supervisor, do you think at this moment it's the right time to perhaps pump the brakes, so to speak, and slow down the rule-writing process, or has this recent episode really made it a stronger case for proceeding with the volcker rule expeditiously? and secondly, if i may, since given that you've suggested that regulators might be late on the rule, surpassing the july 21st deadline, could you perhaps give us a target on when regulators are looking to release the rule? thank you. >> well, on the second question, it's a five-agency rule, i believe. and so a lot of coordination and cooperation is needed. and we had something like 18,000 comment letters. so it's been a yfficult process in terms of the amount of work that has to be done, the amount of coordination that has to be done. so i don't have a date for you. i think if there's a silver lining to the events you referred to, it may be that there's some things we could learn in terms of writing the rule and thinking about how it would work. one aspect of our rule that i

think would have been important in the context of the loss is that in the rule, a bank would be required to provide a plan in advance, explaining how the hedge was going to be done, how it was going to work. it would be necessary to have an auditing process to make sure that, in fact, that was being followed. that there were adequate risk management and governance rules to oversee the process. and it would be necessary that compensation for the executives involved in the management of the position would not be such that it would incentivize them to make proprietary positions. so one aspect of the rule that might have been relevant, and, again, we're still looking at that situation as are the occ and others, would have been the control of the governance aspects of it.

and that might have potentially changed the outcome. >> mark and then we'll go to greg. >> mark gregory, bbc. how much worse will the situation in europe have to get before it starts seriously denting the prospects for recovery in the american economy and thus really changing the direction of fed policymaking? >> well, we hope it doesn't get worse. i think -- it's already one of the factors that has been a drag on the u.s. recovery. not the only factor, by any means. there are a number of others that i mentioned. but it has been having an effect, and it's been having an effect on the economies of other countries, as well. countries that export to europe. so it is a significant issue. we are hopeful that europe will take additional measures and do all that's necessary to stabilize the situation and to

provide the basis for an ongoing stable structure that -- in which banks and sovereigns are both stabilized, in which there is a program for growth and in which fiscal arrangements are clear, made much clearer. so there's a lot of work to be done. again, we think that the policymakers in europe have very strong incentives to get this right. and we're very hopeful they will get it right. and we're in close contact with them as they work on these issues. but again, it's also important for us to be prepared for any further problems that might emerge from europe and we have been doing that. for example, you know, we recently did our stress tests of the large bank holding companies, make sure they had enough capital, even in the face of a severe financial crisis or a european crisis.

we have been monitoring the exposures of banks and other financial institutions to europe. and, of course, monitoring the situation there very closely. so we are hoping for the best. we're hoping that european policymakers will take the additional steps they need to take to stabilize the situation. but we are prepared in case things get worse to protect the u.s. economy and the u.s. financial system. [ inaudible ] >> thank you, mr. chairman. greg robb, market watch. i just wanted to get back to lending and credit. the u.k. has started a program where the bank of england is going to make lending to banks only if they lend to households and companies. is that something the fed is under consideration? >> well, we're very interested, and we're certainly going to follow it. the details are not yet available. and i think it should be noted that it's not just the bank of

england program, but it's joint with the british treasury. so the question -- one question might be how much of a fiscal component is there? is there some kind of fiscal subsidy being included there? but we are looking for, as you know, throughout the crisis, we've looked for new programs, new ways to help the economy. and this will be a type of thing that will be on the list of programs that we look at. greg, the economist. your project eggses show inflations centered below 2% over the median term. and i was wondering if you could explain why. secondly, you've said the fed is prepared to do more if approximate necessary. could you comment on what form additional action would take and what are the relative costs and benefits of doing more qe versus more extension? >> well, the -- in terms of the

inflation forecasts, again, i think it should be said as a preliminary point that economic projections have a lot of uncertainty about them. we talk about that uncertainty in the survey of economic projections. so it shouldn't take a false sense of precision from those numbers. that being said, there is an issue about whether or not there's sufficient stimulus in the economy. as i mentioned earlier, one problem is that we are now at the zero bound, and that the types of unconventional programs that are available are -- we know less about them. they have various costs and risks. and for that reason, you may get a different amount of financial accommodation in this kind of regime than you would in one where short-term interest rates can be varied freely. so i think that's really a critical issue. now, in terms of the costs, i

would list briefly large asset purchases increase the size of our balance sheet, and therefore ultimately will make exit a more extended process. they -- large asset purchases, which means that the fed owns a larger share of a particular type of asset may have implications for market functioning, which in turn might affect the ability of the fed to have stimulative effects on the economy. there are some financial stability issues that we are monitoring and have to be taken into account. so any kind of assessment of appropriate policy must look both at the outlook for the economy and for -- and at the costs and risks associated with new measures, new steps that might be taken. that being said, again, i think at this point we still do have considerable scope to do more, and we're prepared to do more. we'll continue to monitor the economy and see how things

