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transparency, and effective oversight systems are established and maintained. In particular, we believe the GSE's should lead by example in the area of corporate governance. The GSE regulators must be strong, independent, and have the necessary expertise in order to do their jobs, and GSE mission definitions and benefit measures need to be clearly established.

However, our work has also found that GSE governance does not always reflect best practices, and some of these other areas require attention at this time as well. Furthermore, the regulatory structure for housing GSE's is fragmented, and serious questions exist as to the capacity of GSE regulators to effectively fulfill their responsibilities.

To prevent the need for the Federal Government to ever have to provide financial support to a GSE and to minimize the financial risk of instability, it is critical to ensure that proper corporate governance, reasonable transparency, and effective oversight mechanisms are in place. Not only should GSE's be sensitive to good governance, but it is also all the more important that they lead by example in connection with accountability, integrity, and public trust issues.

A regulatory system of GSE oversight must have the necessary strength, independence, and capability to protect against the significant risk and potential cost to taxpayers posed by the GSE's. We have consistently supported, and continue to believe in, the need for the creation of a single regulator to oversee both safety and soundness and mission issues associated with the housing GSE's. A single regulator could be more independent and objective than separate regulatory bodies and could be more prominent than any one alone. Further, a single regulator would be better positioned to consider potential trade-offs between mission requirements and safety and soundness considerations because such a regulator would develop a fuller understanding of the operations of these large and complex financial institutions.

To be effective, the single regulator must have all the regulatory powers, enforcement authorities, technical expertise, and technological capabilities necessary to oversee GSE operations and compliance with their missions. In this regard, we believe that a hybrid executive director and coordinating board model, possibly similar to the one applicable to the Pension Benefit Guaranty Corporation, should be considered by the Congress.

Irrespective of the regulatory model, without clearly defined measures of the GSE's benefits, it is not possible for Congress, accountability organizations, and the public to determine whether the Federal Government should be potentially subject to the financial risk associated with GSE activity. In some cases, there is a lack of measurable mission-oriented criteria that would allow for meaningful assessment of GSEs' mission achievement or whether the GSEs' activities are consistent with their public interest charters. In some cases, it is clear GSE's have contributed to their public missions for which they were initially created. In this regard, it is generally agreed that Fannie Mae and Freddie Mac's mortgage purchase activities have lowered the interest rates on qualifying mortgages below what they otherwise would have been.

At the same time, additional studies may be necessary to more precisely estimate the extent to which GSÉ activities have benefited certain homebuyers, especially those who can least afford a home.

In this and other areas, there is substantially greater uncertainty regarding the benefits of GSE activities, both individually, collectively, and as compared to private non-GSE lenders. As a result, more research is needed to clarify these issues.

Additionally, the lines that initially existed between Fannie Mae and Freddie Mac, on the one hand, and the Federal Home Loan Bank System, on the other hand, have blurred over the years. This can lead to legitimate questions regarding how many GSE's do we need to get the job done. In some cases, the absence of specific criteria and guidance complicates the efforts to assess the need for and the benefits of GSE's.

Finally, I would like to also point out that there are other limitations in the evidence and research on benefits provided by GSE activities. There is limited information as to the extent to which the Federal Home Loan Bank System's more than $500 billion in outstanding advances as of mid-2003 have facilitated mortgage activity. There is limited information available on the extent to which Fannie Mae and Freddie Mac's investments in nonmortgage assets, such as long-term corporate bonds, serve their public missions. And there is virtually no evidence available as to whether Farmer Mac's activities have benefited agricultural real estate markets.

Without quantifiable measures and reliable data, Congress and the public cannot judge the effectiveness of GSE's in meeting their missions or whether the benefits provided by these entities are in the public interest and outweigh the potential financial risk.

To improve the quality of information about GSE activities, we believe that the GSE's should have a single regulator dealing with safety and soundness and mission activities, and that additional research is necessary with regard to some of the items that I have noted in my

statement. Mr. Chairman, that would conclude my opening statement. I would be more than happy to answer any questions that you and the other Senators may have.

