And so I think we are making significant progress. Do we have a long way to go? I think the answer to that is yes, but I would hate to see any change in structure at this point lose the progress that we have made to this point. Senator BUNNING. Thank you. Senator BENNETT. Senator Sarbanes. Senator SARBANES. Thank you, Mr. Chairman. Let me follow up Senator Bunning's last question. The OCC has an average of 20 or so on-site examiners at each of the largest banks under its supervision. How many examiners does the Finance Board have on-site at each of the Federal Home Loan Banks? Mr. KORSMO. Today there are no examiners on-site, sir. Senator SARBANES. How many examiners do you have all together? Mr. KORSMO. Today we have 18 staff examiners, three examiners who are also mortgage analyst specialists, and, of course, the supervisor of our supervision function. Senator SARBANES. And I understand you have plans to go up to 30-is that right?-by the end of next year. Mr. KORSMO. That is correct. Senator SARBANES. Now, that is 30 total to examine the whole system? Mr. KORSMO. That is correct. Senator SARBANES. So we should compare that with the OCC having-well, I do not know the full number they have, but they have, on average, 20 resident examiners at each of the largest banks. Is that correct? Mr. KORSMO. I cannot speak to the situation at OCC. I do not know. Or OTS, I do not know. Senator SARBANES. Well, what is your view of that situation? Mr. KORSMO. Needless to say, I am concerned about it, and that is why we have made, as I was mentioning to Senator Bunning in response to his question, fairly dramatic improvements from where we were when I arrived. And I have to thank my board colleagues for their support in this effort. When I got there, we had eight bank examiners on staff, eight very good examiners, but eight who had an impossible task of overseeing, as you so correctly point out, 12 very large financial institutions with, at the time, assets in excess of $700 billion, capital of $30 billion, debt in excess of $650 billion. What we have put in place starting with the process of hiring a professional director of our Office of Supervision and a professional, experienced assistant director of our Office of Supervision is a very deliberate, a very disciplined, and a very orderly process to upgrade not only our examination function but also really to create an offsite supervisory function. Is the progress enough? Have we moved fast enough? That is a question, you know, I have to leave to others to decide. But I can tell you that the progress is dramatic. It is not where we want to be by any stretch of the imagination, but the movement is in the right direction. Senator SARBANES. Where do you want to be? What is your goal? Mr. KORSMO. Our goal is—and part of the difficulty of moving any faster, sir, is the simple process of bringing qualified people on board and, frankly, attracting them. We are now at the point where we now have as many as 250 applicants for qualified exam positions. But we can only move so fast. Senator SARBANES. How many examiners do you think you need? First of all, I take it it is your view that you do not know have enough examiners to do the job. Mr. KORSMO. Let me answer that question this way: I think we are doing a very effective job of oversight of the banks. Am I saying that we have enough? Clearly not. We have already budgeted, for 2004, to have more. Senator SARBANES. All right. Well, how many do you think you need in order to do the job? Mr. KORSMO. Again, I think that is a question I cannot answer. Certainly our Director of Supervision Senator SARBANES. Well, you are the head of Mr. KORSMO. has suggested that 30 is what we can reasonably expect to have on board and coordinate a new supervisory function between now and the end of next year. Senator SARBANES. Well, now, if you get the 30 Mr. KORSMO. Will we be done? No. Senator SARBANES. —is that where you want to be? I mean, how many-you are the Chairman of this Board. Senator BENNETT. If there were no budgetary constrictions and you could have whatever you want, what number would you give us? Senator SARBANES. Yes, how many do you need to do the job? Mr. KORSMO. I appreciate the question, but understand, budgetary restrictions are not the only constraint. One of the constraints is doing this in a disciplined and orderly fashion. Moving from a supervisory program that was nonexistent to one that exists today has been serious progress. I do not know the answer to how many. I would suggest 50 or 60 is probably appropriate, and that is the goal that we have set long term. The problem is, of course, we cannot Senator SARBANES. So you have set a long-term goal? Mr. KORSMO. That is correct, sir, yes. Senator