prised of the 12 banks. The Federal Home Loan Bank System through the Office of Finance is one of the largest issuers of debt securities in the world into the public markets. Approximately $716.9 billion was outstanding as of September 30, 2003. The Federal Home Loan Banks are exempt from the Federal securities laws because they are GSE's. In the absence of their GSE status, they would be required to register, and the fact that they issue only public debt and do not have public equity would not change their status as required to register as issues of public debt securities. The Banks, because they are exempt, are also not subject currently to the provisions of the Sarbanes-Oxley Act. In September 2003, the Federal Housing Finance Board proposed for comment a rule to require registration with the Commission by the Banks under the Exchange Act. The comment period for that rule ended on January 15, 2004. The Federal Home Loan Banks have many of the same disclosure issues as any financial institution whose debt securities are issued to, and held by, the public. As discussed earlier, we believe investors in the Banks' debt securities are entitled to the same type of information as that provided by other issuers of public debt. As also discussed earlier, we further believe that the Commission's detailed disclosure rules and filing requirements, review and comment process, and enforcement mechanisms provide the best framework for disclosing information to which investors are entitled. As is the case with Fannie Mae and Freddie Mac, the focus to date for mandatory disclosure has been the corporate disclosure required under the Exchange Act. Registration of offers and sales of securities by the Federal Home Loan Banks under the Securities Act has not been the focus to date and is not the subject of the proposed Finance Board rule. In particular, as with Fannie Mae and Freddie Mac, disclosure of corporate information following Exchange Act registration is the same as would be required under the Securities Act. Because of the structure of the Federal Home Loan Bank System, including the Office of Finance, however, there are some issues that may be unique to the Banks that should be taken into account in considering registration. The staff of the Commission has met with members and staff of the Finance Board, representatives of the Banks, and a group of directors of certain Banks, in each case at their request, to discuss the issues that registration under the Exchange Act may raise. In addition, insofar as registration under the Exchange Act is being considered, we believe there would be no impact on the timing or other aspects of offering transactions as a result of registration. We have also indicated to the Banks that we would work with them to determine if there were certain requirements, such as the proxy rules, from which it should be clear the Banks are exempted because the publicly held securities that implicate registration and disclosure issues are their debt securities. This would produce the same results as would be the case for corporate issuers whose only public securities are debt securities. And there is a very significant number of very large corporate issuers who fall into that category. In addition to these items, there have been certain accountingrelated issues that have been identified as significant for the Banks in terms of ascertaining our staff's view prior to any registration process. We have met with representatives and advisers of the Banks to resolve those issues, and the resolution is discussed in detail in the written testimony that I have submitted; I do not intend to go into those right now. In conclusion, the individual and institutional investors who hold debt securities of the banks depend for repayment on the Banks under their joint and several liability, and not a Government guarantee. We therefore believe that applying the Commission's disclosure requirements and processes is the preferred method of helping to ensure that these investors receive the materially accurate and complete disclosures they deserve. If registration by the Banks is pursued, we are committed to achieving that result with maximum protection for investors and maximum efficiency for registrants, consistent with our mission to protect investors. Thank you again for inviting me to speak here today on behalf of the Commission. I would be pleased to answer any questions that you may have. Chairman SHELBY. Thank you, Mr. Beller. Mr. Carnell, welcome back to the Committee. STATEMENT OF RICHARD S. CARNELL ASSOCIATE PROFESSOR OF LAW, FORDHAM UNIVERSITY SCHOOL OF LAW, NEW YORK, NEW YORK Mr. CARNELL. Thank you, Mr. Chairman. Mr. Chairman, Senator Sarbanes, Members of the Committee, I am pleased to have this opportunity to discuss how to improve the regulation of the housing GSE's and particularly how to structure a new GSE regulator. I commend you, Mr. Chairman, for your leadership in focusing attention on these issues, on the weaknesses of current law and the weaknesses of the current structure