based on your logic, there is an alternative solution. Rather than giving the regulator authority to move it around, get rid of it and have the entire focus based on risk-based capital.

Senator SUNUNU. My logic is that whatever capital standards exist should be the responsibility of the new regulator. Your logic is that nobody else has a minimum capital standard, and therefore, we ought not to deal with it.

With regard to the Federal Home Loan Banks, if they are included in the legislation, are you recommending that we include your proposal to tax them?

Mr. RAINES. What I recommend is that if the Committee is going to include the Federal Home Loan Banks, that the Committee address these substantive issues as to whether or not they should be as it relates to their mortgage programs, not to their advances, but as it relates to their mortgage programs-operating under the same rules that we do.

Senator SUNUNU. Which would be a significant change to their charter.

Mr. RAINES. Absolutely. But they have moved into a significantly new business. Just as if we moved into a significantly new business I think you would want to revisit our charter.

Senator SUNUNU. But moving them to a new regulatory authority does not mean they are moving into a new business.

Mr. RAINES. Some of them have already moved

Senator SUNUNU. The question is, if we move them into a new regulatory authority, should we tax them? You seem to say, yes, because we should revisit the charter issues associated with the Federal Home Loan Banks because we are moving them into this new regulatory authority.

Mr. RAINES. No, because the Congress of the United States, I do not believe, is going to take up this issue again any time soon. If you move them into a new regulator you are essentially saying that you are comfortable with the Federal Home Loan Banks having $100 billion today, and potentially $500 billion in a few years, owning of mortgages under an entirely different scheme than you have established for Fannie and Freddie.

Senator SUNUNU. So by extension, should we revisit the issue of the tax status with regard to State and local taxes for the GSE's, and the Treasury line of credit as well?

Mr. RAINES. If we move into a different business.

Senator SUNUNU. If we move Fannie and Freddie into a new regulator?

Mr. RAINES. No. If we moved into a new business I think you should revisit our charter. But we cannot move into a new business under our charter. They have moved into a new business that is entirely different from the business that they were in the last time Congress reviewed their charter.

Senator SUNUNU. So your point seems to be that you want to revisit these issues of charter and taxation because they have moved into new businesses, not because we are considering including them in a new regulator.

Mr. RAINES. Both.

Senator SUNUNU. There is an important distinction to be made here.

Mr. RAINES. It is both of those. But I agree with you. If the Congress was not taking up this issue, then I would not come up here and say, I would like you to take up the issue. But if Congress does take up the issue of the Federal Home Loan Banks, I think this is the one time you are going to deal with it for the next 5 or 10 years, and I think if you do not deal with it now it will never be dealt with.

Senator SUNUNU. But this same exact argument could be made, by someone that wanted to make it, that for those very reasons, because we are talking about these issues, that we should have on the table Treasury line of credit for the GSE's, that we should have on the table applicability of State and local taxes. As you well know, in approaching this I think many people, including me, have said that maybe those ought not to be addressed specifically in this legislation.

Mr. RAINES. There has been no hesitancy in this town for people to raise those issues about Fannie Mae and Freddie Mac. If we were to move into a new business I would expect them to raise them, and I would expect Congress to address them. But nothing has changed in terms of our business since 1992. Congress addressed that issue in 1992. There has been no new argument made with regard to them since 1992. That is why I am saying, I do not see a need for Congress to go into that.

A lot has changed with the Federal Home Loan Banks since 1992; a lot has changed. And a lot has changed since the last time Congress legislated a few years ago with regard to this issue. And the Banks are proud of the change. So this is not hidden. The only question I am raising, a change has occurred. If you are going to now legislate on the Federal Home Loan Banks, it seems to me that change should be addressed.

Senator SUNUNU. I want to salute Mr. Rice for his discipline at the other end of the table and make note that [Laughter.]

Mr. RAINES. It is a Seattle characteristic.

Senator SUNUNU. I do not think the Chairman would have moved on without giving you an opportunity to respond.

