FOR IMMEDIATE RELEASE PRESS RELEASE #28 SUBCOMMITTEE ON OVERSIGHT COMMITTEE ON WAYS AND MEANS U.S. HOUSE OF REPRESENTATIVES 1105 LONGWORTH HOUSE OFFICE BLDG. WASHINGTON, D.C. 20515 TELEPHONE: (202) 225-5522 THE HONORABLE J. J. PICKLE (D., TEXAS), CHAIRMAN, ANNOUNCES A HEARING ON GOVERNMENT-SPONSORED ENTERPRISES The Honorable J. J. Pickle (D., Texas), Chairman of the Subcommittee on Oversight, Committee on Ways and Means, U.S. House of Representatives, announced today that the Subcommittee will conduct a hearing to review reports to the Congress by the Department of the Treasury and the U.S. General Accounting Office on various issues relating to Federal debt management and government-sponsored enterprises. The hearing is scheduled for Monday, May 14, 1990 beginning at 2:00 p.m., in the main Committee hearing room, 1100 Longworth House Office Building. Witnesses representing the Department of the Treasury and the U.S. General Accounting Office have been invited to present testimony at the hearing. Other interested parties are encouraged to submit written testimony to be included in the printed record of the hearing. In an In announcing this hearing, Chairman Pickle stated: "Over the past several years, Committee Members have raised the concern that manipulation of Federal credit activities is becoming an inefficient, backdoor way of Federal spending and borrowing. attempt to better understand the impact of such off-budget Federally-assisted borrowing, the Congress, as part of the Financial Reform, Recovery, and Enforcement Act of 1989, required the Department of the Treasury and the U.S. General Accounting Office to make reports on the financial safety and soundness of government-sponsored enterprises and their impact on Federal borrowing. "Analyses from the Department of the Treasury and the Congressional Budget Office indicate that government-sponsored enterprises have issued over $800 billion in outstanding loans or guarantees which have the implicit backing of the Federal Government, and that government-sponsored enterprise borrowing is estimated to make up nearly a third of all Federal or Federallyassisted borrowing activity in fiscal year 1991. This is a major allocation of credit in our national economy, and yet little, if any, attention has been given to the costs incurred by the Federal Government due to the risks it bears as a result of the activities of government-sponsored enterprises. Nonetheless, as a result of the savings and loan crisis and other recent situations, all Americans have become aware that Federal guarantees, whether they be implicit or explicit, have very real costs to the Treasury and the taxpayer. "It is my expectation that these reports to the Congress from the Department of the Treasury and the U.S. General Accounting Office, and the testimony these agencies will present to the Subcommittee, will begin to provide the Congress, the Administration, and the public with the information and insight needed to properly utilize and manage Federal borrowing." DETAILS FOR SUBMISSION OF WRITTEN COMMENTS: Persons submitting written comments for the printed record of the hearing should submit six (6) copies by the close of business, Friday, June 1, 1990, to Robert J. Leonard, Chief Counsel, Committee on Ways and Means, U.S. House of Representatives, room 1102 Longworth House Office Building, Washington, D. c. 20515. -2 FORMATTING REQUIREMENTS: Each statement presented for printing to the Committee by a witness. any written statement or exhibit submitted for the printed record or any written comments in response to a request for written comments must conform to the guidelines listed below. Any statement or exhibit not in compliance with these guidelines will not be printed, but will be maintained in the Committee files for review and use by the Committee. 1. All statements and any accompanying exhibits for printing must be typed in single space on legal-size paper and may not exceed a total of 10 pages. 2. Copies of whole documents submitted as exhibit material will not be accepted for printing. Instead, exhibit material should be referenced and quoted or paraphrased. All exhibit material not meeting these specifications will be maintained in the Committee files for review and use by the Committee. 3. Statements must contain the name and capacity in which the witness will appear or, for written comments. the name and capacity of the person submitting the statement, as well as any clients or persons, or any organization for whom the witness appears or for whom the statement is submitted. 