SARBANES. Well, I wish we had gotten to that sooner. [Laughter.] What is that long-term goal? Mr. KORSMO. Fifty or 60. Senator SARBANES. Well, my time is about up. I do want to ask a couple of questions to Mr. Falcon before the red light goes on. Senator BENNETT. Proceed. Senator SARBANES. In light of OFHEO's consent order with David Glenn, which you announced this morning, when do you expect a report on Freddie Mac to be completed? Mr. FALCON. We are going to take at least a couple of weeks, Senator, to assess the information that he will provide to us and determine how much additional investigation will be warranted by the information he gives us. At the end of the 2-week period, I would like to come back to you, if I may, and tell you based on what we have learned how much additional time we think it will take based on the additional investigative work. Senator SARBANES. Do you have adequate resources to complete the report as you would like? Mr. FALCON. Not currently, however, once we get the supplemental funds, I hope that will suffice. But if it does not, I will certainly let you know as soon as we understand that. Senator SARBANES. So your target date now for doing the report is when? Because, earlier, it was by now, as I recall. Mr. FALCON. Yes, and we were planning to release the report by the end of the month, but given the fact that we will have new information available to us from the second ranking individual in the company, I would not want to produce an incomplete report. I would rather, if you would allow us additional time, take that new information into consideration. Senator SARBANES. All right. Thank you. Senator BENNETT. Thank you. Senator Hagel. Senator HAGEL. Thank you. Mr. Falcon, in your testimony, you said, "I also support the granting of authority to the safety and soundness regulator to determine whether the activities of an enterprise are consistent with its charter authority." Would you develop that a little more fully? I note that you do talk further about it in your testimony, but why do you think that is so important? Mr. FALCON. I think it is important to establish as a benchmark that any new safety and soundness regulator should have, if one is established, the same authorities as every other safety and soundness regulator. And every other regulator does have the authority to opine on what activities are permissible under the terms of the charter. And certainly as the regulator with the enforcement powers over the two enterprises, I think consistent with that standard, we should have the authority to opine on what is and is not permissible under the terms of the charter. Senator HAGEL. Obviously, to keep them within the mission, the charter of that mission. Mr. FALCON. Yes, Senator. Senator HAGEL. Do you think the two GSE's that you regulate have drifted from that charter, that mission? Mr. FALCON. What I think has happened is increasingly there is a gray area. The terms of the charters are very ambiguous, and there is not a black and white line in the charters as to what they can and cannot do. But certainly as the marketplace evolves and changes and technology advances, certainly the gray area expands and the Enterprises will continue to test the gray area. Senator HAGEL. So that is one of the reasons that you think this should be clearly defined, at least in the regulator's eyes, and within the empowerment of that regulator so it all connects? Mr. FALCON. I think it is to everyone's benefit that there not be uncertainty as to what is or is not permissible, including for the two companies. And if there was a regulator with the authority to clearly state that this is or is not permissible, you would not have any cloud hanging over the activities of the companies. Senator HAGEL. There would be no question. Mr. FALCON. Right. Senator HAGEL. Do you think, as we rewrite a new regulatory reform document, that we should be clear and more definitive? Mr. FALCON. I think that would be preferable. Senator HAGEL. But still give the new regulator the enforcement powers over both-safety and soundness, and mission? Mr. FALCON. Yes. Senator HAGEL. And more clearly define the mission. Mr. FALCON. Yes. Senator HAGEL. Thank you. Mr. Holtz-Eakin, thank you for your contributions. I was interested in some comments you made about the housing market, and it leads me to this question: Do you think there is a continued need for GSE's? Mr. HOLTZ-EAKIN. I think that if one looks at the various objectives of GSE's, one is to ensure a reliable flow of financial funds to the housing sector. There is a good reason to believe that in large integrated capital markets these flows would occur in the absence of GSE's, and indeed, there is some evidence in that private sector