, he said he didn't mean exactly what he said at the hearing. And since then, he has said to a group of colleagues that the administration still hasn't come out with their policy. And so that's why -- you know, we're trying to get to the heart of this matter.

So do you support aggregate position limits on all contracts?

MR. WOLIN: I think position limits are absolutely part of the approach that is appropriate here, Senator, yes.

SEN. CANTWELL: So you think that all -- so putting all these instruments on regulated exchanges and having position limits and having regulatory oversight, you know, organizations like ICE (sp) and others, that are currently not regulated exchanges?

MR. WOLIN: I think the regulation of dealers in these instruments, I think standardized contracts on exchanges and through clearinghouses, position limits, transparency so that the market can understand what is being traded, with, you know, price transparency and so forth, all elements of the proper approach.

SEN. CANTWELL: Thank you, Mr. Chairman.

SEN. BAUCUS: Thank you, Senator.

I'd like to talk a little bit about the IRS. What went wrong? Why didn't the IRS discover Bernie Madoff's scam earlier?

MR. WOLIN: Mr. Chairman, I don't know precisely why they didn't discover Bernie Madoff earlier. What I would say to you is that it is very important for IRS enforcement capabilities and resources and efforts to be focused. It's something that the administration is committed to; that I would, if confirmed, be very much committed to, both from the perspective of, sir, the tax gap, but also from compliance, from the compliance perspective.

And I think part of what the president put forward earlier this week with respect to international tax compliance and tax haven kinds of proposals would help in this regard; more transparency, more information reporting, allow the Internal Revenue Service to better police those kinds of circumstances.

SEN. BAUCUS: Well, I know your heart's in the right place. I have no doubt about that. And the question is, how do we measure success here? As you well know, often benchmarked metrics are needed to measure success, to see if we're making any headway, any progress at all. And one that comes to my mind is this tax gap.

What thoughts do you have in how we would -- what we do at the IRS to very significantly reduce that tax gap? I mean, it's great words, wonderful words, that we're going to work on that. That's one thing. I don't care about -- I don't want to hear those words.

I want to hear what specifically you're going to do and what the metrics are and what the standards would be by which we'll know whether we're successful or not.

MR. WOLIN: Mr. Chairman, I think the first thing I would do is sit down with Commissioner Shulman and work through a set of metrics that we could put in place. Exactly what those are, I'm not sure. But I would want to work with you and your staff and be very clear with Commissioner Shulman about what is it that we can put in place that would allow us to measure our progress in attacking the tax gap. It's obviously a challenging issue, one that people have been at work at for a long time. But I think the establishment of clear metrics and then accountability around achieving progress on those metrics and transparency about how we're doing, transparency with you and this committee and more broadly the American people -- precisely what those metrics are I think I'd want to be able to work through with the commissioner and with this committee.

SEN. BAUCUS: What's a reasonable period of time within which you can develop those and report back to this committee?

MR. WOLIN: I don't know precisely, Mr. Chairman, but I would be, you know, interested in doing that on -- aggressively and in a focused way and as quickly as we could do it.

SEN. BAUCUS: Well, I'm going to give you a date. I've given you first a chance to give me a date, so I'll throw it back to you. What's the reasonable date by which you think you can do this? If you don't give me a date, I'll give you one, and I'll give you one if you don't -- if I don't think yours is reasonable.

MR. WOLIN: (Laughs.) I would hope by Labor Day, Mr. Chairman, we could come back with some ideas --

SEN. BAUCUS: That's a little late. That's a little late. I'm going to give you two months, two months, two months from today. But -- because this is huge. I mean, it's 300 and some billion dollars a year. You know, we talk about cutting programs -- that's often important -- talk about raising revenue. That's often important. But it seems to me the first target should be the -- that $345 billion of taxes that are legally owed but not collected. My gosh, you know, American taxpayers are subsidizing those who are not paying their taxes. That's not right. And I just urge you to attack that aggressively.

MR. WOLIN: Absolutely, Mr. Chairman.

SEN. BAUCUS: Like a mean junkyard dog.

MR. WOLIN: Will do.

SEN. BAUCUS: Good.

Senator Cantwell.

SEN. CANTWELL: Thank you, Mr. Chairman. I guess I kind of have a similar time question, because last September, in front of the Senate Banking Committee, when they were talking about TARP legislation, the SEC chairman, Chris Cox, said that there should be a great sense of urgency to regulate credit default swaps to fill the regulatory black hole.

Do you agree that there should be a sense of urgency at Treasury on this?

