[House Hearing, 107 Congress]
[From the U.S. Government Publishing Office]


 
                   TREASURY'S POLICY ON HOUSING GSE's
=======================================================================

                                HEARING

                               BEFORE THE

                            SUBCOMMITTEE ON
                    CAPITAL MARKETS, INSURANCE, AND 
                    GOVERNMENT SPONSORED ENTERPRISES

                                 OF THE

                              COMMITTEE ON
                           FINANCIAL SERVICES

                     U.S. HOUSE OF REPRESENTATIVES

                      ONE HUNDRED SEVENTH CONGRESS

                             SECOND SESSION

                               __________

                             JULY 16, 2002

                               __________

       Printed for the use of the Committee on Financial Services

                           Serial No. 107-75







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82-685                             WASHINGTON : 2002
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                 HOUSE COMMITTEE ON FINANCIAL SERVICES

                    MICHAEL G. OXLEY, Ohio, Chairman

JAMES A. LEACH, Iowa                 JOHN J. LaFALCE, New York
MARGE ROUKEMA, New Jersey, Vice      BARNEY FRANK, Massachusetts
    Chair                            PAUL E. KANJORSKI, Pennsylvania
DOUG BEREUTER, Nebraska              MAXINE WATERS, California
RICHARD H. BAKER, Louisiana          CAROLYN B. MALONEY, New York
SPENCER BACHUS, Alabama              LUIS V. GUTIERREZ, Illinois
MICHAEL N. CASTLE, Delaware          NYDIA M. VELAZQUEZ, New York
PETER T. KING, New York              MELVIN L. WATT, North Carolina
EDWARD R. ROYCE, California          GARY L. ACKERMAN, New York
FRANK D. LUCAS, Oklahoma             KEN BENTSEN, Texas
ROBERT W. NEY, Ohio                  JAMES H. MALONEY, Connecticut
BOB BARR, Georgia                    DARLENE HOOLEY, Oregon
SUE W. KELLY, New York               JULIA CARSON, Indiana
RON PAUL, Texas                      BRAD SHERMAN, California
PAUL E. GILLMOR, Ohio                MAX SANDLIN, Texas
CHRISTOPHER COX, California          GREGORY W. MEEKS, New York
DAVE WELDON, Florida                 BARBARA LEE, California
JIM RYUN, Kansas                     FRANK MASCARA, Pennsylvania
BOB RILEY, Alabama                   JAY INSLEE, Washington
STEVEN C. LaTOURETTE, Ohio           JANICE D. SCHAKOWSKY, Illinois
DONALD A. MANZULLO, Illinois         DENNIS MOORE, Kansas
WALTER B. JONES, North Carolina      CHARLES A. GONZALEZ, Texas
DOUG OSE, California                 STEPHANIE TUBBS JONES, Ohio
JUDY BIGGERT, Illinois               MICHAEL E. CAPUANO, Massachusetts
MARK GREEN, Wisconsin                HAROLD E. FORD, Jr., Tennessee
PATRICK J. TOOMEY, Pennsylvania      RUBEN HINOJOSA, Texas
CHRISTOPHER SHAYS, Connecticut       KEN LUCAS, Kentucky
JOHN B. SHADEGG, Arizona             RONNIE SHOWS, Mississippi
VITO FOSELLA, New York               JOSEPH CROWLEY, New York
GARY G. MILLER, California           WILLIAM LACY CLAY, Missiouri
ERIC CANTOR, Virginia                STEVE ISRAEL, New York
FELIX J. GRUCCI, Jr., New York       MIKE ROSS, Arizona
MELISSA A. HART, Pennsylvania         
SHELLEY MOORE CAPITO, West Virginia  BERNARD SANDERS, Vermont
MIKE FERGUSON, New Jersey
MIKE ROGERS, Michigan
PATRICK J. TIBERI, Ohio

             Terry Haines, Chief Counsel and Staff Director
            Subcommittee on Capital Markets, Insurance, and
                    Government Sponsored Enterprises

                 RICHARD H. BAKER, Louisiana, Chairman

ROBERT W. NEY, Ohio, Vice Chairman   PAUL E. KANJORSKI, Pennsylvania
CHRISTOPHER SHAYS, Connecticut       GARY L. ACKERMAN, New York
CHRISTOPHER COX, California          NYDIA M. VELAZQUEZ, New York
PAUL E. GILLMOR, Ohio                KEN BENTSEN, Texas
RON PAUL, Texas                      MAX SANDLIN, Texas
SPENCER BACHUS, Alabama              JAMES H. MALONEY, Connecticut
MICHAEL N. CASTLE, Delaware          DARLENE HOOLEY, Oregon
EDWARD R. ROYCE, California          FRANK MASCARA, Pennsylvania
FRANK D. LUCAS, Oklahoma             STEPHANIE TUBBS JONES, Ohio
BOB BARR, Georgia                    MICHAEL E. CAPUANO, Massachusetts
WALTER B. JONES, North Carolina      BRAD SHERMAN, California
STEVEN C. LaTOURETTE, Ohio           GREGORY W. MEEKS, New York
JOHN B. SHADEGG, Arizona             JAY INSLEE, Washington
DAVE WELDON, Florida                 DENNIS MOORE, Kansas
JIM RYUN, Kansas                     CHARLES A. GONZALEZ, Texas
BOB RILEY, Alabama                   HAROLD E. FORD, Jr., Tennessee
VITO FOSSELLA, New York              RUBEN HINOJOSA, Texas
JUDY BIGGERT, Illinois               KEN LUCAS, Kentucky
GARY G. MILLER, California           RONNIE SHOWS, Mississippi
DOUG OSE, California                 JOSEPH CROWLEY, New York
PATRICK J. TOOMEY, Pennsylvania      STEVE ISRAEL, New York
MIKE FERGUSON, New Jersey            MIKE ROSS, Arizona
MELISSA A. HART, Pennsylvania
MIKE ROGERS, Michigan







