synergy that way. You get critical mass and synergy that way. Then there is a debate as to whether or not you are going to get that much more synergy because it happens to be within a department or agency. So the most synergy you are going to get is going to be through combining the potential regulators into one. You could get some more by having it within a department or agency. Thank you.

Chairman SHELBY. Senator Sununu.

Senator SUNUNU. Thank you, Mr. Chairman.

Mr. Walker, as I understand it, the GAO has studied this issue and issued reports in 1991, 1993, and 1997. I might have missed one in there. In each of those cases, aside from the proposal that you spoke to Senator Reed about regarding the board structure and the directors that you have included this time, in each of those studies is it correct that the GAO, whoever the Comptroller happened to be, has recommended an independent regulator that has responsibility for overseeing safety and soundness, capital standards, the various business activities that these GSE's are involved in and regulating the mission? Have all of those things been consistent in all of these studies?

Mr. WALKER. Yes, Senator. Those are consistent recommendations throughout.

Senator SUNUNU. And your recommendation is consistent with all of those other studies? It is not just because you are afraid to be different, is it?

Mr. WALKER. No. It is consistent, and in fact, we have had a number of serious subsequent events that have occurred since those reports, both within the public sector and the private sector that would lead me to believe it is even more important.

Senator SUNUNU. I appreciate that. I am being a little facetious given your statements recently about other budgetary matters. I do not think anyone can claim you are not someone who is unwilling to speak their mind. And I appreciate that. I think that is extremely helpful for this Committee to have someone that is willing to at least step up on a somewhat political issue like this and speak their mind.

You mentioned receivership and your feeling that some provision addressing receivership might be helpful or valuable. It is my understanding that this model was used in the S&L bailout and restructuring. Did it work reasonably well as a mechanism for the S&L crisis?

Mr. WALKER. Based on my experience-and I want to ask for Tom to comment because he was at GAO at the time I believe it had mixed results with regard to what happened with the S&L situation.

Mr. MCCOOL. Right. But I think a lot of it had to do with when receivership was imposed as much as whether it was receivership versus conservatorship. I think what part of the issue has been, and to some extent still is, is the question of when you close down an institution. I think once you decide to close down an institution, receivership has a lot of advantages compared with conservatorship, but the question about when you make that call has always been an issue, and as I said, we have seen instances recently where it still is an issue.

Senator SUNUNU. I mentioned the consistency in these evaluations by the GAO going back now more than 12 years, uniform recommendations that all the capital standards, all the business activities, all the mission-related activity as well, be included under an independent regulator.

What about the issue of the type and the amount of nonmortgage-related assets held by the GSE's; should that fall within the scope of the independent regulator, and does your report include specific recommendations?

Mr. WALKER. We do reference the fact that that is an area that would be subject to oversight by these new independent entity. How does it relate to the related risk and the public purpose for these entities? Not a per se preclusion by any means, but it is something that I think the regulator has to be able to consider. Senator SUNUNU. Something that they should be able to consider.

Senator Reed talked about or raised the concern of politics, and I think that is important, in the board structure, cabinet secretaries, Treasury, HUD, which you mentioned would naturally have an interest and an expertise here. But there are natural concerns because those are cabinet positions. In previous reports the GAO has recommended that the Chairman of the Federal Reserve be part of the board. Having the Chairman of the Fed as part of the board would seemingly address many of the concerns raised by Senator Reed. Is that a recommendation that you would stand by or support?

Mr. WALKER. I believe that is something the Chairman of the Federal Reserve may or may not want to do, but that would clearly be a positive step.

I think the other thing, Senator, that one might want to consider because I am on another board with the Chairman of the Federal Reserve right now dealing with the airline industry-the other thing you may want to consider is there are other board models out there that are hybrids. In addition to the one that I mentioned, I was a trustee of Social Security and Medicare for 5 years, and on that you have three cabinet secretaries and you have two people from the private sector who meet certain experience requirements. So in addition to the Chairman of the Federal Reserve and potentially others, you may want to think about whether or not you have some public members who are not Government employees.