Mr. GOULD. And you noticed, I tried to stay out of the argument. Mr. RICE. I was trying to. I have a hole in my tongue.

The Fifth Circuit Court of Appeals confirmed the System moving into this mortgage purchase area. They said it was consistent with the mission, and the System's housing mission. And the Finance Board authorized us to move into this area. So it was not as if somehow we just moved into this area. We had a lot of people giving us scrutiny, and that precedent is there.

As a matter of fact, it is interesting, this is the hard part with the regulatory structure. Some people want things left as they are as we move forward into the new regulatory structure and some people want them changed. I do not think that you can have it both

ways.

I think at the end of the day we are in a business that our members wanted and that is what we respond to.

I would just say that we do have taxes, we pay RefCorp, which is a percentage of our income. And we have AHP, our Affordable

Housing Program, 10 percent of our net income that is mandatory. And we have no tax shelters.

Chairman SHELBY. I think you used the phrase earlier creeping mission or something like that.

Mr. RICE. Mission leap.

Chairman SHELBY. Mission leap. Well, we hope you are not leaping, any of you leaping toward the taxpayers. That is what we worry about, as you know, and that is why we need strong regulators and strong standards.

Mr. Raines, you have indicated that you support such a change, but there is a need for stability in capital standards. How would you define stability in capital standards?

Mr. RAINES. I think the stability that we would look for is to simply leave it to the regulator to decide when it would be necessary to change the risk-based capital standards. They just became effective this year. I would hate to see the Committee, or the Congress, mandate that the regulator make a change. And so I would leave it to the judgment of the regulator as to how rapidly they would want to make a future change.

But there was some discussion at some points about mandating, that they throw out the existing standard and create a wholly new one. And having just gotten it, after 10 years, we think that would be precipitous.

Chairman SHELBY. You would have to be careful in doing that. Mr. RAINES. You would have to be careful, but we are not looking for any limitation on the ability of the regulator to make a change. We just do not want there to be a mandate that by some date they have to come up with a brand new standard that we would then have to adjust to.

Chairman SHELBY. So basically, would you be comfortable, whatever that comfort level might be, with language on risk-based capital similar to that accorded to the bank regulators?

Mr. RAINES. In terms of how they set the risk-based capital?
Chairman SHELBY. Yes.

Mr. RAINES. We are comfortable-I hesitate on the bank regulator because we have some many examples. But we are comfortable that they have broad authority to do that.

Chairman SHELBY. We know you are different, your mission is different.

Mr. RAINES. Yes, we believe that they should have broad authority, keeping in mind the best practices that have been developed over time, and that they apply their best judgment to that. So we are in favor of a lot of latitude on risk-based capital because it has to evolve and change as the risk posture changes.

Chairman SHELBY. Senator Bennett, would you like to ask any more questions?

Senator BENNETT. Thank you, Mr. Chairman, and I thank Senator Sununu for his diligence and his penetration in his questioning. I just have one quick comment, more or less to get it off my chest than to discover anything.

Mr. Gould, I believe that accounting is an art, not a science. I believe accounting is a philosophy, not an exact procedure. And the assumption everywhere is exactly the reverse. The assumption is that you count the number of beans in the jar and they are what

they are, and any statement of a different number of beans in the jar is dishonest. And accounting is very, very clear and straightforward.

What people who have not run businesses do not realize is that there are a whole bunch of jars sitting on the shelf and you put a bean in the wrong jar, many times because your auditor tells you the second jar is where that bean belongs even though you want to put it in the first jar.

And my understanding of what happened at Freddie Mac was that your auditor, who was Arthur Andersen that no longer exists, was telling you that proper accounting required you to report what you reported. And then when Arthur Andersen, who made some very, very serious accounting mistakes in their advice to Enron, ceased to exist, your new accountant said no, they are in the wrong and let us put it here. And this is not a matter of misleading anybody. It is simply a matter of making a philosophical choice as to which jar the bean goes into that turned out to be the wrong choice.

Now I do not want to lead you, but is that

Mr. GOULD. Well, that would apply to a good bit of all that is wrong, Senator. I can say that with absolute certainty.