                            C O N T E N T S

                              ----------                              
                                                                   Page
Hearing held on:
    Tuesday July 16, 2002........................................     1
Appendix:
    Tuesday July 16, 2002........................................    41

                                WITNESS
                         Tuesday July 16, 2002

Fisher, Hon. Peter R., Under Secretary for Domestic Finances, 
  Department of the Treasury.....................................     9

                                APPENDIX

Prepared statements:
    Ford, Hon. Harold E. Jr.,....................................    42
    Gillmor, Hon. Paul E.........................................    43
    Jones, Hon. Stephanie T......................................    44
    Kanjorski, Hon. Paul E.......................................    46
    Paul, Hon. Ron...............................................    47
    Waters, Hon. Maxine..........................................    59
    Fisher, Hon. Peter R.........................................    51


                   TREASURY'S POLICY ON HOUSING GSE's

                              ----------                              


                         TUESDAY, JULY 16, 2002

             U.S. House of Representatives,
        Subcommittee on Capital Markets, Insurance 
              and Government Sponsored Enterprises,
                           Committee on Financial Services,
                                                   Washington, D.C.
    The subcommittee met, pursuant to call, at 2:05 p.m., in 
Room 2128, Rayburn House Office Building, Hon. Richard H. Baker 
[chairman of the subcommittee] presiding.
    Present: Representatives Baker, Ney, Shays, Paul, Miller, 
Hart, Kanjorski, Bentsen, Sandlin, Maloney of Connecticut, 
Jones, LaFalce, Sherman, Meeks, Moore, Hinojosa, Lucas of 
Kentucky, and Shows.
    Also Present: Representative Maloney of New York.
    Chairman Baker. I would like to call this meeting of the 
Capital Markets Subcommittee meeting to order. This is the 
first hearing of this session with regard to the issue of GSE 
governance, and we are here today to receive testimony from the 
Department of Treasury with regard to their recommendations.
    In a relatively unexpected development last Friday, the 
GSE's have announced a willingness to work with the SEC to 
comply for the first time with the 1934 act registration 
requirements. This is an important step toward important 
progress, and I am sure that the announcement came without 
consideration of this committee hearing, and was hammered out 
after lengthy discussions between all affected parties. Even 
though I just heard about the plan late in the afternoon before 
the day it was to be announced, I found it to be a very 
positive step.
    As to the elements of the plan, it is clear that this 
appears, at least from the GSEs' perspective, to be somewhat of 
a modest improvement. They have over time continually expressed 
that they not only meet all current reporting standards for 
other corporations, but in fact exceed those requirements. 
Assuming their claim is valid, this announcement may not result 
in any significant new data flowing to the markets. If that 
claim is proven to be without foundation, it may provide 
shareholders and others needed information to make appropriate 
judgments.
    On the other hand, there appears to be agreement between 
the GSEs and regulators that conformity with the 1933 act is 
not found to be advisable. I think that is unfortunate, as 
information clearly indicates the growth of GSE debt has been 
significant. Failing to disclose the manner in which mortgage-
backed securities are constructed, I think, could be 
troublesome especially since it is now necessary for triple-A-
rated private mortgage labeled securities to make such 
disclosures.
    In essence, the GSEs have agreed to standards of disclosure 
that I think is a positive change, acknowledging that the 
current regulatory system does need additional fine-tuning. But 
at the end of the day, it is my understanding that before any 
other action may be recommended by any regulator, more study 
may be required.
    One can only imagine my enthusiasm--after waiting on OFHEO 
for an 11-year work product to be released next week as the 
principal regulator to tell us about the GSEs' capital 
adequacy--how excited I was to contemplate additional study. In 
the last 2 years since the previous Treasury administration 
testified before this committee, I have introduced two 
different comprehensive reform proposals. The committee has had 
nine hearings, one roundtable at the suggestion of Mr. 
Kanjorski, plus numerous comments from the GAO, CBO, and 
others. All have concluded that some meaningful regulatory 
reform is appropriate.
    It is my intention in the time we have available today to 
understand what, if any, new direction that the Treasury may be 
considering, especially in knowledge of the tremendous growth 
of the debt issuances of these agencies. I look forward to 
exploring the future of regulatory structuring, understanding 
why registration under the 1933 act is not advisable, and, of 
course, eagerly awaiting OFHEO to appear next week to hear the 
long-awaited stress test results.
    Chairman Baker. Mr. Kanjorski.
    Mr. Kanjorski. Mr. Chairman, I would like to yield to Mrs. 
Jones because she is in another hearing that has got some 
priorities.
    Chairman Baker. Mrs. Jones.
    Mrs. Jones of Ohio. Mr. Kanjorski, Mr. Chairman, thank you 
very much to my colleagues.
    And Mr. Fisher, I don't mean any disrespect but I have 
another hearing I am involved in, but I wanted to be on the 
record in this hearing; so let me go very quickly to my opening 
statement.
    This committee has previously and exhaustively examined the 
government-sponsored enterprises, Fannie Mae and Freddie Mac. 
While recent events have underscored the need for reform in 
financial firms that operate without any financial regulator, 
Fannie Mae and Freddie Mac provide a strong example of sound 
reporting and management controls. These controls provide a 
measure of safety and soundness that is unmatched by 
unregulated financial firms. I am on the record as opposing 
efforts to disrupt housing markets by changing the GSEs' 
congressional charter and requiring the registration of their 
MBS securities. What Fannie Mae and Freddie Mac have achieved 
together with the administration is a nonlegislative way to 
assure their investors and policy-makers once and for all that 
their disclosures meet the same standard to which other 
publicly held companies are held. Their goal was to improve 
investor confidence without limiting their ability to fulfill 