evolve. and if, again, we're looking primarily at the labor market in this respect, if we're not seeing sustained improvement in the labor market, that would require additional action. in terms of balance sheet actions, we're unlikely to do more maturity extension for a while, because we have taken that about as far as we can. so we would have to take other types of steps in order to add to the amount of stimulus in the economy. [ inaudible ] >> thank you, chairman. i hear a lot of conversations on the liquidity trap in the u.s. is the u.s. economy in a liquidity trap, and if that happens, how can the economy escape from here? thank you. >> well, the u.s. economy is in a situation where short-term interest rates are close to zero. and so what that means is the

federal reserve cannot add monetary accommodation by cutting short-term interest rates, the usual approach. it's been one of the themes of my own work for a long time, including some of the work i did on the bank of japan, that central banks are not out of tools once the short-term interest rate hits zero. there are additional steps that can be taken, and we've demonstrated through both communications techniques, guidance about future policy, which is something the japanese have done, as well, by the way. and through asset purchases, also something the bank of japan has done, that central banks do have some ability to provide financial accommodation, support the recovery, even when short-term interest rates are close to zero. that being said, as i mentioned to mr. ipp, these nonstandard policies are less well understood, and they do have some costs and risks, but i do think at the same time they can be effective in helping the economy.

>> jennifer la-berto, cnn money. chairman, are you at all concerned that operation twist could affect banks' earnings and they're willingness to lend? does it undercut your ability to increase credit to consumers? >> credit to consumers? no, i don't think so. if -- take, for example -- i've heard the argument that by lowering interest rates, you make it unattractive to lend. i don't think that's quite right. what we're lowering is the safe interest rate, the treasury rate. that should make it even more attractive for banks rather than the whole securities to look for -- to look for borrowers. and to earn the spread between the safe rate and what they can earn by lending to households and businesses. so i think that macro policy and monetary policy can affect support lending. now the question arises in some

context whether there are other barriers to lending as exist, for example, in some parts of the mortgage market. but lower interest rates on securities and other types of assets, all else equal, would induce banks to look for higher yielding returns, higher yielding assets in the form of loans to households and businesses. >> we'll go to merrill and kathryn. that will be it. >> merrill goosener, the fiscal times. returning to europe briefly. some analysts have said that should the situation deteriorate there, the fed could step in by buying european sovereign debt. are there any countries you would rule out in such a strategy? >> the federal reserve isn't going to be buying european sovereign debt, except we have a very limited amount of european sovereign debt as part of our foreign exchange reserves. and it comes primarily from a

small number of countries. so that's not something that we would be engaged in. >> you have two new fed governors aboard. did that change the tenor of the discussion at all this week, and did jeremy stein push you in any policy direction? >> they're two terrific people with great experience. i've known jeremy for a long time. he's an outstanding academic and knows a lot about finance. jay has both market experience and a lot of experience in government. they both bring a lot to the table. this was their first meeting, so i think to some extent they were in listening mode. but they do have an awful lot to offer, and i really do look forward to working with them, because i think they are exceptional people. and i'm glad for the first time i believe it's the case that this is the first time that we had seven governors at an fmoc meeting since 2005. and it will help us do our other

work as well as monetary policy work more effectively. >> thank you. >> thank you. the house committee voted on party lines today to hold attorney general eric holder in contempt of congress. a vote in the full house is set for next week. you can see the hearing in its entirety online at c-span.org in our o library. and watch key portions tonight at 8:00 p.m. eastern here on c-span 3. friday, supreme court justice ruth bader ginsburg talked about the court's current term, including the health care case. >> no contest since the court invited new briefs and arguments in citizens united has attracted more attention from the press, the academy, the ticket line outside the supreme court.

a line that formed three days before oral argument commenced. some have described the controversy as unprecedented, and they may be right if they mean the number of press conferences, prayer circles, protests, counter protests, going on outside the court while oral argument was under way inside. >> she also spoke about press reports on the decision, expected this week or next. >> and though our deliberations are private, has not dissuaded the media from publishing a steady stream of rumors and accounts. my favorite among press pieces was the observed at the supreme court. those who know don't talk and those who talk don't know. >> watch the rest of her comments from the american constitution society online at the c-span video library.

