saying, well, we are moving closer to privatization, that the advantages that exist now in rates, differentials would diminish. Chairman SHELBY. Your definition of privatization here, where there would be clear and unmistakable language that there would be no implied guarantee. Mr. SYRON. No. Chairman SHELBY. Is that what you are saying? Mr. SYRON. No, I am going even beyond that. I am going beyond that and saying that these things are not creatures of Congress, that they have no tie to Government policy, in a sense. Chairman SHELBY. They are creatures of the marketplace. Mr. SYRON. Exactly. Chairman SHELBY. And they are subject to the marketplace and the rules. Mr. SYRON. And subject only to the marketplace. Chairman SHELBY. Only. Mr. Raines, in your opening statement I believe you indicated that the GSE funding advantage was not a result of an implied guarantee, but because of business focus and expertise. If this were the case, does it not follow logically that receivership authority will not impact GSE's funding advantage, if you accept that premise? Mr. RAINES. No, it does not imply that. Chairman SHELBY. It does not? Mr. RAINES. It implies the Government is going to step into what had been previously a private enterprise and make decisions, and that is the issue. It is that somebody who is a stranger to the transaction is going to step in at some point and start saying here is the way it is going to go from now on. That is the danger. That is a risk. And I have been in the financial services business, now for 25 years. I have had to deal with this situation when I represented State and local Governments. I have had to deal with it in representing companies. I have had to deal with it even when I was in OMB, when we were privatizing the Government's ownership of the production of uranium. As much as those of us who have been in public service like to believe that we can be helpful Chairman SHELBY. Sure. Mr. RAINES. -when people are investing their money, they would just as soon rely on the deal they cut with the business entity and not think someone else is going to come in to be helpful at a later date. Chairman SHELBY. Mr. Rice, Mayor, I am going to leave this last question to you. Currently, the Federal Home Loan Bank System issues its debt, as I understand it, by way of the Finance Board's Office of Finance. You are very aware that this is an entity that is legally under your System's current regulator, yet issues debt on behalf of the System. In other words, a regulator is issuing the debt. Do you believe this authority should be transferred to the bank themselves to issue the debt, you know, as we create a future regulator? And, if so, do you have any thoughts on how a new Office of Finance owned by the banks would be organized. You see my question here. Mr. RICE. No, I do. I think, in my opening remarks, I said I felt that the Office of Finance should move to the independent regulatory structure. I do not think you can make that quantum leap in this legislation. So, I would elect or offer the suggestion that it stay with the regulator, and I think it operates well then. Chairman SHELBY. To be the regulator and the issuer of debt. Senator CARPER. Just one question in closing, and again our thanks to each of you for joining us for this extended period of time and for your very thoughtful answers hopefully to our thoughtful questions. I have a question really for you, Mr. Syron, and this is more I suppose of a personal nature than anything else. I understand, in an earlier part of your life, you served the Boston Fed. Mr. SYRON. Yes, sir. Senator CARPER. And as I recall, you ran the show there for a while. Mr. SYRON. Yes, sir. Chairman SHELBY. I might add he ran it well. Mr. SYRON. Thank you. Senator CARPER. Yes, it got good reviews from as far away as Alabama. [Laughter.] Chairman SHELBY. You know, money travels, and so does a good reputation. Mr. SYRON. Thank you, sir. Senator CARPER. I would like for you just to take a moment in closing here and reflect, if you will, on your earlier service in that capacity some of the lessons that you learned and really some of the values that you brought from that service to your new responsibilities. Mr. SYRON. Thank you for the question, Senator. I would say, if there is one thing I learned, that it is be wary of unintended consequences; that often in solving the problems of today, we create the problems of tomorrow. You will remember that 8 or 9 years ago, everyone said that management in the United States was not sufficiently aligned with shareholders. So what we are going to do is load them up with options, and we have seen some of the undesirable outcomes that came from that. I, also, think if my service had any searing impact on me, it was that you have to look at the system as a whole rather than just the parts, and particularly when we got into this credit crunch in New England in the 1990's, that there was a problem of looking at just, on an institution-by-institution basis or a piece-by-piece basis and not seeing what we were doing to the economy as a whole. Sir, I would respectfully say that that is something I hope I can bring to this because it is like everything else in life. It is a balloon. You press in here, and it pops out someplace else. I will finish on this. What this