And Freddie Mac, who on its own, you know, came out front and indicated it is wrong, and now the problem that we have and that we are faced with is maybe some individuals who wanted to do away with GSES in the first place, you have given them an excuse to try to have this forum so that we can talk about it and maybe change the direction and the mission of what the GSEs had, which they have done a tremendous job.

There has been nothing that was indicated is wrong, you know, with Fannie Mae. Freddie Mac has come up on its own.

The question that then presents is the competence that your agency has with reference to deciding and regulating these GSES. And so I wish I could sit here and say that I am not upset with you, but I am very upset because what you do is give, you know, maybe giving a reason to, as Mr. Gonzalez said, to give someone heart surgery when they really don't need it, they need something else.

So the question, I guess, if there is a question that I have-and we don't have the time, because I want to know, really, what completely went wrong. You may have testified, but what really what was wrong and what would be needed by you. You know, you said, I think I heard you, you were talking about that if he had the same kind of powers or supervisory control as some of the big guys that maybe you can change it. But you didn't come voluntarily and say that at any point prior to the Freddie Mac incident.

So why and what can you say now so that we don't destroy the mission of these GSEs that are creating home ownership? Why should I have confidence, why should anyone have confidence in you as a regulator at this point?

Mr. FALCON. Congressman, OFHEO did not improperly apply accounting rules; Freddie Mac did. OFHEO did not try to manage earnings improperly; Freddie Mac did. So this isn't about the agency's engagement in improper conduct, it is about Freddie Mac. Let me just correct the record on that.

We don't review the accounting practices of the two companies. That is the role of the independent outside auditor. But we are going to begin to look at that going forward.

Mr. MEEKS. And you are saying-and I will stop you, because I know we have got to go vote and you believe that just that one, by looking at the accountants-I mean, because we just had this huge corporate fraud dealing with accounting scandals, et cetera. You are saying that then we'll give you the ability to catch any problems that may be in accounting or otherwise. I mean, we have got to look for-and any other kind regulatory or record-keeping at any GSES so that the American people can have confidence that there is stability and soundness-and safety and soundness in the principles, in the practices of the GSEs.

You are saying that is the sole piece that you need?

Mr. FALCON. I have been asking for these additional authorities for four years now. I have been asking for additional resources, involving independent appropriations assessment powers.

This is not a matter of the agency engaging in any misconduct. And, yes, I think it would be better if the agency had additional resources, so that we could hire the types of people that we need, given the different activities we are going to be doing now. It is not

the role of the safety and soundness regulator to look at the application of GAAP with the GSES books. That is the role of the auditor.

And as we have more resources, we are going to hire the type of people so that we begin to do that. Hopefully, we will try to catch these types of activities. These activities, by their nature, are concealed.

It is not easy for anyone to try to catch them. But with the resources, we are going to try.

The CHAIRMAN. The gentleman's time has expired.

The Chair thanks both of the gentlemen for your testimony, and the committee now stands in recess until 1 p.m.

[Recess.]

The CHAIRMAN. The committee will reconvene. And the Chair would like to introduce our second distinguished panel: Mr. George D. Gould, the Director of Freddie Mac; Mr. Franklin D. Raines, Chairman and Chief Executive Officer of Fannie Mae; Mr. Dean Schultz, President and CEO of Federal Home Loan Bank of San Francisco; and Mr. David H. Hehman, President and CEO of Federal Home Loan Bank of Cincinnati.

Gentlemen, thank you, particularly for your patience on the length of the first panel. The only good news is you are not the third panel.

[Laughter.]

And so you take them where you can find them.

And so again welcome.

And Mr. Gould, we will begin with you.

STATEMENT OF GEORGE D. GOULD, DIRECTOR, FREDDIE MAC

Mr. GOULD. All right, sir.

Well, thank you, Chairman Oxley, Ranking Member Frank, and members of the committee.