Chairman SHELBY. Mr. Walker, the discussion, among other things, on the structure of a new GSE regulator has focused on two models: an independent bureau of the Treasury, like the OCC, for example, or a stand-alone independent agency, like the SEC or the FDIC or others.

If the Congress chose to adopt the independent agency structure, how do we ensure that this regulator has sufficient stature and credibility to provide strong oversight of the GSE's?

Mr. WALKER. Well, obviously, the structure can be important. One has to ascertain what are the proper qualifications for a per. son who would end up leading and overseeing this entity whether or not they should be Presidential appointee with Senate confirmation, what type of authorities they should have, including from a regulatory standpoint and an enforcement standpoint. So, I think those are the substantive issues that one would have to look at.

Mr. Chairman, I know there has been some controversy regarding the issue of whether or not to combine the safety and sound

ness mission issues. I think whether you go with an independent agency or whether you go with an entity within an existing department or agency, like the Treasury Department, it might merit considering having an executive director model with a coordinating board.

Chairman SHELBY. A board with prestige, right?

Mr. WALKER. Yes, a board with prestige. For example, you could have the Secretary of the Treasury, the Secretary of HUD, and other appropriate parties

Chairman SHELBY. The Fed, the Chairman of the Fed.
Mr. WALKER. Potentially.
Chairman SHELBY. SEC Chairman, maybe.

Mr. WALKER. Potentially. But the idea is that, to the extent that you want to make sure that there are responsible authorities, knowledgeable parties who are concerned with and interested in safety, soundness, and mission, and who could help to make sure that all those issues were considered.

Chairman SHELBY. Could you describe some of the problems of Fannie Mae and the Farm Credit System during the 1980's, their underlying causes and the nature of the Government's assistance?

Mr. WALKER. I might get a little bit of help on that since that is before my time, Mr. Chairman, if you do not mind. This is Tom McCool, who is the Managing Director of our Financial Markets and Community Investment, with your indulgence.

Mr. McCOOL. Mr. Chairman, yes, well, Fannie Mae was given forbearance. Fannie Mae was not actually given direct assistance, but they were in trouble and they were given forbearance from a capital and tax perspective. My understanding or my recollection is-it was actually before my time as well—that the Farm Credit System was actually given assistance as part of a bailout, and then it was also reengineered to hopefully be a more independent—the Farm Credit Administration was reengineered to be a more effective agency and a more stand-alone, arm's-length regulator.

Chairman SHELBY. Mr. Walker, your written testimony notes that OFHEO cannot place Fannie Mae or Freddie Mac into receivership. They can go in as a conservator, as I understand, which is different.

Based on your analysis, do you believe that the existing statute authorizing the appointment of a conservator gives the regulator sufficient authority to resolve a troubled GSE?

Mr. WALKER. Based upon the past experience with the savings and loan industry, et cetera, we believe that consideration should be given to expand that beyond just a conservator, and in some usual circumstances to allow for receivership. That is not something that one would expect to happen. I would hope that it would not happen. But, on the other hand, we believe it is something that needs to be in the toolbox of the regulator.

Obviously, that is something where it would be necessary to prescribe some type of guidance as to when and under what circumstances receivership would be used.

Chairman SHELBY. But you have to be ready for it.

Mr. WALKER. Correct. It should be in the toolbox, in our view, Mr. Chairman.

Chairman SHELBY. Would resolution procedures along the lines of those held by FDIC to form bridge banks or to deal with systemic risk issues also be advisable for a GSE regulator?

Mr. WALKER. We believe it is important for you to look at what types of authorities and tools other entities have, such as this, and really the question in our view would be: Why shouldn't they have it? In other words, the presumption would be that they should have these tools

Chairman SHELBY. If you are going to have a regulator, you need a regulator. Is that correct?

Mr. WALKER. Right.

Chairman SHELBY. The last question I am going to touch onwe have a lot of other people here—is the impact of earnings per share as a corporate goal. Doesn't every public company focus on earnings per share?

Mr. WALKER. They clearly do, Mr. Chairman.

Chairman SHELBY. Does this attention to earnings per share measurements impact the holdings in the GSE portfolios, in your judgment?

