Nomination Hearing of William H. Donaldson to be Chairman of the Securities and Exchange Commission

SEN. SHELBY: Senator Crapo.

SEN. CRAPO: Thank you, Mr. Chairman.

Mr. Donaldson, first of all, I want to congratulate you on your willingness to step forward --

MR. DONALDSON: Thank you.

SEN. CRAPO: -- and provide public service in this capacity. And I'm confident, as is the chairman, that your nomination will be confirmed by the Senate. I just want to cover a couple of issues, if I can, if I have time with you today. And the first one is derivatives transactions.

As you know, last year we had some proposals in the Senate to change the way in which over-the-counter derivatives transactions are regulated, namely by requiring that they be on exchange or that they be done through an exchange, rather than an off-exchange transaction.

I strongly oppose that. And, frankly, last year we got letters from the Department of the Treasury, from Alan Greenspan of the Federal Reserve, from the chairman of the U.S. Commodities Futures Trading Commission and from Harvey Pitt, the chairman of the SEC, indicating that they all unanimously felt that we should not change the manner in which we regulate over-the-counter derivatives transactions and that, in fact -- I think Alan Greenspan said it several times -- that it was the flexibility that these instruments provide to us that gave us some significant strength in the economy when we saw some of the softening occurring in the last years.

The obvious question I have for you is -- I expect that we'll be dealing with this issue again, and I would like to know what your feeling is about the issue. Do you believe -- do you agree with your predecessor and with others in the financial community, or do you have a position at this point on whether we should maintain our current regulatory posture with derivatives?

MR. DONALDSON: Yes, derivatives are extremely complex, as you know better than I. I believe that they cross, in terms of responsibility, between the Federal Reserve and the Treasury Department and the SEC and certainly the other exchanges that deal in marketable derivatives.

I would hope to, first of all, understand what work has been done in the SEC. Secondly, I would hope, through the working group of the chairman of the Fed and the secretary of the Treasury, that we would get together and talk about this issue.

I believe that there is the potential for risk out there somewhere. Risk gets passed via derivatives. And somewhere out there, there is risk. Somebody's holding the bag. And I think we've got to bend every effort to find out where that is.

SEN. SHELBY: It's passing on the risk, in a way. You're passing the risk on.

MR. DONALDSON: Exactly.

SEN. SHELBY: But it exists.

MR. DONALDSON: It's a little bit like a hot potato, and somebody is holding that potato. We've got to find out who's holding it and whether we are adequately anticipating what might eventuate from that.

SEN. CRAPO: As I understand it, one of the ways it was explained in one of our hearings by one of the expert -- it may have been Alan Greenspan -- was that the derivatives are actually utilized in our market to allocate risk better for those areas or those entities that can handle it, and that it's a very strong stabilizing influence in the markets. Do you agree with that?

MR. DONALDSON: I think a very good case can be made for that. I think that's one of the positives of them. I think there's a negative case that could be made, as we've seen in a couple of the blowups where derivatives were being used and unexpected things happened.

So I think, as a positive tool of risk, putting risk in the hands of people who are willing to accept it and must be paid for, is not a bad idea. It's just we've got to make sure of the way it's being done and we know that there's not something hidden out there that's going to hit us when we don't expect it.

SEN. CRAPO: In that context, I think that I probably would agree with you. And some of the discussions we've had focused more on reporting and making sure that adequate information was available as opposed to requiring that the transactions be handled through an exchange.

MR. DONALDSON: I think disclosure, transparency, is the first line of regulation. And I don't disagree with that.

SEN. CRAPO: All right, thank you. How am I on time? Out?

SEN. SHELBY: Your summing-up time.

SEN. CRAPO: (Laughs.) All right. I have some other questions for you, but they're more lengthy than that. And so what I'll probably do is just discuss them with you privately.