Good afternoon. My name is George Gould. I have served on the Freddie Mac board since 1990 and am currently the Presiding Director and Chairman of the Governance and Finance Committee. From 1985 through 1988, I served as Under Secretary for Finance at the Department of the Treasury.

I welcome the opportunity to discuss GSE regulatory oversight. Freddie Mac plays a central role in financing home ownership and rental housing for the nation's families, and given the importance of housing to the economy it is critical that our regulatory structure provide world class supervision.

But before expressing our views about regulatory restructuring, I would like to say a few words about the resolution of Freddie Mac's accounting issues and our continued safety and soundness. In January 2003 we announced the need to restate earnings for 2000, 2001 and 2002. In stark contrast to other recent corporate restatements, we expect Freddie Mac's restatements to show a large cumulative increase in earnings for the prior years.

Timing is an issue, however, and I am disappointed to report to the committee today that our restatement will not be completed during the third quarter, as we had previously stated.

We were nearing completion of the restatement and were in the process of verifying results when we discovered a systems error.

We have isolated the underlying problem and will fix it as expeditiously as possible.

As the company stated in our June 25 press release, getting our financials right is job number one.

We are targeting to have this setback addressed during October; we plan to restate earnings in November. Whether it takes two more days or two more months, Freddie Mac is focused on getting our restatement right and regaining the trust of the Congress and the public in our financial statements.

As frustrating as these accounting issues are, let me say a few encouraging words about safety and soundness.

Freddie Mac's franchise is rock solid. Our exposure to both credit risk and interest rate risk remains extremely low.

Just today we announced that our key measure of interest rate risk, duration gap, was zero for the month of August in spite of it being a turbulent period in the bond markets. This is an outstanding example of Freddie Mac's highly disciplined approach to risk management.

Now I would like to comment briefly on the various regulatory proposals.

Over the past few years, Chairman Baker, Congressman Kanjorski and the entire committee have worked diligently to study ways to enhance our regulatory structure. I want to thank you for your hard work and I hope you will find that we have much in

common.

To begin with, we support giving our regulator the authority to ensure we continue to carry out the public commitments we made in conjunction with this committee in October of 2000.

In addition, we support codifying the commitment we made last summer to register our common stock with the SEC under the Securities Exchange Act of 1934.

Freddie Mac also would support the creation of a new regulatory office within Treasury. To ensure regulatory independence, we support applying the same operational controls as apply to the relationship between Treasury and the OCC and the OTS.

We also support providing both the regulator and HUD authority to assess the GSES outside of the annual appropriation process.

Capital adequacy is key to our ability to attract low-cost funds to finance home ownership in America. Our capital standards were developed in keeping with our charter, which restricts us to lower risk assets than banks.

Given our lower risk exposure, we agree with Secretary Snow that the GSE minimum capital requirement is adequate and need not be changed.

With regard to risk-based capital, we agree that the regulator should have adequate discretion, such as provided to federal banking agencies, but discretion should be balanced with continuity.

The risk-based capital standard, which took some 10 years to develop with our present regulator, has been in effect less than one year, and it should not be changed unnecessarily or capriciously. Until an overhaul appears warranted, the regulator should continue to apply the existing rule.

We also support continuity in our mission oversight. We believe the HUD Secretary should retain all existing GSE mission-related

authority. HUD should retain its authority to approve new programs under the same standard as in current law. HUD alone has the experience and the history to determine whether new programs are consistent with our charter and our statutory purposes.

The existing structure also works well with regard to our affordable housing goals. As mission regulator, HUD has significant discretion to establish and adjust the goals and to require the submission of a housing plan if we ever fail to meet one of them.

These are strong incentives for the GSEs to meet the goals year after year, to say nothing of the reputational penalties of failing to meet a goal.

Considering that we have consistently met the permanent affordable housing goals, additional enforcement authority seems unnecessary. Therefore, we would respectfully suggest that no additional authority is needed.

In closing, thank you again for the opportunity to appear today. Freddie Mac is safe, sound and strong.