the vital mission Congress has given them.
    Let me take a look for a moment just at what disclosure 
means. The only distinction that we have here is whether or not 
the securities are registered. This is an important 
distinction. The SEC had 110 issuances during the last year. 
Fannie Mae had 1,500 debt issuances and 40,000 mortgage-backed 
security issuances. It is not a small matter to register all of 
those securities. Of the 40,000, almost all of them were sold 
in a forward market prior to the time that the mortgages in 
them were identified, what they call their TBA or ``to be 
announced'' market.
    When you go to get a mortgage and you lock the rate, that 
means that your lender is selling forward your mortgage. That 
is why they can tell you, quote, ``We will close your loan in 2 
months and it is going to be 7 percent.'' they are not 
guessing. They actually sold that mortgage ``forward,'' 
unquote.
    The last point is critical because there isn't a ``to be 
announced'' market in the registration world, because you can 
only register after you know exactly what the mortgages are.
    On Friday, July 12, Fannie Mae and Freddie Mac announced 
that they would voluntarily register their common stock under 
the Securities and Exchange Act of 1934. Voluntarily register. 
The result will require Fannie and Freddie to comply with the 
act's periodic disclosure requirements. Once these filings are 
made, Fannie and Freddie will be bound as a matter of Federal 
law to continue to make their filings.
    I will leave the rest of my opening statement for the 
record, and I hope I am going to be able to get back and have 
an opportunity, Mr. Chairman, to ask some questions on the 
break from the other hearing. I thank you both for the 
opportunity to be heard out of order and I yield the balance of 
my time.
    Chairman Baker. Thank you Mrs. Jones.
    [The prepared statement of Hon. Stephanie Tubbs Jones can 
be found on page XX in the appendix.]
    Chairman Baker. Mr. Shays.
    Mr. Shays. Mr. Chairman, I want to thank you for having 
this hearing. I have been eager to have you have this hearing 
for months and months and months--.
    Chairman Baker. I am aware.
    Mr. Shays. --because I just admire so much your focus on 
this very important question of Fannie Mae and Freddie Mac and 
why they don't have to do business like everyone else; why they 
would be exempt from just basic disclosures; and why we would 
be content to say, well, if they do it voluntarily, that is 
good enough. I salute the Treasury Department and all the 
parties for moving forward with having registration under the 
1934 act. I am eager to know what that means, and I am eager to 
see how it would be implemented and who would implement it. But 
I also know that this kind of moves us away from the soundness 
issue that was really the thrust of your focus, and so I am 
hoping it won't be just two hearings that we have and that we 
will have others.
    But thank you for having this hearing. I welcome our 
witness. He has a great reputation and I look forward to 
hearing from him.
    Chairman Baker. Thank you, Mr. Shays. Chairman Baker. Mr. 
Kanjorski.
    Mr. Kanjorski. Mr. Chairman, thank you for the opportunity 
to comment before we begin today's hearing to learn more about 
the Bush administration's views and policies regarding the 
housing government-sponsored enterprises or GSEs.
    As you know, Mr. Chairman, I am one of the few remaining 
members of this committee who participated in the entire 
congressional battle to resolve the savings and loan crisis. I 
am therefore acutely aware of the need to protect taxpayers 
from risk. It is in the public's interest that we ensure that 
the GSEs, like Fannie Mae, Freddie Mac, and the Federal Home 
Loan Banks, continue to operate safely and soundly. We can best 
achieve this goal by pursuing a three-pronged supervisory 
approach that includes regular congressional oversight of, 
continued effective government regulation over, and increased 
market discipline for the housing GSEs. We are from my 
perspective making continued progress in each of these areas.
    In particular I expect we will spend considerable time 
today discussing the disclosure practices of the GSEs. Last 
week, Fannie Mae and Freddie Mac declared that they would 
voluntarily register their common stock with the Securities and 
Exchange Commission. As a result of this announcement, the two 
GSEs will file public financial disclosures with the Securities 
and Exchange Commission. Their decision is virtually 
irrevocable.
    The two GSEs, as I understand, developed this new policy 
after consulting with officials at the Treasury Department, the 
Securities and Exchange Commission, and the Office of Federal 
Housing Enterprise and Oversight. These disclosures, in my 
view, will help to reassure investors by providing them with 
accurate, timely, and useful information. These public filings 
should also help to strengthen the housing marketplace.
    Throughout our lengthy deliberations over GSE policy during 
the last two-and-a-half years, I have consistently noted that 
we must move forward cautiously in this area so as to ensure 
that we maintain the delicate balance that has led to more than 
67 percent of American families owning their homes. On at least 
one occasion, however, our committee's actions discouraged 
investors and raised homeownership costs. As we proceed today, 
we must renew our efforts to ensure that we do not repeat that 
mistake.
    Moreover, the housing marketplace has remained the most 
vibrant sector of our Nation's struggling economy during the 
last 18 months. We must therefore move carefully, deliberately, 
and objectively in examining these issues.
    In closing, Mr. Chairman, I continue to share your desire 
to conduct effective oversight over the housing GSEs and to 
ensure that we maintain an appropriate and sufficiently strong 
supervisory system for them. Accordingly, I look forward to 
hearing from our distinguished witness about the Bush 
administration's views on these matters. Thank you.
    Chairman Baker. Thank you, Mr. Kanjorski.
    [The prepared statement of Hon. Paul E. Kanjorski can be 
found on page XX in the appendix.]
    Chairman Baker. Mr. Paul.
    Mr. Paul. Thank you, Mr. Chairman. I want to thank the 
chairman for dealing with this subject. The GSEs need to be 
addressed. I believe they play a significant role in the 
ongoing housing bubble. Unfortunately, I do not see the 
solution on the horizon, additional regulations will not solve 
this problem, so I am not leaning in that direction. I have 
recently introduced a bill called the Free Housing Market 
Enhancement Act, which would suggest that we should move toward 
a freer market rather than an overly regulated market.