Mr. WALKER. It can. As you know, there are certain holdings that can enhance value and potentially moderate risk, and such investments have the potential to do that. And I believe, Mr. Chairman, that one of the challenges that we have, not just with GSE's but in corporate America, is too much focus on short-term earnings rather than earnings over the longer-term, along with sustainable earnings, and quality earnings.

Chairman SHELBY. Senator Reed. Senator REED. Thank you very much, Mr. Chairman. Thank you, Mr. Walker, for your testimony. Back in 1997, the GAO issued a report, “Advantages and Disadvantages of Creating a Single Housing GSE Regulator.” It rolls right off the tongue, a very good title. “Our analysis of different regulatory structures indicate that an independent, arm's-length, stand-alone regulatory body headed by a board would best fit our criteria for effective regulatory agencies.” Is that still your position today?

Mr. WALKER. We do believe there needs to be a single regulator to address safety, soundness, and mission considerations. I have now offered a possible hybrid model that we did not put forward in 1997 that I think the Congress should consider, an executive director but possibly a coordinating board involved with appropriate individuals to be able to help make sure that there is effective coordination of mission, safety, and soundness considerations.

Senator REED. What has changed since 1997 that would prompt this hybrid proposal?

Mr. WALKER. David M. Walker has become Comptroller General of the United States and has prior experience in dealing with entities that had these types of structures. It has worked pretty well. For example—and, by the way, the financial condition of the entity that I am going to talk about is not a model that we want to follow, but the Pension Benefit Guaranty Corporation has an executive director and has a board of directors comprised of the Secretary of Labor, the Secretary of Treasury, and the Secretary of Commerce. One of the reasons that that model was chosen was to be able to

provide the executive director with the responsibility and authority to run this independent agency in a way to protect the public interest and to serve the mission purpose of the agency, at the same point in time recognizing that each of those three Cabinet-level Departments had an interest in the activities of the PBGC and the board served as a mechanism for them to periodically be able to convene and discuss issues of major public significance.

It is not an activist board, but it is a mechanism that worked fairly well during my tenure and helped to deal with major public policy concerns.

Senator REED. Well, I must confess, one of the concerns I have is the notion of independence, and when you have Cabinet Secretaries who are effectively the board of directors, they are subjectand regardless of the Administration to the current winds that are blowing through this town. And that to me is not something that is going to reassure the investing public and the markets that the decisions are being made on an independent basis based upon the financial conditions of the housing market in this case.

You know, I think with that model you run the risk—and I will not even get into the financial condition of the Pension Benefit Guaranty Corporation of conditions which, if not realistically problems, appear to be problems to people.

Mr. WALKER. Senator, I would respectfully suggest that one might want to look at who would be the appropriate members of the board. In my personal opinion, clearly you would want to have the Secretary of the Treasury and the Secretary of Housing and Urban Development. But you may want other individuals, such as the ones the Chairman suggested, to be involved who tend to be somewhat more independent and/or have term appointments that could help provide that check and balance.

Chairman SHELBY. It also would bring prestige to this board, would they not?

Mr. WALKER. Yes, Mr. Chairman, depending upon what positions and who the parties are, it could.

Senator REED. Well, again, a contrary view might be that some of our boards work very well because they have a term, they are removed from the day-to-day politics, the individuals have been in several administrations. Again, I think we should be very, very sensitive to the notion of independence because of the signals it will send to the marketplace.

Let me ask something else, too. There is the notion with these GSE's that there is an implicit subsidy to their activities because of their perceived benefit of not failing, we will step in. What is your view on that?

Mr. WALKER. Well, various studies have been conducted over time that speak of this implicit subsidy, one recently conducted by the staff of the Federal Reserve Board. I think there is a general view that some people presume that if there was a failure at one of these institutions, the Federal Government would step in.

As you know, the Federal Government is not obligated to step in. There are no appropriated funds involved at the present point in time. But quite frankly the Federal Government is not obligated to step in for the Pension Benefit Guaranty Corporation either. Nonetheless, perceptions of this

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