lower than the 2.5 percent that we statutorily are required to hold

now.

Chairman SHELBY. That is what is causing some of the regulators some heartburn, is not it?

Mr. SYRON. It is causing them a lot of heartburn.

Chairman SHELBY. Lowering the capital standards.

Mr. SYRON. But I think if you look at what Chairman Greenspan said yesterday, you know, that these institutions-and I am new to this, so I am not going to brag on the management of my own organization—have extraordinarily sophisticated hedging systems, extraordinarily sophisticated risk control systems, I mean to the extent where I every day at 5 o'clock, get a whole family of measures on my rim on exactly how we finished the day with respect to our exposure to interest rate risk. We have lots of measures of tests that we are within and whether we are meeting up to what is required.

Chairman SHELBY. Senator Dodd, I believe you are next.

COMMENTS OF SENATOR CHRISTOPHER J. DODD Senator DODD. Thank you, Mr. Chairman, and I apologize for stepping in and out of the room here.

First of all, let me thank you, Mr. Chairman. You have done a very fine job-both you and Senator Sarbanes in having this series of hearings on this issue. And I think it has been tremendously worthwhile, so let me express my gratitude to you.

Let me thank all three of you as witnesses. I had a chance to listen to a couple of you talk and express yourselves, as well as read your testimony. And we thank you for it and for your ideas and suggestions.

I would just briefly say, Mr. Chairman, obviously like most of us here this is one of the great success stories of all time, and we do not want to lose sight of that. And as has been pointed by all, by our witnesses here, obviously the 70 percent of Americans who own their own homes today in no small measure due to the work that has been done here, and that should not be lost in this debate and discussion. And I think the points that have been raised by our witnesses emphasize that, and I certainly want to associate my own thoughts and feelings with those comments. And looking at how we can regulate these institutions in a way that will complement their jobs and the goals desired here is something we should embrace with a sense of caution, and I emphasize that word, that we do not do it in a way with a sledgehammer when a scalpel may be the appropriate tool so that we get maximum benefits out of these institutions rather than doing great damage to what has been one of the great engines of economic success in the last 30 or 40 years. So I thank them.

I do not know if you have raised this question while I stepped out of the room. If you have, then I will just step back. I heard Mr. Syron talking about it, and I know Frank Raines raised it as well, and that is the issue of receivership versus conservatorship. And I do not know if the question has been raised or not.

Chairman SHELBY. That is a good question, and timely, too.

Senator DODD. Why do not you just walk us through your concerns again? I heard briefly what you had to say, and I do not

know if you disagreed with what each other had to say about this. I know you agreed mostly. And, Mr. Rice, as well, if you have some thoughts on this, I would like to hear them. But if you might give us your concerns with this recommended change that has been raised. And from your perspective what are the problems with providing a future regulator with the ability to place a GSE in receivership? And what are the potential market impacts of such a change?

Mr. SYRON. Senator, if I might just start on this, I think one of the great geniuses that Congress resulted with in creating these GSE's was an ability to transfer interest rate risk, particularly interest rate risk on 30-year, fixed-rate mortgages, from the homeowner to the capital markets.

Now, with the retained portfolio, given international investors' preferences not for mortgage-backed securities but preferences for the actual debt of these institutions, the GSE's, particularly Fannie and Freddie, we have found a way to sell more and more of our debt overseas, thereby shifting the interest rate risk, if you will, from homeowners in the United States to investors in foreign capital markets. And I think that is a substantial gain to the United States at a time when we have a lot of international trade issues, and it is not something that we very lightly want to give up.

I am not implying that there are not issues that have to be faced with this, but I think the best way to facing the issues of the size of our portfolio and the growth of our portfolio is the same way that you deal with the institutions as a whole, and that is, as my colleague said, making sure that you have good capital standards, that you have a very strong regulator, the regulator is able to change the capital standards on a frequent basis if it deems necessary because of change of risk, rather than specifically coming in and saying we are going to bless certain types of obligations and we are going to prohibit other types of obligations.

Thank you.

COMMENTS OF SENATOR PAUL S. SARBANES Senator SARBANES. Did you indicate how much of your debt went overseas in your testimony?