of OFHEO, and for your resolve to move legislation to correct these problems. A new GSE regulatory agency should regulate all three housing GSE's. It should be responsible for keeping GSE's safe and sound and for making sure that GSE's carry out their housing mission. It should have permanent funding. It should have the same safety and soundness authority as the Federal bank regulators, including authority to raise capital standards and take enforcement action. It should also be able to appoint a receiver for an insolvent GSE. I want to focus now on three specific issues-first, the governance of the new agency; second, the need to have an adequate mechanism for handling an insolvent GSE; and third, the double game that GSE's play in talking about their relationship to the Federal Government. First, governance of a new agency. In structuring the agency, the paramount goal should be to assure the agency's independence from the GSE's and thus to maintain the new agency's integrity, objectivity, and effectiveness. One approach would be to make the agency an autonomous bureau of the Treasury Department, like the OCC and OTS. The Treasury has an institutional commitment to safety and soundness and has the will and institutional credi bility to stand up to the GSE's. The GSE's would find the Treasury harder to bully than any of the alternatives, including a new, independent agency. The GAO has suggested a hybrid approach with an executive director and a coordinating board. I would like to think more about that but also to offer some initial impressions. I like the idea that the coordinating board would consist of people with other major Government responsibilities. That will help you get capable people. If you want to find somebody for a board position that does not have other responsibilities—that is, where you are not the chair of the agency, and you do not have any other position in Government-you are going to have trouble getting really qualified people to take those jobs and stay there. There is just not enough challenge. So if the coordinating board does consist of people like the Secretary of Treasury, the Secretary of HUD, the Chair of the SEC, and the Chair of the Fed, I think that is a composition that makes sense. I would caution, though, about trying to have the coordinating board actually run the agency. Big boards may sound good on paper, but they often work badly. Without a strong executive director, I do not think a five-member board, no matter who was on it, would be up to the job over time. I think it would be vulnerable to manipulation by the GSE's. I think that having so many members blurs accountability and impedes decisionmaking. So I think the executive director, if you went that route, should have considerable power to make policy. The second topic I want to address is receivership. Current law provides no adequate mechanism for dealing with Fannie and Freddie if they become insolvent, that is, if their liabilities exceed their assets. We have mechanisms like this for the Federal Home Loan Banks, we have it for business corporations. We do not have it for Fannie and Freddie. The Bankruptcy Code does not apply. OFHEO could appoint a conservator, but the conservator would have no power to resolve the shortfall between the liabilities and the assets. So this lack of an orderly receivership mechanism is a serious gap in current law, with potentially serious consequences for financial markets. Congress could fill the gap by authorizing the GSE regulator to commence a bankruptcy proceeding against an insolvent GSE, or it could take a different approach, like the banking law, and authorize the regulator to appoint a receiver to deal with it under a specialized body of law. That is what we do with the FDIC. I want to point out, by the way, that receivership is not something special to the thrift debacle. Bank regulators have done probably a thousand bank failures and a thousand receiverships in the last two decades, and that has worked well in that context. A receivership mechanism, by providing an orderly means for dealing with a failed GSE's debts, would help limit and contain the harm resulting from a GSE's failure. Third, I want to talk about what I call the GSES' double game, about their relationship to the Government. Fannie and Freddie play an extraordinarily successful double game in dealing with this relationship. They deny that they have any legally enforceable Government backing. They leave the impression that they have no Government backing at all, yet at the same time, they also work to reinforce the market perception that the Government implicitly backs them. Critics of GSE's did not make up the idea of an implied guarantee. Fannie and Freddie themselves have propagated that idea for decades. For example, in my written statement, I give several examples. One of them is where Fannie Mae said in an official comment letter to the OCC, it emphasized the "implied Government backing of Fannie Mae," and it goes on to say that this backing makes Fannie's securities "mere proxies for Treasury securities." Think about that. Fannie says its implied Government backing is so strong that its securities are almost as good as U.S. Treasury securities. So this double game lets the GSE's have it both ways. It is like telling Congress and the press, "Don't worry, the Government is not on the hook," and then turning around and telling Wall Street, "Don't worry, the Government really is on the hook." The GSE's play this game unchallenged, year after year. No reporter exposes it. No committee investigates it. No executive branch official criticizes it. So in a world of global information, the GSE's still get away with saying one thing to Washington policymakers and saying something fundamentally different to New York bond traders and financial analysts. Last week, Fannie Mae's CEO seemed to question the existence of any implied guarantee. I urge the Committee to follow up on this point, an important point, by having Fannie and Freddie answer three simple questions which I list in my written statement. For example, if Fannie and Freddie were to default on their debts, would the Federal Government have any moral obligation to ensure that Fannie and Freddie's creditors get paid? I think it would really move the process along to get some clarify here. Finally, I want to say a word about affordable housing. Chairman SHELBY. Mr. Carnell, what were the other questions? Mr. CARNELL. Oh, certainly. I appreciate your interest, Mr. Chairman. Chairman SHELBY. Absolutely. Mr. CARNELL. The other questions are: Do capital market participants err in perceiving the Federal Government as implicitly backing Fannie and Freddie? And, do you believe that the Government in any way implicitly backs Fannie and Freddie? So they are related questions, but I think to get clear, unequivocal answers from the GSE's would be very beneficial. Finally, I would like to say a word about affordable housing. Fannie and Freddie receive very valuable benefits from the Government, but they do very little considering their size and special privileges that would otherwise get done. Studies have indicated that they do less, proportionately, than banks and thrifts. The basic problem is that the current affordable housing requirements are not targeted. Fannie and Freddie can satisfy these requirements by doing lots of middle class and lower middle class housing that they have a profit motive to do anyway. So as long as Fannie and Freddie retain their Government sponsorship, they should be required to do much more for affordable housing. Thank you, Mr. Chairman, and I will be glad to answer questions at the appropriate time. Chairman SHELBY. Thank you. Mr. Rayburn. STATEMENT OF JAMES R. RAYBURN PRESIDENT, NATIONAL ASSOCIATION OF HOME BUILDERS Mr. RAYBURN. Good morning, Chairman Shelby, Ranking Member Sarbanes, and distinguished Members of the Committee. My name is Bobby Rayburn, and I am a builder of affordable housing in Mississippi, Louisiana, and Alabama. I am also the President of the 215,000-member National Association of Home Builders, which I represent today. Thank you for holding this hearing on the regulatory framework of the housing GSE's. NAHB believes that the focus of the GSE regulatory reform must remain, to use your words, Mr. Chairman, on their vital role of providing liquidity and stability for the Nation's housing finance system. This has been clearly demonstrated by housing's critical jobproducing role as an economic engine in an otherwise faltering economy. It is safe to say that the record one million-plus new home sales last year would not have occurred without the liquid and vibrant secondary market that is supported by the housing GSE's. I want to emphasize that no one believes there is an imminent crisis within the GSE system. There is time to take a careful and thoughtful approach to these issues. An ill-conceived change could seriously damage housing and the economy. Regulation of the GSE's involves two key aspects-one, enforcing compliance with safety and soundness principles, and two, ensuring unwavering mission orientation. The purpose of the safety and soundness regulation is to ensure that the housing GSE's are adequately capitalized and to ensure appropriate governance structures and procedures. NAHB would support transferring the safety and soundness oversight of the GSE's to a strong and credible regulator that possesses adequate authority and resources, such as the Treasury Department. The purpose of mission regulation is to ensure that the GSE's fulfill their Congressional mandate and operate within their charters. Safety and soundness is a very relevant element but should not dominate program oversight. That would severely retard the development of programs needed to fulfill the GSEs' housing mission. NAHB maintains the program approval activities that are currently conducted by HUD should not be transferred to the Treasury Department. Innovative solutions to increase homeownership will continue only if mission oversight is regulated by an agency which has a |