Mr. SYRON. Who would get paid first? Boy, this is speculative, to some extent on my part, you would have two sets of creditors, if you will the debtholders and the holders of the mortgage-backed securities, and I would assume that they would go on a pari passu basis, but I am not an attorney, and we should get back to

Chairman SHELBY. The priorities are debtholders, in the scheme of things, in the corporate world, is it not?

Mr. RAINES. It depends on what the contracts say.
Chairman SHELBY. Absolutely.

Mr. RAINES. It depends on what the contracts say, and so you really have to go back to each contract, and the contracts that Freddie Mac have may be different than contracts we have. I do not want to answer as an absolute, but overall they stand pari passu. They stand in line together. The mortgage-backed securities holders have an advantage in that they also have the collateral of the mortgages which the debtholders do not. Our debtholders have no security interest in the mortgages in our portfolio, whereas, our mortgage-backed securities holders do have a security interest in the mortgage-backed security.

Chairman SHELBY. In the package that they buy.

Mr. RAINES. In the packages that they finance. But on the whole, they stand pari passu. The issue is that for some 60, 70 years we have been successfully selling debt on this basis. What I am concerned with is someone is going to put a provision in a statute that raises the question: Have you changed something? And, if So, what? And I do not look forward to going around the world, as I am about to leave on Saturday for a week in Europe to go visit investors, and I am sure I am going to be asked a lot of questions about the last couple of days, I do not look forward to going out and explaining—

Senator SARBANES. You are going off to Europe for a week while the Congress is in session?

[Laughter.]

Mr. RAINES. Senator, I have such undying faith in the U.S. Congress that I would even dare to go off and visit investors and raise a little money for homeowners while Congress is in session.

Chairman SHELBY. Mr. Raines, let me pose this question to you. If the receiver had FDIC-like protections for debtholders, would that be acceptable?

Mr. RAINES. I would have to look at

Chairman SHELBY. You want to look at it.

Mr. RAINES. We have to look at what is meant by

Chairman SHELBY. Mr. Syron, you come out of the Federal Reserve, go ahead.

Mr. SYRON. Yes, excuse me, sir. I think that is a very good question. But, then, to be honest with you, we start to change the whole character of the receiver.

Chairman SHELBY. I know.

Mr. SYRON. But it does reduce

Chairman SHELBY. Let us assume that we change the whole character of the receiver.

Mr. SYRON. I do not know the right or the exact answer, but it does remove some of the problem that you would have with debtholders.

Mr. RAINES. As I said, I can agree with the suggestion made by Chairman Greenspan

Chairman SHELBY. It could alleviate some of the problems, possibly.

Senator SARBANES. Or you could call it "Bob." Did you not suggest earlier just calling it Bob?

[Laughter.]

You take these categories and try to press something into it, but these are special institutions or enterprises, and you may have to work out special arrangements to deal with them, and you need a different name.

Mr. RAINES. I agree with you totally, Senator, and that is why I agreed earlier with the suggestion by Chairman Greenspan. I am not adverse to spelling out in statute what happens. I just don't want to leave it ambiguous, and that is my concern. And I think putting the word "receiver" in makes it ambiguous. But if there is a concern that the statute is not clear, I am in favor of making it clear.

Chairman SHELBY. Now, the word "receiver" could be very definite and unambiguous. It depends on what you set out, could it not? A conservatorship could be ambiguous.

Mr. RAINES. It could be. And if there is a doubt as to what is meant in the statute today, even though we do not believe there is a doubt, but if there is a doubt, we have no problem with making it clear. But what I fear is that we will not be clear. It will be ambiguous, and what we will have is lawyers all over the world trying to figure out, what did Congress mean when they did that? They must have meant something. They could not have meant just to leave it the way it was.

Chairman SHELBY. That would not be the first time lawyers tried to find out what Congress meant-ambiguities.

[Laughter.]

Mr. RAINES. But trying to sell trillions of dollars of securities in that environment is not always the best.