Mr. SYRON. Yes, I think-now, Senator, I will apologize for being relatively new in this, but my understanding-and I only know our recent offerings. But in our recent offerings, I think somewhere on the order of about 34 percent has gone overseas.

Senator SARBANES. Of that offering, but how about your total debt, how much of it is overseas?

Mr. SYRON. I would have to get back to you on that.

Mr. RAINES. For Fannie Mae, of our benchmark debt securities, 32 percent are purchased by investors outside the United States. It is a very large part of our funding.

But, Senator Dodd, directly to your question, I think there is a lot of misunderstanding on this issue, and I think there has been a lot of back and forth on the names receiver and conservator. The key things are the powers. Typically, a receiver's major power that is different than other powers is the ability to take a contract and say it is no longer effective. That is the big power. It is able to take

one position and put somebody else ahead of you and say they get paid before you do.

If you are the Government and have a bank insurance fund, you want to make sure you have paid the depositors and you are first in line to get repaid. And you need a receiver's power because, otherwise, everybody else will say you just showed up. We get paid first, you get paid last. So the job of the receiver is essentially to push everybody else out of the way, and pay the Government first. And then from whatever is left, the receiver can pay the others.

In our case, the Government is not involved, so there is nobody to be pushed out of the way. Our bond holders are simply saying, "Whatever there is left, pay me, but do not let someone else come in ahead of me." And when you say "receiver" in that kind of a case, they have a right to say, "Well, exactly who is this receiver supposed to shove out of the way? Is it me? And for whom? Who is putting money in? I am the only one putting money in. The shareholders are behind me, so that is fine. But who is it who wants to come ahead of me, the senior debt holder?" If you are a senior debt holder, you have to ask that question: "Why do they want this? Who do they want to have ahead of me? What is the point?"

I think it is far better to make it very clear-and I think Chairman Greenspan even suggested this yesterday-to make it very clear that the investors in the Enterprises have only access to the assets of the Enterprises and they get only what their contracts say they will get. And that is how we read the statute now. If others do not read it that way, we are perfectly happy to have it clarified that that is what is meant. But we think it would be a huge mistake for enterprises that have trillions of dollars of outstanding obligations for someone to come in and say, "Well, you know, we are not so sure about what those contracts mean. We are not so sure of how they will be enforced in the future."

I think that would be a terrible mistake to no advantage. So that is why it is so important to get this right. We shouldn't get hung up on the names. You can call the person "Bob" as far as I am concerned, as long as they do not have the power to push aside our debt holders and say they do not have access to the assets to pay off the debt holders, even if you do not get paid 100 percent. But they do not want someone else coming in and saying, someone else has the first access to those assets.

Mr. RICE. In the case of the Federal Home Loan Banks the case is already laid out. It is called joint and several liability, and should one bank falter, then the other banks are required to step up to the plate to cover the debt. So the Federal Home Loan Bank structure in my mind is resilient where each Federal Home Loan Bank is individually capitalized, but they are backed up by the other banks due to the joint and several aspects of that nature.

I think that one of the things that we really understood in this whole process of capital and looking, with Gramm-Leach-Bliley we review the capital of the Federal Home Loan Banks and raise the standard is what we needed to have as far as where we need to be. So, I think we were clearly under the magnifying glass for how we manage risk-based capital and leverage, and I think that will serve us well.

Senator DODD. Mr. Chairman, could I ask one more question?
Chairman SHELBY. Go ahead.

Senator DODD. One of the biggest concerns raised by Chairman Greenspan yesterday, one of the largest questions raised by him yesterday is that the Fannie Mae and Freddie Mac pose a systemic risk as a result of unsustainable growth, was I think the quote, almost a direct quote. Challenge that statement if you will.

Mr. SYRON. Senator, first of all I would say these organizations have undeniably grown very fast in the last number of years, but let us face it, we have had the best mortgage market, not just in the history of the United States, in the history of the world probably. Just given the changes that are happening in the economy, it is inevitable that the retained portfolios of these institutions are not going to grow as fast in the future and may even decline, and particularly in relationship to the public debt, I think as someone said, Greg Mankiw said, to the publicly held debt of the United States, given our own reasons of what is happening with the deficit, that is going to increase greatly.