    The two main things my bill would do--and I would like to 
get some discussion later, because my written statement is 
detailed and I will submit that for the record--but the two 
major points I want to make is that the GSEs have had this 
tremendous advantage over the private markets because of this 
line of credit, as well as the Fed's ability to monetize GSE 
debt. My bill would eliminate both. It would take away the line 
of credit and would also prohibit the Fed from buying these 
debt instruments and using them as collateral in the monetary 
system, because this has done nothing more than say this debt 
is much more valuable than it really is, even to the point 
where foreign central banks now own well over $120 billion of 
these GSE securities. I think that has done a lot to encourage 
the housing bubble, with artificially low interest rates, and 
that mere tinkering with some regulations I don't think will 
solve the problem.
    And as I mentioned, I will submit my written statement for 
the record and I yield back the balance of my time.
    Chairman Baker. Thank you, Mr. Paul.
    [The prepared statement of Hon. Ron Paul can be found on 
page XX in the appendix.]
    Chairman Baker. Mr. LaFalce.
    Mr. LaFalce. Thank you, Mr. Chairman. And I again 
congratulate you. You have had a number of hearings on this 
issue and I think they have been productive and there are so 
many people I want to give a little pat on the back to. First 
of all, Treasury; Mr. Fisher in particular. I think you took 
the lead in this issue and you got an excellent result. I 
certainly want to commend both OFHEO and the SEC. I think you 
have come up with maintenance of the jurisdiction of OFHEO, but 
new jurisdiction for the SEC that serves the public good.
    And I also want to commend Fannie Mae and Freddie Mac for 
going along with this voluntarily or being dragged along 
voluntarily, as the case may be, but I want to commend you for 
stepping up to the plate and seeing that this was a public 
interest action. I also think it is something that should serve 
as a model for the other GSEs. There is no reason why all GSEs, 
even those who were not publicly traded, shouldn't be following 
suit, and I would encourage Treasury to encourage other GSEs to 
follow suit.
    Now, with respect to the issue of mortgage-backed 
securities, I suppose you can never make everybody happy, 
especially the editors of the Wall Street Journal, but I think 
if you look from a prudential perspective, you have probably 
gone as far as you should at this stage of the game, and you 
wisely decided to study that issue.
    I don't think that is inappropriate. In fact, I think it is 
most appropriate, and I don't prejudge that issue one way or 
the other, but I think a study of its ramifications should 
precede any decision. And again I commend the Treasury for that 
perspective. I thank the Chair.
    Chairman Baker. Thank you Mr. LaFalce.
    Chairman Baker. Mr. Ney.
    Mr. Ney. Thank you, Mr. Chairman. I want to thank you, Mr. 
Chairman, for holding what I think is an important hearing and 
for all the previous hearings that you have held on these 
subjects because you have established, obviously, a very 
lengthy track record of diligence in overseeing our Nation's 
government-sponsored enterprises, and you need to be credited 
for it.
    I want to make a couple points, and I have a lengthy 
statement, so, without objection, I would like to place it in 
the record.
    Chairman Baker. Without objection.
    Mr. Ney. In recent months, no doubt this committee has held 
a number of hearings that demonstrated how vital it is for 
corporations to be transparent and open, and we know that from 
WorldCom and a lot of other cases in the recent months that we 
can cite. President Bush highlighted this as part of his 
comprehensive corporate governance plan.
    The Financial Services Committee passed H.R. 3763, which 
would increase corporate accountability and transparency, to 
which I think no one objects. And also I would like to that 
state Friday's announcement was the second time in less than a 
month that Fannie and Freddie have stepped up to the plate and 
I think are responding with a lot of leadership ability to what 
the President also has stated that he would like to see. And 
with their commitment to provide more than $700 billion for 
minority home ownership, those companies would be a vital part 
in closing the home ownership gap which is so important to many 
members of this committee.
    I am for transparency, but also I want to emphasize that 
because of Fannie Mae and Freddie Mac's critical role in the 
United States housing finance system, I don't believe the 
Congress supports repealing the SEC registration exemption. 
That is my opinion. I am sure some people would disagree with 
that statement, obviously. I think the right steps have been 
taken.
    I commend you again, Mr. Chairman, and I would like to 
submit the rest of my statement for the record. Thank you.
    Chairman Baker. Thank you, Mr. Ney.
    Chairman Baker. Mr. Bentsen.
    If I may interrupt, Mr. Bentsen, I need to put Mr. Ney in 
the chair for a moment, and I will return in a moment.
    Mr. Bentsen. Thank you, Mr. Chairman.
    And, Mr. Fisher, thank you for being here today. I will be 
brief. I want to make a couple of observations. Number one, I 
am eager to hear the administration's position with respect to 
GSEs and disclosure, particularly Fannie Mae and Freddie Mac. 
This is a long-running story with respect to those who like 
what the GSEs are doing and those who don't.
    I would make one observation to you, that when your 
predecessor spoke before this panel, I believe it was 2 years 
ago, with respect to the then-Clinton administration's 
position, his candor and bluntness--which was appreciated--also 
led to one of the largest drops in the value of the GSE stock I 
think in one day. So you have to sort of weigh what your 
approach is going to be, but I think we would like to hear what 
exactly the administration's position is with the future of the 
GSEs.
    The other thing--I would make an observation and I may ask 
you to comment on this later. And that is that in the last 
year, what I would consider some of the hype from the opponents 
of the GSEs, that they were rising in volume of debt and soon 
would supplant the Treasury market as the standard bearer debt, 
because we were going to pay off all the national debt and 
therefore increase the potential risk of the GSEs, has 
apparently gone by the boards; because in our meeting with your 
colleague, Mr. Daniels, this morning before the Budget 
Committee, he explained to us that we would have plenty of 
public debt outstanding for the forseeable future, and in fact 
you may be wanting to bring back the 30-year bond the way 