next, a senate hearing on the process of the initial public offering of stock like the recent facebook ipo, and how it impacts the economy. a finance professor and a lawyer specializing in companies going public testify. this securities insurance and investment subcommittee hearing is just over an hour. [ banging gavel ] let me call the hearing to order. my ranking member, senator crapo, is delayed. we anticipate that other colleagues will be arriving

shortly. but since the panel is assembled and the time has come, and it's appropriate to begin the hearing. let me welcome everyone to the hearing. it's a very important topic examining the ipo process as it working for ordinary investors. i've had the opportunity to read your testimony, and let me thank you all for very thoughtful and insightful comments. i appreciate it, and i look forward to the questioning. the number of individuals participating in our capital markets has grown substantially, especially for investors trying to save for their retirement through 401(k) plans and other retirements. once an opportunity limited primarily to institutional investors, now the chance of participating in initial public offerings is increasingly available to ordinary investors. the essential question i want to -- this hearing to answer, is the system fair and transparent, and is it working for everyone, particularly individual investors?

a dysfunctional ipo market can harm our economy, while the summer is typically the peak season for ipos in the wake of facebook's highly publicized ipo's troubles which was marred by technical mishappens, many planned ipos have been cancelled by more americans, and many are questioning the ipo process. and frankly, i think we all recognize that without confidence by investors, the ability to officially form capital and to generate jobs is impaired. that confidence is fundamental to our free market system. regulators continue their investigation to some of the specific problems surrounding the facebook ipo. this hearing is a chance to broadly and publicly examine the procedures for taking a company public. that's one data point, but it's a much, much broader set of issues we want to confront this morning. there's also concern that the jobs act recently passed made some of the biggest regulatory changes to u.s. capital markets

in decades, and weakened some key investor protections. it may have caused some other new problems, such as allowing more shell companies for reverse mergers to go public in the united states. indeed, a recent "wall street journal" article quoted special purpose acquisition companies and blank check companies, basically empty shels with almost no employees used as mergers or back door for u.s. stock listings have been quick to identify themselves for regulatory filings as, quote, emerging growth companies. the new law uses that label to describe companies when they decide to go public should be exempt from financial reporting and corporate governance rules. companies with less than $1 billion growth are eligible for the less restricted rules. a standard that would have been met by the majority of companies conducting an ipo in the last several years. so this is a very high threshold, obviously. companies that qualify as emerging growth companies don't have to comply with the

stocks -- star sarbanes oxley act. it also allows them to make fewer financial disclosures, use a new confidential s.e.c. review process for ipos and let's their banks communicate more freely. the more sophisticated players under investment bank. underwriting the growth companies is a big business on wall street. investment banks are expected to take full advantage of the new, less stringent requirements. as a result, retail investors may be denied critical information that is essential to making sound investment decisions. unfortunately, during the expedited process used to pas nde jobs act, improving the ciransparency of the existing ipo system was not really discued. with ful and fair infor for inveors, our capital markare mor efficient and facitate the capital formati so important our ti rly,cleall investorse certain risks when contributing

capital to either small or rge in fact, the panels ha made the uite clearly that risk is inherent in all of these ipos and that should be acknowledged. however, we need to ensure there isn't one set of rules for sophisticated wall street clients and another set for ordinary investors. everyone should have access to the same set of data and disclosures or at least equivalent data and disclosures. chairman johnson has instructed committee staff to conduct its due diligence regarding issues raised in the news about facebook's ipo. this hearing would be part of that, but the focus is on the broader issue of ipos. and many have stated once these briefings are concluded, we'll determine if a full committee hearing is necessary. so today's hearing will serve as a jumping off points, broadly examining the procedures for taking a company public. and i think it will be a very productive hearing. when senator crapo arrives, if he is able to arrive or my colleagues, if they wish to make an opening statement, i'll interrupt your statements and give them that opportunity. but let me now proceed to introduce witnesses and ask for your statements.

our first witness is dr. ann shermann, dr. sherman is the associate professor of finance at de paul university. she received her phd in economics from the university of minnesota. had he she was a consultant on the google ipo. dr. sherman has taught finance at the university of wisconsin-madison, university of notre dame and hong kong university of science and technology. and next witness in line is ms. liz buyer. founding principle of the class five group, providing strategic and logistical guidance in official public offerings. ms. buyer has firsthand experience in venture capital t capitalis capitalists, board member and internal coordinator/analyst and employee. previously was the director of business optimization for

google, inc. where she was one of the chief ash tekts of the company's innovative ipo. our next witness is mr. joe h. trotter, a partner at lathe am watkins and co chair of the practice group and deputy chair of the corporate department in the washington, d.c. office. his focus is on capital markets transactions, mergers and acquisitions, securities regulation and general corporate matters. thank you. and finally, our last witness is ms. elan must co vits. he is a senior analyst for the motley fool, a global financial service company and is tireless advocate for investors specializing in financial reform, macro economics and shareholder rights. his research has been cited numerous times in the national press. we thank you all for being here. all of your testimony will be made part of the record in its entirety, and i would ask you to summarize it within five minutes. and we'll begin with dr. sherman. dr. sherman. >> chairman reid, thank you for inviting me to testify today.