We are prepared to support many of the provisions put forth by this committee and the Administration. A strong, credible regulator is essential to maintaining the confidence of the Congress and the public.

We look forward to working with Chairman Oxley, Ranking Member Frank, Chairman Baker and Ranking Member Kanjorski and other members of this committee as you move forward to enhance our regulatory oversight structure.

I look forward to answering any questions the committee may have.

[The prepared statement of George D. Gould can be found on page 163 in the appendix.]

The CHAIRMAN. Thank you, Mr. Gould.

And, Mr. Raines?

STATEMENT OF FRANKLIN RAINES, CEO, FANNIE MAE

Mr. RAINES. Thank you, Mr. Chairman, and thank you for this opportunity to appear before the committee. And let me as well thank the members.

Mr. Chairman, I have submitted a longer statement for the record, and I would ask that that could be included, and I can just summarize it.

The CHAIRMAN. Without objection, all the statements will be made part of the record.

Mr. RAINES. Thank you.

I want to thank you for the crucial role that the United States Congress has played and is playing today in building and sustaining and constantly improving the best housing finance system in the world.

Fannie Mae is proud to be at the core of this remarkable system. And I am here today to ask Congress to take action to make this remarkable system even better by supporting the Administration's proposal to move our financial regulator to become a bureau within the U.S. Department of the Treasury.

The Administration's proposal would help ensure that Fannie Mae and Freddie Mac have a strong, well-funded, highly credible financial regulator.

We support the Administration's proposal for three reasons. First, we support having a strong, well-funded, highly credible financial regulator. Having a strong regulator is in the best interest of housing and housing finance, the best interest of investors and the markets that supply private capital to housing through Fannie Mae, and in the best interests of Fannie Mae and our stakeholders. Second, the Administration's proposal supports our charter, mission and status, including our freedom to continue to innovate with our lender customers and housing partners to expand affordable housing to new people and places.

And, third, the Administration's proposal supports the advanced capital structure Congress provided in 1992, which ensures that we remain safe and sound through even the worse economic conditions, while allowing us to direct the maximum amount of low-cost financing to home buyers.

Fannie Mae looks forward to working with Congress and the Administration to see the proposal enacted into law this year.

I believe that strengthening our financial regulator is the next natural step in a sequence of congressional actions to advance the success of Fannie Mae, a sequence that began 65 years ago.

In 1938, with the blessing of Congress, the Federal Government created Fannie Mae. The purpose was to ensure a nationwide flow of low-cost mortgage capital to all communities, at all times, under all economic conditions and to make the long-term fixed-rate refinanceable mortgage available nationwide.

At the time, local housing lending was limited primarily to local bank deposits and the long-term, fixed-rate mortgage was a novel idea.

Today Fannie Mae is one of only two companies in America to guarantee the nationwide flow of low-cost mortgage capital at all times, even when other suppliers of mortgage capital cannot or choose not to provide such capital.

And the long-term fixed-rate mortgage is the standard home loan in America, the financing choice for 80 percent of homeowners and the most consumer friendly loan available.

With this financing, home buyers can lock in a low mortgage rate for the life of the loan. And if rates go down, they can refinance their mortgage and lower their monthly payments.

Three decades after creating Fannie Mae to ensure this nationwide flow of consumer friendly mortgages, Congress took a bold step to vastly enhance Fannie Mae's worth.

In 1968, Congress privatized Fannie Mae, creating a private, shareholder-owned corporation with a charter and a public mission of expanding home ownership by raising private capital.

Privatizing government functions was a novel idea at the time, but privatizing Fannie Mae has proven to be a resounding success and a model of marshalling private capital to achieve a public purpose, in this case the goal of expanding home ownership.

In its 30 years as a government agency, Fannie Mae had built $185 million of retained earnings, and in 1968, financed $6.8 billion in mortgages.

But after 35 years as a shareholder-owned company, Fannie Mae has amassed over $30 billion of private equity capital to finance $2 trillion of mortgages today.