MR. WOLIN: I think there's no question, Senator, that, with respect to the wide range of regulatory reform issues in the financial services sector -- the president has spoken to it, the secretary have -- that we need to get something done. And we need to put into place a framework much sooner than later.

SEN. CANTWELL: Well, you've already missed one deadline by legislation, which was due April 30th. And so what is your sense of when that can happen?

MR. WOLIN: Senator, I don't know. If confirmed, I certainly would want to understand where this Treasury Department is in this process and to urge that it be completed absolutely as quickly as possible. You'd have my commitment that I would --

SEN. CANTWELL: And what do you think that time frame could be? (Chuckling.) I don't have the power of the chairmanship, so I can't commit --

SEN. BAUCUS: Oh, yes, yes, you do, Senator. (Laughter.) Yes, you do. (Chuckles.)

SEN. CANTWELL: Not yet. (Laughs.)

(Laughter.)

MR. WOLIN: With respect --

SEN. BAUCUS: You -- we'll work it out -- what you want.

MR. WOLIN: With respect to the report, Senator, or the regulation of the thrifts --

SEN. BAUCUS: Why don't we do it this way? I'll consult --

SEN. CANTWELL: It's taken us five months now of this administration to say clearly and in an articulate fashion, in writing, this is what the problem with credit default swaps were, and this is how we believe they should be regulated.

You had 13 OPEC countries basically saying to the administration, "We need this. The global economy needs this regulation. We need the United States to be clear that you are not going to let this happen again."

And these statements aren't that hard to make. But when the Treasury secretary comes up here and says, "This is what I mean," and then later says, "No, no, that isn't what I meant," and then later tells members of Congress, "We haven't even decided yet what we're going to do," it clearly gives everybody the indication that the administration is slow-walking what is needed requirements for regulatory oversight for something's that caused the biggest financial crisis in America in the last, you know, several decades. And the fact that it's taken this long to articulate that, that's -- it's not that hard to articulate. And what you're going to find is that Congress is going to articulate it and do so very quickly.

MR. WOLIN: Senator, I will certainly commit my best efforts to getting this, you know, articulated absolutely as quickly as possible.

SEN. CANTWELL: So if you had to give a date, just like on the previous commitment --

SEN. BAUCUS: Well, let's do it this way. Senator, why don't you and I consult, and we'll send a letter to the nominee today --

SEN. CANTWELL: Thank you, Mr. -- thank you, Mr. Chairman.

SEN. BAUCUS: -- and -- in order to get a response before the confirmation vote.

SEN. CANTWELL: Thank you. That's a good suggestion. Thank you very much.

Thank you, Mr. Wolin.

SEN. BAUCUS: Executive compensation: Your thoughts?

It's a huge issue. And to be honest, I don't know that Wall Street understands the anger in the country over executive compensation abuse and all the bonus payments when -- you know, especially TARP recipients -- when companies are going down the drain.

And they're getting all these taxpayers' money. They get these -- they pay these big bonuses. And they seem to be insensitive to the American public -- you know, hard-working Americans. I don't want to overstate that point, but it's true. We're paying taxes and they -- they're very insensitive. I don't think Wall Street gets it.

On the other hand, I'm not sure that Washington really understands some of the exigencies of -- of compensation and the well running of banks and other firms in the country.

But the main point is, we need limits on executive comp. And I know Secretary Geithner is working on coming out with guidelines. I -- I -- the haunting echo of what Senator Cantwell is saying: That was supposed to be some time ago, and we still haven't heard it yet. And I know he's working with Senator Dodd, chairman of the Banking Committee, on those limits.

But if you could, just talk to us a little bit about executive comp and what you think the limits should be, especially companies that receive taxpayers' money -- or even the companies that don't receive taxpayers' money -- in order to get a sense of confidence in this country that certain people aren't ripping off the bulk of other people in the country. Your thoughts?

MR. WOLIN: Mr. Chairman, an enormously important issue. I thank you for raising the question. There's no question that the levels of executive compensation have gotten untethered from what seems appropriate. And this is an issue on which I know the president and the secretary have articulated principles. But it seems to me that compensation needs to be more transparent. It needs to be much more related to success, to alignment with shareholder interests or, in the case when government assistance is involved, to taxpayer interests. And it needs to be based on performance, the idea that compensation should be linked to success. And success should be thought of in longer-term periods than just this quarter or this year's sales results, but to the real creation of value.