4. A supplemental sheet must accompany each statement listing the name. full address, a telephone number where the witness or the designated representative may be reached and a topical outline or summary of the comments and recommendations in the full statement. This supplemental sheet will not be included in the printed record. The above restrictions and limitations apply only to material being submitted for printing. Statements and exhibits or supplementary material submitted solely for distribution to the Members, the press and public during the course of a public hearing. may be submitted in other forms. Chairman PICKLE. The Chair will ask our guests to please take their seats, and the committee will come to order. The purpose of this hearing by the Subcommittee on Oversight is to receive reports from the Department of the Treasury and the U.S. General Accounting Office, based on their studies of the various risks associated with the operations of Government-sponsored enterprises, the so-called GSE's. This is the second hearing by the subcommittee in connection with these studies, and one of a series of hearings held by members of the Committee on Ways and Means in connection with the use of GSE's to finance Federal obligations or to further Federal policy in general. I am glad to say that we have with us today Congressman Bill Gradison, who is a coauthor of the resolution we passed last year. Recently, we have given a great deal of attention to these GSE's because they have become a fundamental part of the spending and borrowing policies of the Federal Government. Controlling the Federal budget is the most intractable problem the Federal Government has faced over the past decade. It has been so difficult to balance our Federal budget that we have had to pass a law, the Gramm-Rudman-Hollings Act, to compel us to do our jobs. And still, every year, the Congress and the administration agonize over the difficult choices which must be made. This year is no exception. Even as we meet, the leaders of Congress and the administration are holding budget summit meetings in an effort to keep the budget process on track. Given all this concern about Federal spending and borrowing, it is surprising to me that so little attention is paid to the operations of GSE's. The fact of the matter is that GSE's represent the fastestgrowing category of Federal credit assistance. They currently have issued over $800 billion in outstanding loans or guarantees, up from about $40 billion in 1970. The rate of growth in GSE obligations is nearly three times that of direct Federal borrowing over the past 20 years. Today, GSE borrowing represents about 33 percent of all Federal or federally assisted borrowing activity. Further, there is no end in sight to this mushrooming volume of GSE borrowing. To the contrary, as a result of the passage of the Gramm-Rudman-Hollings Act, and our attempt to impose some budget discipline on direct Federal expenditures, there is a heightened interest in using off-budget GSE's. Since the beginning of 1987, five new GSE's have been created. Two of them, FICO and REFCORP, were to pay for the savings and loan fiasco, and two others, FAC and Farmer Mac, were created in connection with the bailout of the farm credit system. Proposals have also been advanced to create several other new GSE's. Last year, the administration gave serious consideration to chartering a GSE to raise tens of billions of working capital which the Resolution Trust Corporation believes will be needed during the course of resolving the savings and loan crisis, and Congress is giving consideration to creating other GSE's, to provide credit for small business venture capital and earthquake reinsurance. Now, we ought to be honest and open and want to say also that GSE's can and do serve as a very useful source of needed credit, so we should recognize that. And yet, in spite of the enormous volume of explosive growth in the issues of GSE obligations and the cre ation of new GSE's, there have been to date little or no analysis of the risks of these activities to the Federal Treasury, and ultimately, the taxpayers. Perhaps those risks are remote. Perhaps my concerns are overstated. Perhaps. But, when the Federal Government has in effect cosigned an open-ended note which is over $800 billion and climbing, it is not unreasonable to ask for a little accountability. The sad truth is that there has been little or no accountability here for a long time. Budget Director Darman has characterized the GSE liabilities as not being fully visible. He describes them as "like a hidden Pac Man waiting to spring forward to consume another line of resource dots in the budget maze.' The Congressional Budget Office has warned that, "the practice of neither measuring nor controlling the risks of GSE's could lead, if continued, to large and unanticipated Federal outlays." The General Accounting Office has, on several occasions, cautioned the Congress about the lack of effective oversight over the operation of GSE's. The Department of the Treasury has alerted us to the potential use of GSE's as a means of avoiding budget discipline, and the Gramm-Rudman-Hollings Act itself also noted that the potential losses associated with GSE's are not just theoretical