is all about is none of us can eliminate risk. We are all about trying to repackage and reduce risk and have it go to the part of the system where we Chairman SHELBY. Minimize it. saying, well, we are moving closer to privatization tages that exist now in rates, differentials would, Mr. Chairman. Chairman SHELBY. Your definition of priva vas speaking about there would be clear and unmistakable lancesponsible for issuing be no implied guarantee. Mr. SYRON. No. with the new regulatory mentioned options in the Les people believe it was not the Chairman SHELBY. Is that what you options were treated, and that Arte, on the balance sheets, because believe, in corporate America. were treated, from a tax perspective as compared SLBY That is right. Mr. SYRON. And sub Chairman SHELBY Mr. Raines, in that the GSE f guarantee, but the case, doe not impact Mr. RAT Chair Mr. F had b that trar is t is fc r man SHELBY agree with you. My concern was drestricted stock was treated created unfortuAbsolutely. I totally agree. Me hearing is adjourned. tlemen, thank you for your insights today. We appreciate it. Prepared statements, response to written questions, and addiWhereupon, at 5:08 p.m., the hearing was adjourned.] tional material supplied for the record follow:] Statement of Franklin D. Raines Chairman and CEO, Fannie Mae Senate Committee on Banking, Housing, and Urban Affairs February 25, 2004 Sarbanes, members of the committee, thank you for inviting USE regulatory reform. The last time I came before you to discuss October. Since that time, this committee has worked diligently to new GSE regulatory regime that ensures strong oversight of Fannie Mae Mac. behalf of Fannie Mae, let me express how much I appreciate the hard work and serious thought the Committee has invested in this issue over many years and in particular over the past several months. I believe at the end of the day we share the same goals. We all want to protect, advance and strengthen the best housing finance system in the world. We all want to ensure that the government-sponsored housing enterprises, which fuel this remarkable system, continue to achieve their mission to expand homeownership in America. And we want to strengthen GSE oversight because effective oversight is in the best interest of the company, our mission, and the U.S. housing finance system. Let me repeat something I said last October: Fannie Mae supports a strong, credible safety and soundness regulator. In fact, strong, effective oversight is the backbone of our unique GSE status. Congress created Fannie Mae in 1938 as an instrument of national policy -- a policy to expand homeownership because it is good for families, communities, the economy, and the country. In 1968, Congress privatized Fannie Mae, but imposed a restrictive charter to ensure we continued to be an instrument of national policy promoting homeownership. And in 1992, Congress further focused us as an instrument of national policy, creating explicit affordable housing goals for the company and establishing a safety and soundness regulator to ensure the company's ongoing financial viability so that it could continue to serve homeowners. Strong oversight is the means by which the federal government displays its commitment to a national policy favoring homeownership. That national policy is working. Fannie Mae and Freddie Mac have helped to create a market-based, consumer-focused housing finance system that draws capital from all over the world, making long-term, fixed-rate, refinanceable mortgages more widely available at lower costs. All of this is accomplished at no cost to the government. The highly efficient mortgage market touches millions of homeowners, as well as an entire housing industry. Last year, over $3.7 trillion of single-family mortgages were originated, as an estimated 22 million households either financed a new home purchase or refinanced an existing mortgage. In each of the last two years homeowners were able to take advantage of strong home price appreciation and low interest rates by taking out over $125 billion of home equity through "cash-out" refinancing, using the proceeds both to retire other, Mr. SYRON. Yes, sir. Mr. RICE. I just wanted to make a clarification, Mr. Chairman. I really believe the new regulator, when I was speaking about OFHEO's oversight, the bank still would be responsible for issuing the debt, but the oversight would still go with the new regulatory body. Chairman SHELBY. Mr. Syron, you mentioned options in the times a few years back. A lot of people believe it was not the issuance of options, it is the way the options were treated, and that is of course still subject to debate, on the balance sheets, because options do have a place, I believe, in corporate America. Mr. SYRON. Senator, I totally agree with you. My concern was that the way they were treated, from a tax perspective as compared to the way that Chairman SHELBY. That is right. Mr. SYRON. —and restricted stock was treated created unfortunate incentives. Chairman SHELBY. Absolutely. I totally agree. Gentlemen, thank you for your insights today. We appreciate it. The hearing is adjourned. [Whereupon, at 5:08 p.m., the hearing was adjourned.] [Prepared statements, response to written questions, and additional material supplied for the record follow:] |