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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?

Nr. 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.

Mr. RAINES. We guarantee the timely payment of principal and interest on the obligations. This is looking at who has the interest rate risk, and contrary to opinion, Fannie Mae and Freddie Mac do not own the interest rate risk on all the mortgages in America. We have a combination of about 20 percent on our portfolio. The other 80 percent is in other institutions, many of them quite large.

The second point is: How much risk do they have and what do they do with that risk? Because that is where you have to determine what is happening. This is a complicated chart, but I will make it quite simple. It is just simply a measure of what is the growth risk you have, that 12 and 8 percent I said before. What is the net? What is left after you have hedged? Fannie and Freddie do a pretty good job of taking the risk that they got in the beginning and passing on about half of that risk to others. Look what happens when you get to depository institutions. They pass on almost none of the risk that they take on when they buy mortgages. They keep it. So again, if I am worried about risk in financial institutions, I would be a lot more worried about those who take it and keep it than those who pass it on.

Senator SARBANES. What percent of their assets in the financial institutions are reflected by mortgages?

Mr. RAINES. Today about 34 percent.
Senator SARBANES. I thought the figure was about 21 percent.

Mr. RAINES. If you look at the financial assets of banks and thrifts, about 34 percent are made up of mortgage assets.

Senator SARBANES. What percent of your assets are made up of those items?

Mr. RAINES. Ninety-six. I mean we are specialists. This is what we do. In between banks and us would be thrifts, who have a large share as well.

Senator SARBANES. Would that not lead to the conclusion, if there is some concern about the risk here, and you are an institution in which 96 percent of your assets are in that category, that there is reason for heightened concern there as opposed to an institution in which 32 percent of its assets are in that category? Would that not simply follow, before you get to the hedging issue?

Mr. RAINES. You cannot ignore the hedging because we would not buy the asset if we did not do the hedging. It is not optional to us as to whether or not we are going to

Chairman SHELBY. Mr. Raines, just for the record, and I know it is Senator Sarbanes-Senator Dodd's time.

[Laughter.]

On the other hand, I think Senator Bennett's time is coming up. But, Chairman Raines, what is the source of your data, and would you furnish that for the record?

Mr. RAINES. I would be delighted to do that.

Chairman SHELBY. Because our Committee would like to see that.

Mr. RAINES. I would be delighted to share it. This is an issue that obviously we spend a lot of time on. But it is a question I think the Committee can rightly ask: Are you better off having people who specialize in an asset, and this is all they do, or are you better off to have someone who has assets all over the board? Banks do 20 different things. They do junk bonds. They do Third World debt. In whose hands would you rather have these assets? Someone is going to have this risk, unless of course we tell consumers, you cannot have a fixed rate mortgage. We can solve this problem. It is solved all over the world by telling people, you have the risk, you the homeowner. We are not going to have the banks take the risk. You have it.

In this country we have done something different, and in fact, that is why Fannie Mae was created in 1938, was to buy this newfangled mortgage that someone came up with, which was the FHA 30-year, fixed-rate, refinanceable mortgage. Today, over 60 years later, we are still doing the same thing.

Senator SARBANES. Of course, Chairman Greenspan was critical yesterday of that concept. I mean he is in here in a sense pushing adjustable rate mortgages yesterday, and throwing this risk back on the consumer, and in fact made the argument that the consumer would come out ahead. Of course, that is going to, it seems to me, require a fairly smart consumer who is going to have to know when to jump in and jump out and so forth. But he, in effect, is downing the 30-year fixed rate mortgage and pushing up the adjustable rate mortgage.

Mr. RAINES. Absolutely, Senator. You said it as plainly as I think it can be said, and the choice is really Congress's choice. It is a choice of whether or not you think consumers should have access to long-term fixed rate mortgages or they should not. And one can disagree on that. It is not as though that there is only one answer, but if you want them to have that choice, this is the only country who has figured out how to do it, and we figured out how to do it with a housing finance system that works.

Senator DODD. Particularly, if you are talking about serving underserved constituency. Adjustable rate mortgages, for a low income constituency, is a nightmare.

Mr. SYRON. If I may just inject something. Adjustable rate mortgages would have been a terrific instrument to have in the last 8 years or so when we have had one of great bull markets in bonds in the history of the republic. They would not have been such a great instrument to have had you taken out an adjustable rate mortgage in 1974, 1978, or any other points in the business cycle.

The plain fact is, as a matter of national policy-it happens to be national policy I agree with, but as Frank says, it is your choice—we have decided that as Americans that we would prefer to shift the risk, the interest rate risk from homeowners to a sector that is better able to bear it. Other nations have not tried to do that. Many are exploring doing it now. The EU, as you know, is looking at setting up a GSE, but that is a decision we have made.

Chairman SHELBY. Senator Bennett, you have been very patient.

STATEMENT OF SENATOR ROBERT F. BENNETT Senator BENNETT. Thank you, Mr. Chairman. I have had all my questions already asked.

[Laughter.]
There is an advantage of waiting.

I have not had this conversation with Chairman Greenspan, and I would like to because I would like to understand his thinking a

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