firms that have undertaken to provide capital market financing for those mortgages not covered by the GSE's and other firms that have securitized different kinds of loans, such as credit cards or commercial mortgages. So there is a considerable amount of evidence that these activities-the provision of funds and the disbursement of risk among capital market participants can be undertaken by other entities as well. Senator HAGEL. Do you think then that the markets have or are going to outgrow GSE's? Mr. HOLTZ-EAKIN. I think there is every reason to believe the private capital markets can funnel these funds to the housing sector, and there is also some evidence in the research community that the private market is equal or in some cases ahead of the GSE's in providing funds to low-income borrowers. On those two fronts, there has been a maturation of private-sector capital markets that has in many ways caught up to the GSE's. Senator HAGEL. Thank you. My light is about ready to turn red, and I wanted to ask you a question, Mr. Korsmo. You, in your testimony, suggested to some extent that you look at Federal Home Loan Banks as maybe a competitor, some competition to the other two GSE's, more choice, lower rates, and so on. Could you define that a little bit more clearly, what you meant by that? Mr. KORSMO. As I alluded to, the acquired member asset programs, MPF and MPP, do provide albeit a small competitor at this point to Fannie and Freddie, they do provide competition, competition that I think has become recognized in some of the comments you probably heard Fannie and Freddie make about the desirability of banks being in that line of business, although I would argue it is the same line of business as advances. I think having another outlet, another vehicle for providing mortgage funding to lenders, particularly small lenders, particularly rural lenders, but also members of the Federal Home Loan Banks in general does provide a competitive edge that leads to lower costs, presumably over time, at the very least, for homebuyers. Senator HAGEL. Thank you. Senator REED. Thank you, Mr. Chairman. Mr. Falcon, the current minimum capital standard is 2.5 percent for these GSE's. Is that too high or too low? Mr. FALCON. I believe it is adequate for the time being. Senator REED. And the proposal is to allow the regulator set both the minimum capital and the risk-based capital. What are the advantages that you see for that, or disadvantages? Mr. FALCON. I think it would be an advantage to give the regulator the discretion to adjust both capital levels, if the regulator determined in its best judgment it was appropriate. There are two different types of standards. The risk-based capital standard is one that tries to quantify measurable risk through the use of models, through the use of historical analysis of performance of assets and liabilities. And that is all fed into a stress test which produces cashflows and determines what is the appropriate capital level. But nothing is ever fail-safe. That is why you also need a minimum capital standard to ensure that, at a minimum, they will always maintain a certain amount of capital. And so the two capital standards interact in that manner. If given the changes in the marketplace, the changes in the companies' risk profile, it is in the regulator's judgment that either standard needs to be adjusted upward, I believe it would be important for the regulator to have that discretion and to be able to exercise that discretion in a timely manner. Senator REED. Why wouldn't it be sufficient simply to have the discretion to adjust risk-based capital since the most critical change is a result of business practices of the firm that drives the riskbased capital? That is something I think you alluded to in your re sponse. Mr. FALCON. Right. Well, as I said, I think since risk-based tries to capture quantifiable risk, I do not think it is ever possible to capture them perfectly, and so you always have to rely on at least a flat leverage type ratio as a fail-safe in the event that anything was not fully captured in a stress test. Senator REED. Typically, risk-based capital is higher than minimum capital. Mr. FALCON. Not currently, sir. Senator REED. Not currently? Mr. FALCON. Yes, Senator. Senator REED. So, you are saying risk-based capital is lower than minimum capital? Mr. FALCON. Yes, sir. Senator REED. And, again, I guess if you adjusted risk-based capital up, you would effectively in this case compensate for the perceived lack of capital. You would just raise it above the minimum level, which you could do. Is that correct? Mr. FALCON. Yes. Senator REED. While you have been Director of OFHEO, has HUD ever approved or declined to approve a new program or prod |