possibilities. Throughout the 1980's, financial institutions have demonstrated the ability to lose vast amounts of money, and their creditors have repeatedly turned to the Federal Government for Federal assistance. The bailout of the farm credit system and, of course, the current Federal savings and loan disaster, should be sobering lessons to anyone who advocates allowing private institutions unfettered use of Federal credit. Taxpayers should not and will not be expected to pay for the wretched excesses and dismal failures of some of our private financial institutions. It appears to me that we have been amply warned regarding the potential risks and abuses of GSE's. Our challenge is to react appropriately to these warnings, and to avoid taking unnecessary risks. It is my hope these studies will provide the basis on which the Congress, administration and the GSE's can act to address these risks responsibly. Let me conclude with saying it is not my intention today to propose or support specific measures to reduce the risk associated with GSE's, but as we learn more about the risk they pose, I would expect that careful consideration be given to reform, which might better protect Treasury and the taxpayer. It seems to me that there are three areas are areas which ought to receive close attention, and they are disclosure, capital, and supervision. Disclosure to ensure that the Federal Government and the public financing market have timely information needed to correctly assess the risk. Capital to ensure that those that invest in and benefit from GSE's bear a commensurate share of the risk. Supervision to ensure the Federal Government, which is ultimately responsible for the condition of the American economy, has the ability to examine and control various GSE's as they are created, when their operation begins to involve excessive risk to the taxpayer. I do not know of any imminent crisis about to befall any GSE. But, I am here to tell you ignorance is not bliss, the time to gather information and ask hard questions is now, when we can limit our losses, and not after a disaster, when we can only fight about who must pay the piper. I am going to ask Mr. McGrath if he has any opening statement? Mr. MCGRATH. I do. Mr. Chairman, I am pleased to join you in opening our hearing on Government-sponsored enterprises. Last September, our subcommittee held its first hearing on GSE's. It was a real eye-opener. It showed that GSE's have over $800 billion of outstanding debt which is guaranteed implicitly by the Federal Government. A serious financial downturn could lead to GSE down the road to a failure, similar to the recent savings and loan collapse. The Federal Government and taxpayers would then be called upon to bail out the GSE in order to prevent the nationwide financial shock wave. Our last hearing surveyed the GSE landscape, and we asked a lot of questions, but we did not get a lot of answers. The Financial Institutions Reform, Recovery, and Enforcement Act of 1989 directed the Treasury to conduct several studies on the safety and soundness of GSE's. Today, we will receive the first Treasury Department study on GSE's. And hopefully will provide the answers to the questions which we raised last year. The recurring question is, what is the adequate level of core capital required by each GSE to protect the Federal Government from having to make good on its implicit guarantee of GSE net? The answer will vary from GSE to GSE, because each one has a different programmatic risk. The Treasury Department study should help us set the framework to develop the proper capital standards for each GSE. Mr. Chairman, in the past, the attitude toward GSE's was, if it ain't broke, don't fix it. That attitude may be good for lawn mowers, but not for GSE's, with an implicit claim on $800 billion of Federal taxpayer dollars. My fear is that when a disaster strikes, it may be too late to take effective preventive measures. Therefore, we should develop strong safeguards to assure the soundness of GSE financing operations now. Mr. Chairman, I look forward to learning the results of the Treasury Department's study on GSE. Thank you, Mr. Chairman. Chairman PICKLE. Thank you, Mr. McGrath. Mr. Gradison is the coauthor of the resolution which was embodied in part of the FIRREA legislation, and we are pleased to have him with us today. Mr. Gradison, would you like to make a statement? Mr. GRADISON. Thank you, Mr. Chairman. I am happy to join with you and Mr. McGrath at this hearing. I believe this is an important milestone and progress in ensuring adequate oversight not just by the Congress but also by the executive branch, most particularly the Treasury, in light of the rapid growth in the obligations of the GSE's. As I think about it, it seems to me that it is a fair analogy to suggest that Treasury's role in this situation should be that of a credit officer of a bank which is guaranteeing loans. |