Senator SARBANES. It is hard to persuade them that we did not mean anything, even though that may be the case.

[Laughter.]

Chairman SHELBY. I hope it means something, but you never know.

Mr. Raines, you note in your testimony that, "Enacting a receivership provision unfairly imposes new risk on holders of existing obligations that they could not have anticipated at the time they purchased the obligation."

What is the new risk you are referring to?

Mr. RAINES. It is the risk that there is a meaning in the receiver that is contrary to their interests.

Chairman SHELBY. Supersede the risk.

Mr. RAINES. They now have 60 years of history as to what this means. If the language changes, everyone is going to want to know what is the import of the change. That is why lawyers are so reluctant to change documents that have existed for many years.

Chairman SHELBY. That is why we have so many lawyers in Washington.

Mr. RICE. Mr. Chairman, one of the things I will say, as you look at the structure, that is one of the reasons why we think that it is necessary to have two divisions under them because we are not the same in the way we are laid out.

Chairman SHELBY. I know you are not, and I also know you are not publicly traded.

Mr. RICE. Right.

Chairman SHELBY. I want to follow up on this. I know that the evening is moving on. Wouldn't the GSE investors-I will pose it to these two-and debtholders be better served by a clearer specification of the resolution process; in other words, remove some ambiguity, Mr. Rice? In other words, if the GSE investors and debtholders knew what was in the resolution process.

Mr. RICE. Mr. Chairman, we have successfully sold trillions of dollars the way it is. Any change will be viewed introducing risk. Chairman SHELBY. But a lot people are questioning the way it is now.

Mr. RICE. Not our investors.

Chairman SHELBY. I know that.

Mr. RICE. Our investors are not questioning it, and it is their money that is at risk.

Chairman SHELBY. But there is taxpayers' money possibly at risk, too, and that is what concerns a lot of people.

Mr. RICE. That is the problem.

Chairman SHELBY. That is right.

Mr. RICE. If the Congress is saying that there is no guarantee, but just in case we are going to do one, we are going to put in provisions that push you to the back of the line, there are a lot of people that are going to say that is not the deal I signed up for, that if you are going to guarantee it, guarantee it. If you are not going to guarantee it, do not guarantee it. But do not say I might change my mind later on and want to step to the front of the line.

Chairman SHELBY. I believe, in your words, you want to remove any ambiguity that we can. In other words, make the language clear. Clarity is important. I think that is what we are going to try to do. I do not know.

Mr. Syron, you note, and these are your words, that "many market participants might view a change to receivership as a first step to privatization of the GSE's." Given that GSE equity and debt is held by private investors, should these investors not bear the full risk? In other words, they bear the rewards.

Mr. SYRON. Well, I think that the situation is, I mean, Congress has before it, and Congress has the ability to totally privatize these entities. I think with that, you would take away some of the special responsibilities we have, for example, in the low-income housing area, where I think that we do have responsibilities. It is not clear to me what all of the gains to that would be.

What my real concern comes down to is that in this country, and we do not have anyplace in the world-I sound like Johnny One Note we have this 30-year prepayable instrument, and I think if you were to totally privatize these institutions, that would go away because it does not exist anyplace else, even with the same set of players, and the more that we move in the direction of someone

saying, well, we are moving closer to privatization, that the advantages that exist now in rates, differentials would diminish.

Chairman SHELBY. Your definition of privatization here, where there would be clear and unmistakable language that there would be no implied guarantee.

Mr. SYRON. No.

Chairman SHELBY. Is that what you are saying?

Mr. SYRON. No, I am going even beyond that. I am going beyond that and saying that these things are not creatures of Congress, that they have no tie to Government policy, in a sense.

Chairman SHELBY. They are creatures of the marketplace.

Mr. SYRON. Exactly.

Chairman SHELBY. And they are subject to the marketplace and the rules.

Mr. SYRON. And subject only to the marketplace.

Chairman SHELBY. Only.