And so I think those are the principles that are appropriate to executive compensation, particularly, as you say, in circumstances where government assistance has been provided; but even more generally, the idea of alignment to value and performance, and payment for success and not for failure, I think are key elements of how we ought to be approaching executive compensation and how, as I understand it, the Treasury Department is approaching it as they seek to put forward implementing rules for the language in the -- in the Recovery Act that dealt with executive compensation.

SEN. BAUCUS: Well, I urge you to look at this aggressively, because if you're confirmed -- you will be confirmed -- as deputy secretary, you're going to have a lot of operating authority in making sure that people are working on this very aggressively and very forthrightly. Because I -- you know, patience is wearing a little thin, and I urge you to -- you know, a word to the wise. Just follow through and do the best you can, because it's -- I mean, we've got to nail that one down.

I'd like to ask a couple -- a few questions about China. I believe that the management of our relationship with China will very much determine the well-being of the American people five, 10, 15, 20 years from now, as well as of the Chinese people, and perhaps many other people in the world. We've got to get this managed -- we have to manage this right. And like most things that are very important, it takes effort, it takes creative thought, it takes a lot of work, it takes a lot of focus.

And I compliment Secretary Paulson for putting together the Strategic Economic Dialogue. And I thought that was a good start, but it was only a start. I think it can go -- I think it can be much more focused, more aggressive, more comprehensive than it has been.

And the next is here in Washington. I think it's in June. I'm not sure the exact date. I remember back in the first strategic dialogue, Wu Yi was the main Chinese leader. She's a tough lady. She was pretty good. But she's been replaced by Wang Quishan as well as Dai Bingguo -- Dai Bingguo.

And I urge you to give a lot of thought to make sure that is put together very well and very comprehensively, but also with the Congress. We're a non-parliamentary form of government. And that's why we're having this hearing, in many respects. So when you put your plan together, I urge you to also have separate meetings between Congress and your Chinese counterpart, because they've got to learn from us, because we're, you know, one of the three branches of government. We write the laws. It's a non-parliamentary form of government, and we write them, not the administration.

And we got to learn from them, and they from us. So it's just get ahead of the game and do the very best you can to focus on a strong relationship, in my judgment, with China.

I also want to remind you that because of scheduling conflicts, many senators who are interested in your nomination were unable to attend, but they will nevertheless have questions they'll want to submit to you. I urge them to have their questions in by 5:00 this afternoon, and I also urge you to respond to those questions as quickly as you possibly can so we can take up your nomination, vote on the Senate floor very quickly.

I guess my final point is to just impress upon you how important it is for you and Secretary Geithner -- well, I'm talking about you, because you're here -- to be forthright -- very forthright and to work with us and not surprise us. With all due, full respect, your opening statement reminded me of what I call the Justice Sandra Day O'Connor statement. I was earlier, a few years ago, on the Judiciary committee, and prior to her, many nominees would give long, involved statements about the law and so on and so forth. When she testified, she said nothing. Absolutely nothing. It was basically thank you and that was it.

And I was very disappointed. And I thought it was a cop-out. I thought it was just a dodge. I thought it was just, here she is, she's been nominated to one of the most honorable positions in the United States government, and she just sat there. It was a tactic, just to avoid any difficult statement that you might otherwise make. And with all due respect, your statement was a little short too.

So -- I'm saying is, we are a separate branch of government and we care too, just like you do. And theoretically, we're in the same political party. And so just -- you should err on the side of working with us, not against -- you should err on the side of working with us and err on the side of calling us up -- calling me up and saying, "Hey, we got a problem here; hey, this is something we need to work on, this is coming up," and that kind of thing, advance notice of things. You will find us very willing to want to work with you. But on the other hand, if you don't, you know, things tend to fall apart.

So I just urge you very, very strongly to just think, okay, what -- maybe once a week, "What can I tell them down there that's important (to respond to ?), what information do I have to get from them?" I meet weekly with Secretary Geithner -- no, excuse me, I meet weekly with Mr. Summers. I meet monthly with Secretary Geithner. And it's locked in.

And I just encourage you to in your calendar just think of the appropriate people that you need to lock in, and once a week, every other week or something, just make a telephone call or something, just keep up -- those lines of communication open, just keep working with them.

MR. WOLIN: You have my commitment on that, Mr. Chairman.

SEN. BAUCUS: Good.

Okay. Good luck.

MR. WOLIN: Thank you, sir.

SEN. BAUCUS: Wish you and your family good luck. It's a tremendous undertaking. It's a great honor you'll be pursuing, and I wish you the very best luck.

MR. WOLIN: Thank you, Mr. Chairman, very much.

SEN. BAUCUS: The hearing's adjourned. (Strikes gavel.)

END.

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