things are going.
    But in any event, we are happy to have you here today and 
we look forward to talking to you in great detail with respect 
to these two institutions. I yield back.
    Mr. Ney. [Presiding.] The gentleman yields back.
    Mr. Sandlin.
    Mr. Sandlin. Thank you, Mr. Chairman. Mr. Chairman and 
ranking member Kanjorski, I commend you for holding this 
important hearing today to ascertain for the first time the 
Bush administration's position regarding housing GSEs.
    Mr. Fisher, I particularly appreciate your appearance 
before our subcommittee today and look forward to hearing your 
testimony.
    As we all know, Congress chartered Fannie Mae and Freddie 
Mac in 1938 and 1970 respectively, with the goal of increasing 
the supply of money available for low- and middle-income 
families to buy homes. Over the years, Congress' goal of 
creating a healthy and stable secondary mortgage market has led 
to the creation and growth of the strongest housing market in 
the world. Over the past year, some economists and financial 
analysts have asserted that our country's strong housing market 
has prevented our economy from slipping into a full-scale 
recession. At the very least, it is safe to say that without an 
active secondary mortgage constant, which ensures that banks 
and other lending institutions have a constant supply of money 
to lend home buyers, our economy would not be performing as 
well as it is today.
    Mr. Fisher, I will be particularly interested in hearing 
the administration's position on legislative attempts to repeal 
the congressional charters on Fannie Mae and Freddie Mac. I 
believe that efforts to repeal the GSEs' charters would serve 
only to increase uncertainty in our housing markets, which is 
dangerous in good economic times and it is potentially 
devastating during our Nation's current economic situation. As 
our country has clearly witnessed over the last several months, 
however, accurate financial disclosure and transparency is 
essential to the efficient functioning of our capital markets.
    To that end, I applaud Fannie Mae and Freddie Mac's recent 
announcement in conjunction with the Treasury Department, the 
SEC, and the Office of Federal Housing Enterprise Oversight, 
that they will submit voluntarily to section 12(g) disclosure 
requirements of the SEC Act of 1934.
    While Fannie Mae and Freddie Mac have voluntarily disclosed 
their financial statements with their Federal regulator for 
several years, voluntary registration of their common stock 
with the SEC will provide additional reassurance to the 
investors if Fannie Mae and Freddie Mac are financially sound. 
Fannie Mae and Freddie Mac's recent voluntary announcement in 
continuing good-faith efforts to increase transparency 
precludes the need for Federal legislation to accomplish that 
very goal.
    Mr. Fisher, I appreciate all of your hard work with Fannie 
Mae and Freddie Mac in their efforts to disclose their 
financial statements with SEC, and I look forward to the 
administration's continued role in assuring affordable housing 
for all Americans.
    I yield back the balance of my time, Mr. Chairman. Thank 
you.
    Mr. Ney. Thank you.
    Mr. Ney. Mr. Sherman.
    Mr. Sherman. Mr. Chairman, thank you for holding these 
hearings, although our subcommittee could be engaged also in 
important work. In looking at the corporate calamities of the 
last few months at the full committee level, have gone right 
from Enron to WorldCom and haven't had enough time to look at 
Quest, Xerox, and some of the others. This means some major 
corporate leaders have not had an opportunity to explore their 
fifth amendment rights, and perhaps this subcommittee would 
want to explore those parts of this corporate debacle that the 
full committee has not had a chance to deal with.
    Looking at these two GSEs, it is vitally important that the 
administration understand, demonstrate, its understanding and 
appreciation for the role that the housing GSEs play in our 
economy and the fact that housing right now is kind of the sole 
ray of hope as we try to pull ourselves out of this economic 
downturn.
    This subcommittee has a long and exhaustive history of 
oversight of Fannie Mae and Freddie Mac. In the course of these 
hearings over the past 2 years, we have learned an awful lot 
about these GSEs. Their announcement on Friday to voluntarily 
register their common stock is consistent with many of the 
things they have undertaken in an effort to be responsive on 
policy issues, the latest being Congress and the President's 
role for increased corporate accountability, including 
voluntary initiatives undertaken by these companies in October 
of 2000 and the recent completion of the risk-based capital 
role by the regulator, the OFHEO.
    Now they are going to register with the SEC, which begs the 
question of all of the issues that we have dealt with there, 
the latest being stock options, and whether those stock options 
would be expensed. Right now, we have the absurd system where 
the incredibly timid FASB says that expensing stock options is 
the preferred approach but we won't make anybody do it. And now 
a corporation to be commended, Coke, has agreed to take the 
preferred approach, creating a circumstance where every 
American can compare Coke with Pepsi. But investors will not be 
able to compare Coke with Pepsi, because we have got the 
preferred accounting rule and then the widely used accounting 
rule.
    My hope is that these two GSEs will disclose what their 
earnings per share would be under both methods, so that 
earnings per share could be compared with both those that are 
following the most widely used approach and those that are 
following the better approach, which begs the question: What is 
generally accepted accounting principles when this Congress has 
not yet compelled the use of best accounting principles, namely 
the expensing of stock options?
    I also want to point out that some critics of Fannie Mae 
and Freddie Mac have suggested that they be called upon to 
register their mortgage-backed securities and their debt, and I 
hope in the course of these hearings to get the information 
necessary to evaluate that issue. However, we should not be 
pushing for anything that slows the process by which capital is 
accumulated and made available to home buyers, that being so 
important to our economy, particularly at this time.
    I yield back.
    Mr. Ney. The time of the gentleman has expired. Mr. Lucas.
    Mr. Lucas of Kentucky. I am just looking forward to Mr. 
Fisher's testimony. Thank you.
    Mr. Ney. I thank the gentleman.
    Mr. Ney. Mr. Maloney.
    Mr. Maloney. I thank the gentleman.
    Mr. Ney. We will proceed now to testimony. Thank you. Mr. 
Fisher.