Chairman SHELBY. I know it is Senator Dodd's time, but could you address specifically the concern of Chairman Greenspan to holding the debt in portfolio, because he spent some time on that yesterday.

Mr. SYRON. He spent a lot of time on it.

Chairman SHELBY. Obviously, it is a great concern to him.

Mr. SYRON. But I think now-I do not want to get into quibbling about, debating about exactly each of his words-I happened to watch his testimony again last night, and he focused a lot on the rate of growth of the debt from the current base, and he said that, paraphrasing, that he saw nothing in these institutions that gave him any current concern from a safety and soundness systemic perspective.

The issue he raised I think was that if you looked at the recent rate of growth of these portfolios, that he would have substantial concerns. What I am saying, quite honestly, is I do not think because of the expectation they have on what is going to happen on the mortgage market, that these portfolios are going to begin to have that rate of growth in the next few years as they have had in the last several years. That is a factual issue.

Beyond that, I think the way to deal with this-and I may be repeating myself here but is to have a strong safety and soundness regulator, and as I have already said, in terms of their ability to look at us, we are going to be holding more capital. It may be unpopular. Then the maybe unpopular Basel II ratio would have some of the largest financial institutions in the world hold against similar securities.

Senator SARBANES. But that is just a proposal in Basel II and a lot of people are complaining very strongly about that.

Chairman SHELBY. All over the world.

Senator SARBANES. I do not think you can take a proposal about which considerable question is being raised and use that as the benchmark to make your argument.

Mr. SYRON. But I would come back then and I would say what we should look at is what has been the historical risk exposure of these types of assets. Both of these GSE's, exclusively housing

GSE's, have a requirement to meet quite strict stress tests on the different types of scenarios, and my understanding of it is, having gone through the exercise a couple of times, is that they meet those stress tests quite well. Your point is well taken, Senator, that it is a proposal and not a fully endorsed proposal by lots of people.

Mr. RAINES. Let me take a crack at this from another perspective. Clearly we are big, and we have grown as the market has grown. There are a couple of points that I would make, and that is that not only have we gotten big, but also everyone in the mortgage market has gotten big. Remember, the size of the mortgage market doubled in the last decade. It went from $3 trillion to $6 trillion, and we think it is going to double in this decade if we are going to meet the housing demand.

But look at this chart at what has happened since 1999 when we had $5 trillion of mortgage debt outstanding and in 2003 we went over $7 trillion. Freddie Mac's share of that went from 6 percent to 8 percent, Fannie Mae's went from 10 percent to 12 percent. The largest commercial banks went from 16 percent to 20 percent of the market. It is not simply the case that only these two institutions have gotten big.

There was a time when we thought Fannie Mae was about to be the largest company in America. Right now we are going backward. Why? Because banks are growing faster than we are. It is simply not enough to say these institutions have gotten big, because if that is the problem, you are going to have a problem across the board. You are going to have big banks, and we are in a country that is not used to having big financial institutions. We are a country where in many States it was illegal to be big. You could only have one branch. But we are now in a world in which we are going to have larger financial institutions. That is the first thing.

The second thing is: What are these institutions doing with these mortgages? Where is the risk?

Senator SARBANES. Who are the others before you leave that chart?

Mr. RAINES. The other largest holders?

Senator SARBANES. No. You have others, 52 percent in one and 47 percent in the other. Who is that?

Mr. RAINES. Primarily that is the holders of our mortgage-backed securities.

Senator SARBANES. Your mortgage-backed securities?

Mr. RAINES. Ours and Freddie Mac's, as well as the private label mortgage-backed securities that have been issued by banking institutions. So that is mutual funds and insurance companies

Senator SARBANES. Of those mortgages, what percentage of them are yours and Freddie's?

Mr. RAINES. Of the total there is about 44 percent are a combination of Fannie Mae and Freddie Mac, where we have the credit risk. This is a measurement of who has the interest rate risk because we were talking about the concern about interest rate risks in portfolios. For about 44 percent of mortgage debt, Fannie Mae and Freddie Mac have the credit risk.

Chairman SHELBY. What do you mean by that? What is your guarantee on that, because there is a risk there.