There are probably some other instances of transactions where on reflection, with the help of our new auditor, our people internally would say gosh, we were following the wrong policy, albeit that a number of those may have been passed upon by Arthur Andersen. I am not trying to exonerate everything or whitewash what had been done. But I will just give you one example.

We changed auditors and Price Waterhouse comes in and looks at 140 accounting policies and decides to change 130 of them. Now that is not saying that 130 of them are necessarily dead wrong. That is saying they felt best practice and the proper way to do it was to change 130, and that is one of the reasons this restatement has taken so long.

But you are absolutely correct, there is subjectivity in accounting rules. There is no bright line, often. Sometimes there is a bright line and sometimes Freddie Mac went over that bright line.

But the fact is that there was a lot of subjectivity to it, a lot of art form. In fact, sometime if we had a lot of time, perhaps you and I could have a philosophical discussion of what are earnings? What reflects the underlying economics of a business best? And that is not an easy question to answer. So you are correct certainly, sir, in that respect.

Senator BENNETT. Well, I just simply, in this discussion, want to make it very clear that there is a difference, and it is a very significant difference, between the Enrons where people are greedy and stupid and usually those two go together-and deliberately cooked the books to achieve a result that was not sustainable from the economics. And then accounting challenges that come because of philosophical differences between accountants.

And this is one of the challenges that a regulator is going to have to deal with, because the regulator is going to have to decide how the books should be kept, in many instances.

Mr. GOULD. Again, I want to be very careful that I am not exaggerating here. Freddie Mac made some errors and that is undeni

able, particularly as to whether or not certain things conformed with GAAP or the business purpose of certain things. A lot of it was, as suggested, differences of opinions. But there were some mistakes made and those mistakes have been corrected and the remediation has included not only correcting those mistakes but also ensuring it will not happen again by changes in personnel and systems.

Senator BENNETT. That is why I raised the question, because wanted to be clear to what extent it was just you were following the advice of your auditor, and what extent you made mistakes. And you have made it clear that there was both.

Mr. GOULD. I wish I could say it was entirely someone else's fault, but that would not be an honest statement.

Senator BENNETT. Thank you. I appreciate that.

Chairman SHELBY. Mr. Gould, is that restatement date, is that in November now?

Mr. GOULD. Yes, sir.

Chairman SHELBY. I know it slipped.

Mr. GOULD. It has been a moving target, but it is now November. Chairman SHELBY. Are you going to make it? I think the world would like to know.

Mr. GOULD. I certainly do not want to perjure myself in any way here. No, yes. I feel a very high degree of confidence that we will have it completed. The last glitch has been largely a systems

Chairman SHELBY. Sure, we know you have to go back and do a lot of things.

Mr. GOULD. Yes, we had to go back to 1998 and review some numbers because of a systems glitch. But the fact is that I am quite confident that it will be November, yes, sir.

Chairman SHELBY. Thank you.

Senator BENNETT. If I could just interject, Mr. Chairman, you have announced your intention to register with the SEC, as Fannie Mae has already done. Is your registration with the SEC delayed by your ability or inability to meet these deadlines?

Mr. GOULD. Yes, sir. Our ability to register with the SEC is contingent upon having current financials and we do not have those, and will not have current financials for probably the middle of next year.

Senator BENNETT. So your registration is not a lack of will or a dragging of the feet, it is simply the mechanics of getting numbers. Mr. GOULD. Precisely. We thought we would have been there by

now.

Senator BENNETT. I see. Thank you.

Chairman SHELBY. Sir, do you anticipate November, if you meet the deadline, the news is going to be upward and out and good news as far as

Mr. GOULD. Well, I expect it will be really

Chairman SHELBY. I know you are not going to say what.

Mr. GOULD. The news that we have already tried to announce to the public in several releases, we have given a range of our expectations.

Chairman SHELBY. It is going to be a gain, not a loss?

Mr. GOULD. Oh, yes. It is going to be

Chairman SHELBY. It is going to be a substantial