  STATEMENT OF PETER R. FISHER, UNDER SECRETARY FOR DOMESTIC 
            FINANCE, U.S. DEPARTMENT OF THE TREASURY

    Mr. Fisher. Thank you, Mr. Chairman, Representative 
Kanjorski, and members of the committee. I appreciate this 
opportunity to provide the administration's views on 
government-sponsored enterprises in general, and on H.R. 4071, 
the Uniform Securities Disclosure Act in particular.
    I want to commend the Chairman and members of the committee 
for your careful consideration of GSE issues in recent years. 
You have recognized that in a constantly changing financial 
world, we need to pay continuous attention to ensure that these 
organizations continue to serve our objectives as effectively 
over the coming years as they have in the past.
    We share the concerns of the authors of H.R. 4071 about the 
importance of providing investors with assurance as to the 
comparability, consistency, and sufficiency of GSE financial 
disclosures, but the administration cannot support H.R. 4071 
because it focuses too narrowly on only two of the GSEs, and 
because we are not prepared to support repeal of their 
exemptions from the Securities Act of 1933.
    The administration believes that all GSEs should comply 
with the same corporate disclosure requirements of the 
Securities Exchange Act of 1934 as interpreted and applied by 
the Securities and Exchange Commission. The administration 
believes that this can be accomplished without the necessity of 
legislation.
    For this reason, the administration is pleased that Fannie 
Mae and Freddie Mac agreed to voluntarily register their common 
stock under section 12(g) of the 1934 act, which will ensure 
that they are required as a matter of Federal law to meet 
current and future SEC requirements for financial disclosure 
under the 1934 act. Their disclosures will be subject to the 
regulatory framework established by the SEC and the Office of 
Federal Housing Enterprise Oversight. We are requesting that 
the other currently exempt GSEs make similar arrangements to 
voluntarily register with the SEC under the 1934 act.
    Last Friday's announcement was made possible by the 
leadership of Chairman Pitt and Director Falcon and also by 
Frank Raines and Leland Brendsel. It seems to me, though, that 
this accomplishment would not have been possible without the 
leadership that you, Mr. Chairman, and the members of the 
subcommittee have shown over the last several years on GSE 
issues.
    Mr. Chairman, this administration is committed to the 
objective of affordable housing for all Americans and as a 
means to that end to improving home ownership opportunities for 
minorities. This administration is also committed to the 
objective of a sound and resilient financial system and as a 
means to that end to protecting investors by improving the 
clarity of disclosures about the risks and rewards to which 
their investments are exposed. The question is not whether we 
are committed to either of these objectives, but rather how we 
strive to achieve them both simultaneously.
    To do this, we look to mobilize the private sector, to 
bring even more capital to bear both in creating housing 
opportunities and in the financial intermediation that supports 
and prices the relevant risks and rewards. If we are going to 
rely on private capital to achieve these objectives, then we 
need to work even harder to improve the quality of the 
information that shareholders and creditors receive. And if we 
are going to rely in part on the vehicle of GSEs, we have no 
less of a need to inspire confidence in the sufficiency and 
comparability of the disclosures by GSEs to the investors whose 
capital we seek to employ.
    The GSEs are privately owned but federally chartered 
companies created by Congress to help overcome barriers to the 
flow of credit into certain segments of the economy: housing, 
agriculture, and education. They are private companies that are 
not backed by the full faith and credit of the Federal 
Government. Today the largest GSEs, Fannie Mae, Freddie Mac, 
and the Federal Home Loan Bank System are focused on housing. 
Two other GSEs, Farmer Mac and the Farm Credit System, are 
focused on agriculture. One GSE, the Student Loan Marketing 
Association, is focused on education and is now in the process 
of a congressionally mandated transition to full privatization.
    Although GSEs were created to help bring the capital of 
private investors to bear on these societal goals, only Farmer 
Mac, the most recently created GSE, is fully subject to the 
disclosure regime that informs investors and is administered by 
the SEC under our Nation's securities laws. Given the size and 
importance of each of the GSE's operations in our capital 
markets and banking system, continued operation outside of the 
SEC-administered corporate disclosure regime is inconsistent 
with our objective for investor protection and a sound and 
resilient financial system, and will only hamper our efforts to 
bring even more capital to bear on the objective of affordable 
housing and more generally on all the objectives served by 
GSEs.
    In sum, the GSEs, and particularly the three housing GSEs, 
are no longer modest experiments on the fringes of our 
financial system. They are large, rapidly growing, and 
important players in our capital markets and in our banking 
system. As such, they need to be role models for our system of 
investor protection, not exceptions to it.
    H.R. 4071, the Uniform Securities Disclosure Act, would 
repeal Fannie Mae's and Freddie Mac's exemptions from both the 
