t a better handle about whether this is a good thing in terms of the overall housing market. add that I think, to the extent there is a good juse System being in this business, it is for the commu1 I wish I saw, in the numbers that I am reading, g and delivery of services to the smaller banks, as arge originators. ETT. Anyone else? ay. WAY. Yes, Senator. I was going to change and talk t subject. NETT. Please, go ahead. WAY. SEC registration. WAY. I would like to speak from my experience as a area, but also, as you may remember, I am also a board of directors of Farmer Mac. I have some experea of being involved with a GSE, where Zions is a er, for an entity that is regulated by the SEC. One at needs to be taken into consideration is the misC is quite different than the mission of a safety and lator, whether it be the Comptroller of the Currency Housing Finance Board or, in the case of Farmer of the SEC is to protect investors, and particularly s in public securities. The mission of a safety and lator is to make sure that the financial institutions ate are safe and sound. So they approach problems I will give you an example, which raises some of ere. is take loan loss reserves. Anybody that has been y long knows that the regulators love to see large es. They would like to see them as large as possible ives protection to the Bank and to the FDIC, ultie U.S. Government if there are losses in the loan ews. I takes an exact opposite position. They believe that eserves in the various different financial institutions and they view the large loan loss reserves being a ial institutions to manage their earnings. They besparency would require smaller loan reserves. And, have the accountants, with GAAP, who come out to pard of directors and a management that are being e opposite from their two regulators, if they, in fact, lators. Their safety and soundness regulator telling believe we would like to see some higher reserves so be safer and sounder or, at the same time, the SEC ou have too much in reserves and, in fact, we believe pproaching the point of managing earnings, which is e public markets. iction. This is real. It is happening today. One of the we is how we deal with two regulators, and we deal with it in banking all the time, but it is a problem when you get two regulators with different views, and both of them having the power to regulate a single financial institution. One of the concerns, not to drag it on, but the safety and soundness regulators, which I have already mentioned the names, have the power to remove an executive or remove a member of the board of directors. The SEC has the power to send you to jail. And so, at the end of the day, the boards tend to be more responsive to the SEC because of the more power and the threat of criminal activity if, in fact, you do not follow their rules. Senator BENNETT. I assume, when you go to jail, you are also removed from the board. [Laughter.] Mr. HEMINGWAY. Well, you know of an incidence in Utah where that was not the case, but that is usually the case. [Laughter.] Senator BENNETT. Well, let us go back to Senator Bunning's comment, then, when he raised the suggestion that it was potential registration with the SEC that caused Freddie Mac to get in the situation where they restated their earnings. Do you accept that as a cause-and-effect relationship? Mr. HEMINGWAY. I think there is another issue there, is they changed accountants. You will probably recall that Arthur Andersen was the accountant for Freddie Mac, and I am personally not aware which of those instances caused this to come to light; was it the new accounting firm or was it registering with the SEC, a combination of both or neither. I do not know, personally. Senator BENNETT. Before I turn it over to Senator Sarbanes, does anybody have a comment on the conflicting stresses created by the two types of regulators that Mr. Hemingway has raised? Mr. MIDDLETON. Senator, I support that. My company is an SECregistered bank as well, but we registered with the SEC because it was in the best interest of our business plan, and I worry about the mission of the FHLB we have a statutory mission plan, if you will, by Congress. Senator BENNETT. Did you have an option not to register with the SEC? Mr. MIDDLETON. Yes, sir, but because of the number of shareholders, we registered. We could have restricted the number of stakeholders had we want to do so. Senator BENNETT. I see. Mr. MIDDLETON. That is a choice, and that is why it is a voluntary_registration. I just worry, as a deep user of the Federal Home Loan Bank, is that the difficulties that have to be worked through can be worked through, and a disclosure, in SEC format is easy to obtain, and everybody has recognized that this is always good for a GSE, but we do need to have sustainable, written agreements that say, here is how we are going to interpret issues such as joint and several obligations. This is how we are going to interpret issues such as REFCORP. This is what happens if the mission requires specific action-how do we serve the mission if it conflicts with the SEC's decisions. So there are very difficult things to work through, and I can assure you I am on the Audit Committee and I chair the Finance he Atlanta Bank-we have spent a lot of hours and es making sure that we do this thing in an approbecause, at the end of the day, corporate law preent business judgment decision provision of the duty 3. So, when we vote for this, we must know that sues are resolved so that we will not hurt and do System. NETT. Okay. ON. Does that help you? NETT. That is helpful. Ms. Bair, do you want the last I could just add, my sense is that the prospect of n was added impetus