my research has been primarily on ipo methods in various countries. and in the last three decades, there's been a lot of experimentation in various countries with different methods. now one of the main points i want to make today, the u.s. method commonly called book building is the most popular method around the planet. and it wasn't always that way. if you go back to the early 1990s, it was used really only in the u.s. and sometimes canada. by the end of the 1990s, it was the dominant method, and it's become even more popular since then. now, the difference between book building and the other methods is that with book building, the underwriter gets feedback from investors before setting the offer price. and it's not always easy to get people to honestly tell you they like an offering if you know that you're going to use that information to raise the price. and that's why it's important that the underwriter also controls allocations. who gets what. so by controlling allocations, the underwriter can favor

regular investors that don't just try to cherrypick the hot offerings. can favor investors that give feedback that help to set the price, and can favor long-term investors. so there are reasons why the underwriter may favor institutional investors. ordinary investors may not have the expertise or resources to play the same role in an ipo. that doesn't mean they can't participate. if you look around the world, most countries open up the ipo process to all ordinary investors. but the key is that they open up the allocations but they do not control the price setting. the ordinary investors don't help to set the price for ipos, they just get a chance to get shares. so the most popular method outside the u.s. is a hybrid or a combination, where they have a tranche that uses book building and they use that to set the price and allocate to institutional investors. and then for ordinary investors,

they have a separate tranche. ahead of time it's announced what proportion of shares will go into each tranche, and everyone is allowed to order shares in the retail tranche. and if it's oversubscribed, they have basically a lottery. so it's open, it's transparent, everyone has a chance to get shares. but they don't disrupt the price-setting process. that's a method that has worked well over in the world. the method that has not worked well around the world is to use an auction that's open to everyone, so that everyone has an equal say in setting the price. i don't want to use up too much of my introductory time, but i would be happy to answer questions on that. and the auction method has been used in more than two dozen countries, and they've pretty much all abandoned it, because of huge problems. when i was doing literature searches, or newspaper searches to find out more about various ipo auctions, i learned that good search terms were flop

disaster, de back he will, catastrop catastrophe, calamity. the auction method is one that has blown up in people's faces around the world, which is why countries stopped using it. retail investors should be allowed to participate, but you have to be careful about giving them a major role in the price-setting process. so what should the u.s. do? frankly, i'm neutral on whether the u.s. should require issuers to give a bigger role to ordinary investors. but i feel strongly that if we're going to do that, it should be through the hybrid method with a separate tranche so that everyone has an equal chance of getting shares, but it doesn't disrupt the price setting. last, on the role that small investors should play in private equity, and in particular crowd funding, where you have a -- maybe a website and a bunch of people put up a few hundred dollars each, i see two big problems with that. the first is who is going to do the due diligence? fraud is a major problem with these.

someone needs to screen these offerings before they get funding, and someone needs to continue to monitor them. and if we don't find a way to do that, crowd funding could be a disaster for ordinary investors. and second question is who is going to set the price? i hope that i've communicated that letting ordinary investors price ipos has been disastrous. and if they're not good at pricing relatively sophisticated or advanced ipos, then there's even less reason to think that they can price early-stage start-ups. again, thank you, and i would be happy to answer any questions. >> thank you very much, doctor. ms. buyer, please. >> chairman reid, thank you very much for inviting me to be here today. i'm honored to submit my commentary to such an important discussion of the ipo process. which is clearly such a important rite of passage for so many companies. having been an institutional investor responsible for deploying the assets of aggregate individuals, and

investment banker, part of the team that designed and implemented a unique and high-profile ipo and a board member of a company as it transitioned from private to public, i've looked at the process from a variety of perspectives, and it is from that combination of perspectives i offer my comments today. ipos, as you mentioned are always and inherently very risky. riskier than investing in had seasoned companies. in fact, if we look at the class of 2012 as of a day ago, the best-performing ipo year-to-date was a buffalo, new york based company, sin acore, traded up 5% day one. and now is up in incremental 162%. and then there is cirrus, up 14% day one, currently down 31%. and then there's the higher-profile spelunk up 90%, meaning those people who

e frpaiczy of day onemay be under water, even though the stock hasrldoled fr c offering. the pot of tt is to say, it's very diffult to predict what any stock will do on its ipo. d,act, there is no right answer. there are always winners and sers. soi believe that -- ifact, thpeople who invest since d one ally speculators, not vestors. ins neveor be in for a longer period of time. i believe the importance here is for overseerso make sure that up front, anyone who chooses to vereripate in an not real risks. ggon her i would make only one suggt that bef conrming an order, beithone or in nline, every individual be ask to read or be read to, acknowledge and confirm agreement with a very short, bo statement along the lines. i fully acknowlget this stock has an equal chance of trading o tradin