Securities Act of 1933 and the Securities Exchange Act of 1934. 
The 1933 act requires a public company to submit a registration 
statement and prospectus when bringing new issues to market. 
Registration under the 1934 act triggers periodic disclosure 
requirements about the financial condition and management of 
companies that issue securities.
    We do not see a basis for removing the 1934 act exemptions 
only for Fannie Mae and Freddie Mac. Instead, we support the 
application of the 1934 act disclosure requirements to all 
currently exempt GSEs, triggered by their voluntary 
registration under the 1934 act.
    Fannie Mae and Freddie Mac are two well-run companies that 
have done much in recent years to provide their investors with 
high-quality financial disclosures. However, as they have 
recognized and the administration has agreed, the time has come 
for their investors to be assured that the level and quality of 
the corporate disclosure they receive are the same as those 
that are made by any other company that actively participates 
in our capital markets.
    The only way to achieve this assurance of comparability is 
to have each GSE agree to comply with the disclosure 
requirements of the 1934 act as interpreted and applied by the 
SEC. This ensures that investors will receive the benefit of 
knowing that GSE disclosures are consistent with those of other 
companies as determined by the SEC, consistent with the changes 
in disclosure requirements as they are implemented over time by 
the SEC, and that GSE disclosures are available on a consistent 
basis through the SEC's EDGAR system.
    To accomplish this, the administration is requesting that 
each of the GSEs initiate a process with the SEC that will 
result in the application of the disclosures required under the 
1934 act. The administration is pleased that Fannie Mae and 
Freddie Mac reached agreement last Friday with the SEC and 
OFHEO to do exactly this: to establish a regulatory framework 
that will ensure their complete compliance with the 
requirements of the 1934 act.
    As Secretary O'Neill stated, we applaud Fannie Mae's and 
Freddie Mac's self-initiated compliance with the corporate 
disclosure requirements of the Securities Exchange Act of 1934. 
This arrangement, as SEC Chairman Pitt observed at his press 
conference on Friday, reflects a commitment to the goals the 
President has called upon us to meet and toward which we are 
working--exemplary corporate governance, complete transparency 
of financial information, and full and fair disclosure.
    Under section 12(g) of the 1934 act, an issuer that is not 
otherwise subject to the requirements of the act may register 
its common stock with the SEC, thereby triggering obligations 
under section 13 of the act to file periodic financial and 
material event disclosures with the SEC on an ongoing basis. 
Although the process begins at the initiative of the company, 
once the initial filing is made, the issuer is henceforth 
required to make all appropriate filings, reports, and 
disclosures in the same manner as any other company subject to 
the 1934 act.
    Fannie Mae and Freddie Mac have agreed with the SEC to 
register their common stock under section 12(g). In addition, 
to ensure compliance with all the provisions of the 1934 act, 
as part of the regulatory framework agreed last week, OFHEO has 
agreed to promulgate a rule requiring that Fannie Mae and 
Freddie Mac and their respective officers and directors file 
with the SEC all statements, reports, and forms required by 
sections 14 and 16 of the 1934 act and to file the same 
concurrently with OFHEO. The effect of this rule will be that 
Fannie Mae and Freddie Mac will have to comply with the SEC's 
requirements that officers and directors report any purchases 
or sales of common stock of the companies, and that the 
companies file with the SEC proxy statements relating to annual 
or special shareholder meetings, and that their proxy 
statements be subject to review and comments by the staff of 
the SEC.
    The SEC and OFHEO and Fannie Mae and Freddie Mac have 
worked hard so that this framework can provide a role model for 
smart, efficient regulation. This arrangement reinforces the 
principle of functional regulation, ensuring that the SEC 
administers and enforces our regime for investor protection, 
that OFHEO maintains its responsibilities for the safety and 
soundness of the housing enterprises operation, and that there 
will be no duplication or overlap between them.
    It should be noted that OFHEO retains its own authority to 
require such disclosures from Fannie Mae and Freddie Mac as it 
deems necessary or appropriate under its safety and soundness 
mandate to regulate the enterprises. This is an area of some 
considerable interest to me, having worked on several projects 
to develop and enhance risk disclosures for financial 
intermediaries prior to my service at the Treasury. I look 
forward to working with Director Falcon to consider whether and 
how enhanced risk disclosure concepts might be applied to the 
housing enterprises.
    We have requested that the other GSEs begin working with 
the SEC and their regulators to achieve a comparable 
arrangement with the SEC that would subject them to the same 
set of disclosure requirements.
    Finally, the administration is not prepared to support 
repeal of the GSEs' exemptions from the 1933 act, and OFHEO is 
not pursuing a securities registration regime for Fannie Mae 
and Freddie Mac. The administration would like to promote a 