to the Freddie Mac board to in order, so to speak. say I worked with the SEC for many years as the ment Relations for the New York Stock Exchange. re-based regulatory regime. It is not a safety and latory regime vis-à-vis publicly traded companies. n there have been conflicts between the bank reguss reserves, that has been not a safety and soundhe SEC so much as it has been a managed earnings ire issue. ic, you bringing it up, because I have heard another that the low-level retained earnings in the System, nter to where you might think the conflict was with loss reserves. e is they are not a safety and soundness regulator. closure-based regime, and that is the approach they NETT. I see. anes. ANES. Thank you, Mr. Chairman. each of the panelists very succinctly, if they could, hey think is the proper regulatory structure for the nks. NETT. Mr. Rice, let us start with you and go on e proper regulatory structure is NETT. Here, the buck always starts in the middle of u are right. egulatory structure is the structure, as it exists in pendent regulator of a GSE, and that establishes credibility that their investment is safe and sound. Ms. BAIR. I would hope that there is, as I said in my written testimony and oral statement, I believe that the broader the constituent base of the regulator, the stronger or the better position a regulator is in to be independent and not captive of a particular point of view. I think it will be a stronger regulator if the Federal Home Loan Bank System, and perhaps all other GSE's, are included in this new regulatory entity that it looks like we are on track to create. I would hope that this new regulator, it is not worth doing, unless the quality and credibility of the regulatory regime is significantly enhanced. I would hope we would be designing a system that would parallel the supervisory quality and professionalism that you get with OCC and OGS, including accreditation standards for examiners, you know, the overwhelming bulk of the budget going to safety and soundness oversight, not mission promotion or housing promotion. I think those are the things that the market needs to be sure that these things that we have created that do perform, all three, perform extremely significant and important roles in the housing market are run in a safe and sound manner. Senator SARBANES. What are the roles that they perform in a housing market? Ms. BAIR. The traditional role has somewhat been debated because they are getting into each other's line of business right now. But the traditional role has been for Fannie and Freddie to purchase and either hold, in portfolio or securitized mortgages, mortgages that come within the conforming limits set by HUD. The Federal Home Loan Bank System's job has been to provide advances, loans to its members. Its focus is on the institutions, as opposed to direct purchase of loans, which are collateralized by mortgage assets provided by the members. They are two distinctly different, somewhat competing roles, and since that, you can go to two different places for your funding. You can sell your mortgage to Fannie and Freddie or you can get an advance from the Federal Home Loan Bank System, but now we have a situation Senator SARBANES. I understand that the majority of the loans held by the Bank System are jumbo loans, beyond the conforming limits; is that correct? Ms. BAIR. For collateral? Mr. RICE. No, they are not. Mr. HEMINGWAY. They do not buy jumbo loans. Senator SARBANES. Are you telling me the Home Ms. BAIR. I think by regulation Senator SARBANES. -the Home Loan Bank system holds only conforming loans? Mr. RICE. Yes, that is correct. Mr. HEMINGWAY. The Mortgage Purchase Program will not buy jumbo mortgages. I believe you Program are talking about the Mortgage Purchase Ms. BAIR. No, he is talking about BANES. I am talking about the collateral for securing WAY. Oh, excuse me. BANES. What is the answer to that? WAY. Whatever the bank pledges. I mean, jumbo lify as collateral, as do conforming mortgages. It is Bank happens to have available to pledge. But in the chase Program, you cannot, a bank cannot sell, a t sell jumbo mortgages to the Home Loan Bank, only rtgages. BANES. What about a regulator? would just like to echo what we heard. I think the strong, credible, and independent regulator for the nk System. WAY. I would agree, a strong independent regulator. add to it, in my banking back BANES. Those of you who are saying that, is it your now have such a regulator? Yes. TON. Yes. BANES. Ms. Bair is no. TON. Does it vary by the volume of the affirmation? BANES. What is your TON. It is my understanding that the credit markets ent, and they recognize that we have a very strong, d BANES. What is your view, expressed by some, that co risk that the Home Loan Bank System is engaged g and that poses a potentially significant public polbelieve BANES. Do you think there is nothing to that? h, no, on the contrary. I believe that as we progress m, we are adding the resources, we are changing our e into account this new business activity, and we will ssary resources to maintain a safe and sound oper different analytics that go with it, and we are recoghose are and investing in the people that are nec BANES. When we say "we," who do youur bank, I am sorry. RBANES. Your particular bank. My particular bank. I cannot speak for all of the othk almost every bank that is looking at MPP are maksions. RBANES. The fact that you just said you cannot speak leads me to my next question. I am moving quickly we have limited time. er described a system with joint and several liability t capital structure as akin to 12 people with their tied together, but running at different speeds, and |