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January 21, 2003
Opening Statement by Congressman Paul E. Gillmor
House Financial Services Committee
Thank you, Mr. Chairman, for holding this important hearing and for your continued leadership on this issue and the overall topic of reforming the regulatory structure governing Government Sponsored Enterprises (GSEs).
I applaud OFEHO's efforts in conducting this investigation of Freddie Mac's accounting and management failures, resulting in Freddie Mac's $5 billion restatement of earnings. However, I do have some questions regarding its timing. OFEHO began its investigation only after the management and accounting problems at Freddie Mac became publicly apparent. This does not leave me with great confidence in OFEHO's ability to effectively oversee our GSEs.
I look forward to hearing from Director Falcon on this issue and to further this committee's discussion of pending legislative proposals to improve the regulatory oversight of both Fannie Mae and Freddie Mac. As an original cosponsor of HR 2575, the Secondary Mortgage Market Enterprises Regulatory Improvement Act, I would like to see its prompt consideration by this committee.
In the meantime, I was pleased to see that OFEHO and Freddie Mac have entered into a consent agreement requiring Freddie Mac to pay a civil monetary penalty of $125 million and make significant internal management and operational changes. The most important aspect of this agreement, in my view, is the formulation of a plan to improve Freddie Mac's public disclosures and regulatory reporting. Freddie Mac and all our housing GSEs are tasked with the responsibility to do a public good and enjoy certain special circumstances in order to accomplish their corresponding goals. Accordingly, they should be accountable to the public in their financial activities.
OPENING REMARKS OF THE HONORABLE RUBEN HINOJOSA
HOUSE FINANCIAL SERVICES COMMITTEE
SUBCOMMITTEE ON CAPITAL MARKETS OFHEO'S REPORT ON THE SPECIAL EXAMINATION OF FREDDIE MAC
JANUARY 21, 2004
Chairman Baker and Ranking Member Kanjorski,
I want to thank you for holding this hearing.
Before we address OFHEO’s report, I want to stress that the housing market has served as the foundation of the U.S. economy since the stock market decline post-Clinton and post-9/11. During that time, Fannie Mae and Freddie Mac have played a key role in supplying liquidity for the housing market, thereby supporting our economy in a time of need.
It is my firm belief that whatever action that we decide to take in Congress, if any, with respect to either of these institutions, we must not alter their internal structure, or any aspect of their regulation, that would harm them or our economy.
I understand that OFHEO has not closed its examination of Freddie Mac completely and continues to seek to compel former Chief Executive Officer Leland Brendsel and former Chief Financial Officer Vaughn Clark to testify to the actions they took at Freddie Mac. It is also my understanding that this matter is pending before the U.S. District Court for the Eastern District of Virginia, that the SEC is investigating whether Freddie Mac possibly violated U.S. securities laws, and that the U.S. Attomey for the Eastern District of Virginia is conducting a criminal investigation. It is important that I note all of this to stress again that any action Congress takes prior to the conclusion of these investigations and court actions would be premature. Consequently, I will refrain from drawing any conclusions until all of these investigations are concluded.
Having said that, I look forward to hearing the testimony of Mr. Falcon from OFHEO and Mr. Baumann of Freddie Mac.
OPENING STATEMENT OF
HEARING ON THE REPORT OF THE
WEDNESDAY, JANUARY 21, 2004
Mr. Chairman, we meet for the first time this year for the purpose of reviewing the special examination report issued and the consent agreement reached in December by the Office of Federal Housing Enterprise Oversight regarding Freddie Mac's financial restatement of more than $5 billion. The report makes serious revelations about how insufficient accounting, audit and internal controls and a troubling culture nurtured by top managers resulted in an environment that led to significant earnings management at Freddie Mac. The consent decree also requires Freddie Mac to adopt numerous remedial reforms to prevent a similar situation in the future.