Mr. Raines, in your opening statement I believe you indicated that the GSE funding advantage was not a result of an implied guarantee, but because of business focus and expertise. If this were the case, does it not follow logically that receivership authority will not impact GSE's funding advantage, if you accept that premise? Mr. RAINES. No, it does not imply that.

Chairman SHELBY. It does not?

Mr. RAINES. It implies the Government is going to step into what had been previously a private enterprise and make decisions, and that is the issue. It is that somebody who is a stranger to the transaction is going to step in at some point and start saying here is the way it is going to go from now on. That is the danger. That is a risk. And I have been in the financial services business, now for 25 years. I have had to deal with this situation when I represented State and local Governments. I have had to deal with it in representing companies. I have had to deal with it even when I was in OMB, when we were privatizing the Government's ownership of the production of uranium.

As much as those of us who have been in public service like to believe that we can be helpful

Chairman SHELBY. Sure.

Mr. RAINES. -when people are investing their money, they would just as soon rely on the deal they cut with the business entity and not think someone else is going to come in to be helpful at a later date.

Chairman SHELBY. Mr. Rice, Mayor, I am going to leave this last question to you. Currently, the Federal Home Loan Bank System issues its debt, as I understand it, by way of the Finance Board's Office of Finance. You are very aware that this is an entity that is legally under your System's current regulator, yet issues debt on behalf of the System. In other words, a regulator is issuing the debt.

Do you believe this authority should be transferred to the bank themselves to issue the debt, you know, as we create a future regulator? And, if so, do you have any thoughts on how a new Office of Finance owned by the banks would be organized. You see my question here.

Mr. RICE. No, I do. I think, in my opening remarks, I said I felt that the Office of Finance should move to the independent regulatory structure.

I do not think you can make that quantum leap in this legislation. So, I would elect or offer the suggestion that it stay with the regulator, and I think it operates well then.

Chairman SHELBY. To be the regulator and the issuer of debt.
Senator Carper, you have been very patient.

Senator CARPER. Just one question in closing, and again our thanks to each of you for joining us for this extended period of time and for your very thoughtful answers hopefully to our thoughtful questions.

I have a question really for you, Mr. Syron, and this is more I suppose of a personal nature than anything else.

I understand, in an earlier part of your life, you served the Boston Fed.

Mr. SYRON. Yes, sir.

Senator CARPER. And as I recall, you ran the show there for a while.

Mr. SYRON. Yes, sir.

Chairman SHELBY. I might add he ran it well.

Mr. SYRON. Thank you.

Senator CARPER. Yes, it got good reviews from as far away as Alabama.

[Laughter.]

Chairman SHELBY. You know, money travels, and so does a good reputation.

Mr. SYRON. Thank you, sir.

Senator CARPER. I would like for you just to take a moment in closing here and reflect, if you will, on your earlier service in that capacity some of the lessons that you learned and really some of the values that you brought from that service to your new responsibilities.

Mr. SYRON. Thank you for the question, Senator.

I would say, if there is one thing I learned, that it is be wary of unintended consequences; that often in solving the problems of today, we create the problems of tomorrow. You will remember that 8 or 9 years ago, everyone said that management in the United States was not sufficiently aligned with shareholders. So what we are going to do is load them up with options, and we have seen some of the undesirable outcomes that came from that.

I, also, think if my service had any searing impact on me, it was that you have to look at the system as a whole rather than just the parts, and particularly when we got into this credit crunch in New England in the 1990's, that there was a problem of looking at just, on an institution-by-institution basis or a piece-by-piece basis and not seeing what we were doing to the economy as a whole.

Sir, I would respectfully say that that is something I hope I can bring to this because it is like everything else in life. It is a balloon. You press in here, and it pops out someplace else. I will finish on this. What this is all about is none of us can eliminate risk. We are all about trying to repackage and reduce risk and have it go to the part of the system where we

Chairman SHELBY. Minimize it.