Senator SUNUNU. One final question about the mission. GAO, I think in the 1997 report, highlighted or discussed that when mission and safety and soundness regulations are performed by different regulators, even with some coordination there is the potential for the GSE's to try to pit the regulators against one another. Could you talk a little bit about examples, the specific examples where this had occurred, and whether that was behind your recommendation that it all be included in the new regulator?

Mr. WALKER. I will make a comment, then ask Tom for some specific examples. There is no question that to the extent that you have different regulators and they have different rules and different authorities, that there is going to be some human tendency to try to do that. That is just human nature. Our view is that for critical mass, for credibility, for capability, potentially for synergy

and other purposes, that it makes sense to have one regulator for these types of entities.

Tom.

Mr. MCCOOL. Again, I think that our experience with having a mission regulator without-under a different entity than the safety and soundness regulator, it was not so much that there were clashes, as that the mission regulator in the case of Fannie and Freddie, when it first set its goals in the mid-1990's, did not have much financial experience and did not have much ability to understand what pushing the goals a little higher would lead to in terms of potential risk or potential loss in profit, and I think that is what we think a regulator that understands the whole thing can do and do a better job of.

So our view, for example, is the first set of goals that HUD set were fairly conservative because they were operating without the full knowledge of everything that one regulator could have. Since then HUD has ratcheted up the goals and one could argue that the goals are maybe getting to where they should be, but without seeing the whole picture it is very hard to make that judgment. And we think a single regulator could do that.

Mr. WALKER. If I can come back real quickly, Senator. To me this is an issue like so many issues: It is a combination of value and risk. How can we try to maximize value and manage risk? In doing that I think you need to integrate the mission issues with the safety and soundness issues because there are tradeoffs. We are trying to achieve certain public purposes through these entities, and those need to be considered. But to the extent that you push the envelope too far one way, it can have an adverse effect on the other. So by integrating these issues I think you have a better chance of being able to make more informed judgments on the value/risk tradeoff. Senator SUNUNU. Thank you.

Thank you, Mr. Chairman.

Chairman SHELBY. Senator Sarbanes.

STATEMENT OF SENATOR PAUL S. SARBANES

Senator SARBANES. Thank you very much, Mr. Chairman. I am sorry I was not here at the outset, and I want to join with others in welcoming the Comptroller General again. We always very much appreciate his appearances and his testimony. And Mr. McCool, it is good to see you again.

Mr. Chairman, I do want to commend you for the very thorough and thoughtful way you are approaching this matter. This is the fourth hearing we have held on this issue. It is a very important issue, and I think we need obviously to build as strong and as thorough a record as we can as we consider moving ahead.

Fannie Mae and Freddie Mac, along with the FHA, have been key players in making the mortgage market in this country the deepest and most liquid in the world, and actually it is the accumulation of housing wealth and the ability of homeowners to tap into that wealth because of the efficiency of our mortgage markets that have been a strong support for our economy.

Most recently it is clear that the economy has been held up by people being able to draw on their housing wealth. So we have to be very careful, as we move ahead, that we do not impinge nega

tively on the secondary mortgage market to which Fannie and Freddie have contributed so much.

One way to exercise that responsibility is to make sure these institutions are subject to strong, effective supervision and regulation, that they are within a framework that can assure their safety and soundness. I would apply the same thinking to the Federal Home Loan Banks. Of course, there is concern now about the adequacy of the supervision drawn to our attention by Freddie Mac's recent problems.

I do, in fairness to OFHEO, want to say I do think they have responded appropriately, as I see it, to the Freddie Mac problems. They have moved ahead, and I am going to ask the Comptroller General whether they have a view on that particular current issue. But we do have these important questions as to whether the regulators have sufficient resources, expertise, and authority to provide the effective supervision. We are trying to balance two important goals: Increase scrutiny and more effective regulation, and commitment to the housing mission.