One year ago, Freddie Mac first revealed that it would delay the release of its 2002 accounting reports pending the completion of a restatement of its financial records for earlier years. This announcement raised considerable concerns for those who monitor GSEs. It also began a period of intense scrutiny of the company by its regulators, lawmakers, and the press.
Six months later, Freddie Mac's board announced an unexpected management shakeup. This change in corporate leadership produced even greater concerns among those with knowledge of GSEs. For example, I observed that government-sponsored enterprises “with their public responsibilities and private capital have a special obligation to operate fairly, safely and soundly." I continue to believe that today. The management at these entities must ensure that they produce accounting statements that reflect their real financial condition.
At the time, I also said that Freddie Mac must “maintain sufficient capital reserves, adopt prudent management reforms, expedite completion of its earnings restatements, and employ appropriate accounting techniques” to prevent similar problems in the future. I suspect that before we complete today's hearing we will discuss each of these issues in great depth. We have a responsibility to study these matters and ensure that the company follows its statutory mandate to operate in a safe and sound manner.
Additionally, the financial reporting problems at Freddie Mac renewed efforts by some to modify GSE regulation. As I said at our very first hearing on the oversight of governmentsponsored enterprises in March 2000, “we need to have strong, independent regulators that have the resources they need to get the job done.” I continue to support strong GSE regulation. A strong regulator will protect the continued viability of our capital markets and promote confidence in Freddie Mac and Fannie Mae. It will also insure taxpayers against systemic risk and expand housing opportunities for all Americans.
Today, more than 68 percent of Americans own the homes in which they live. Government-sponsored enterprises have contributed greatly to this accomplishment. Because our housing marketplace is one of the most important sectors in our persistently struggling economy, we must also tread carefully in our forthcoming debates over any legislation to modify the regulation of GSES.
In closing, Mr. Chairman, I commend you for your sustained leadership in these matters and for convening this timely hearing. OFHEO's report and consent agreement merit our full attention. Hence, I urge my colleagues to give these matters the careful study that they deserve.
The Honorable Bob Ney
Hearing on OFHEO's Report on Freddie Mac
Committee on Financial Services
Wednesday, January 21, 2004
I want to welcome our two witnesses this morning. I look forward to hearing their testimony on the Office of Federal Housing Enterprise Oversight's (OFHEO) December report on the Special Examination of Freddie Mac and the current state of GSE regulatory oversight.
OFHEO's recent report on the activities asserts that there were insufficient accounting, audit and internal controls in place to prevent earnings manipulation. The lack of control displayed by the internal accounting executives at Freddie is deeply troubling. The blatant manipulation of earnings to project consistent growth has turned the mortgage companies into ideal representatives of necessary regulatory reform.
As Chairman of the Housing Subcommittee, I have a keen interest in the strength of our secondary mortgage market. Fannie Mae and Freddie Mac were chartered by Congress to create a secondary trading market and to improve the functioning of home mortgage markets; as a result, the United States mortgage and credit markets are second to none.
A strong, vibrant housing market also is vital to the health of our economy. Recent studies have found that housing accounted for more than one-third of economic growth from 2000-2002. Many observers, including Federal Reserve chairman Alan Greenspan, have noted that refinancing provided crucial support to the economy during the past recession by enabling homeowners to reduce their debt burdens and maintain adequate levels of consumer spending by tapping into the equity of their homes.
There can be no doubt that we must take steps to strengthen the GSE by establishing a new 'world class' regulator. With the growing presence of GSEs in the capital markets and the possible risks they could pose to the financial system, reconstituting the safety and soundness regulator would be a prudent step. Such a move would send an important signal that we understand the importance of GSEs and the secondary mortgage markets in maintaining a stable economy.
As I have said before, I believe that there are several important components that are integral to providing enhanced regulation for GSEs while not impeding their ability to support affordable housing in America. Everyone agrees that strong regulatory oversight is critical to maintaining public confidence in this remarkable