I want to first ask the Comptroller General, what is your view about the adequacy of the housing mission of these institutions? How well is that being addressed? How important is it, and how do we ensure that if it is important that we are adequately addressing it?

Mr. WALKER. Senator, as you know, one of the primary reasons why these are GSE's is to promote homeownership in general, and also among those who can least afford to own a home. As Director McCool mentioned earlier, Housing and Urban Development has had the responsibility to set those mission goals, and they significantly increased what those goals were, I think in 1998, if I am not mistaken.

I believe, as my testimony notes, that additional guidance might be necessary by this Congress on mission and what is trying to be accomplished. And I think that we have to keep in mind that in the case of Fannie Mae and Freddie Mac, they are public companies, and that therefore those who are on the board of directors of those entities have a fiduciary obligation to the shareholders.

At the same point in time at least the statutory appointees who are being put on the board to protect the public interest, need to pay special attention to the public purpose of these entities, and that more needs to be done in order for them to be able to demonstrate, other than lowering the average mortgage by 25 to 40 basis points, what else is being done and to what extent are these GSE's are adding value above and beyond value that other GSE's are adding, and to what extent these GSE's are doing a better job than non-Government Sponsored Enterprises with regard to mortgage lending. I think there are some very serious issues that need to be explored further.

Senator SARBANES. How would you ensure that the housing mission was being adequately addressed in any structure that is developed here?

Mr. WALKER. That is why I think that you should consider this hybrid model. I really believe that it is important to consider some type of a hybrid model with regard to overseeing the regulator that provides the capability, the credibility, and the ability to look at

both the public mission and also the safety and soundness issues. I believe that could help tremendously, in addition to other items that we laid out in the testimony.

Senator SARBANES. Mr. Chairman, I see my time is up. I have a couple more questions after the others finish. Chairman SHELBY. Thank you.

Senator Hagel.

STATEMENT OF SENATOR CHUCK HAGEL

Senator HAGEL. Mr. Chairman, thank you.

Mr. McCool, Mr. Walker, thank you for coming before us this morning.

I want to begin, Mr. Walker, with part of the exchange you had with Senator Reed regarding the concept of too big to fail. In your view, have the housing GSE's and their relevance to the housing market approached the "too big to fail" position?

Mr. WALKER. Well, first let me say I do not think any entity is too big to fail, but I do think that we have to be careful to make sure that they do not fail because if one of these entities did fail, it would have a significant adverse ripple effect throughout the entire financial markets.

But, Tom, would you agree?

Mr. MCCOOL. I agree. I mean that the question of whether something is too big to fail is fundamentally, ultimately a political call I guess is part of it. But to the extent you can keep it from becoming reduce the prospects of failure by having effective oversight and regulation, that is where we need to focus our attention.

Again, we have not had to deal with a "too big to fail" situation, at least in the financial sector in a while, and we do not know, for example, in the banking sector whether the new rules and procedures put in place by FDICIA will work. We hope they will or hope they will allow a large institution to be at least unwound in an effective way, if not protecting it from failure.

But it is a concern because obviously when entities perceive themselves as too big to fail or are perceived as too big to fail, that has consequences for market discipline.

Senator HAGEL. Following up on your comments, your point about we need to do everything we can to assure that we do not get into a position like that. Would, for example, restricting the types and amounts of assets, be a useful regulatory tool, as we are thinking through possibilities as we start to develop a framework for a new regulator?

Mr. WALKER. I think that comes back to one of the questions that Senator Sununu and others mentioned, and that is, should the regulator have the ability to provide some type of restrictions on the amount or type of assets that they can hold including whether and to what extent derivatives are used to mitigate risk and to reduce risk, rather than to enhance earnings. I think these are things that should be within the portfolio of the regulator within reason.

Chairman SHELBY. Could you elaborate on that just a little bit?

I know it is his time, but would you?

Mr. MCCOOL. Well, as we know, derivatives can be

Senator SARBANES. The Chairman just gave him additional time. [Laughter.]