more level playing field with respect to initial offering 
disclosures between GSE and non-GSE mortgage-backed securities 
issuers, and wants to ensure the adequacy of disclosures to 
investors in all mortgage-backed securities.
    As announced last Friday, the Treasury, SEC, and OFHEO will 
conduct a study of how this can best be achieved consistent 
with the administration's objectives for both affordable 
housing and a sound and resilient financial system. The three 
agencies will study the disclosures now provided by mortgage-
backed security issuers with a view to ensuring that our 
mortgage-backed security market continues to function smoothly, 
that investors receive the information they need to price these 
instruments, and that issuers do not face duplicative 
requirements. We will also study how we can create a more level 
playing field and greater comparability of disclosures.
    Requiring the GSEs to register their securities under the 
1933 act could have certain benefits, including uniformity and 
consistency of disclosures for new offerings, but such a change 
has the potential for disrupting a large and well functioning 
market and imposing burdens and added costs. Consequently, 
application of the 1933 act to the GSEs' mortgage-backed 
market, without much greater consideration of the costs of 
moving from one regime to the other, would likely in the short 
run compromise our objectives for both affordable housing and 
for a sound and resilient financial system.
    We would like to a fresh look at the initial offering 
materials of all mortgage-backed securities. To do this, the 
Treasury, SEC, and OFHEO will conduct a joint study. We will 
listen carefully to the securities industry, investors, Fannie 
Mae, Freddie Mac, Ginnie Mae, private label issuers, and others 
in the regulatory community to gain a fuller understanding of 
the market structure, the nature of competition, and the risks 
being priced and transferred. This will serve as background to 
a fundamental reconsideration of the initial offering 
disclosures that would best serve all the participants in 
mortgage-backed markets and be most consistent with our twin 
objectives. Our overall aim will be to recommend how investors 
can receive clear, concise, and useful information about the 
risks and rewards of mortgage-backed securities.
    We will complete our review of initial offering disclosures 
of all mortgage-backed security issuers and report back to this 
committee and other interested congressional committees early 
in the first session of the next Congress.
    In closing, Mr. Chairman, we must recognize that our system 
of regulating securities markets has served our country well 
for almost 70 years. That does not mean we can be content. Our 
financial markets and financial institutions have evolved and 
expanded in ways that were unimaginable just a few decades ago. 
Constant attention is necessary to ensure that our system of 
investor protection and our system of government-sponsored 
enterprises continues to serve us as well in the future as it 
has in the past.
    Thank you again for this opportunity, Mr. Chairman.
    Chairman Baker. [Presiding.] Thank you very much, Mr. 
Fisher.
    [The prepared statement of Hon. Peter R. Fisher can be 
found on page XX in the appendix.]
    Chairman Baker. We do appreciate your willingness to 
participate in our hearing today and to bring forward your 
thoughts with regard to the GSE governance.
    I know Mr. Shays has interest in understanding more fully, 
and will take his time to discuss the elements of compliance 
with the 1934 act and noncompliance with the 1933 act, and I 
wanted to take my time to focus more on where we might go next. 
One of the reasons for my concern is that--I usually do this at 
all hearings relative to GSEs. I have absolute confidence in 
current management. They are currently profitable. They are 
well-managed institutions which do not present an immediate 
risk to the shareholders or the American taxpayer.
    However, in light of the growth of the GSEs over the last 
couple of years, I will have for distribution in a minute, 
charts for members on an 8-1/2 by 11, but the red line is the 
big one which represents the aggregate debt in MBS issuances by 
both Fannie Mae and Freddie Mac in 2001 on the left side, and 
2002 on the right side, as of March of each reporting year. And 
what is intriguing is the purple bar on the right represents 
the total United States debt, so that the debt in MBS issuances 
are already twice that of the United States Government. And 
regardless of who they are, you have to look at the regulatory 
adequacy of the organizations charged with the duty of 
overseeing their rate of growth. And those are CBO certified 
numbers by the way, and the resources of OFHEO.
    Your office does not engage in day-to-day capital or safety 
and soundness analysis. Your charge is with the overall 
governance and broad policy. That being the case, then, if 
OFHEO were an OCC-like organization with a formula assessment 
on the bank, OFHEO's regulatory budget would be in excess of 
$60 million. Today it is around 21 million. Just on its face, 
there appears to be some mismatch with resources to agency 
complexity if they were viewed as an international bank with 
complicated internals.
    You are not suggesting with this testimony that compliance 
with the 1934 act registration is the only and sufficient step 
needed by the Congress in gauging that risk, are you?
    Mr. Fisher. Mr. Chairman, no, I am not. Let me be clear. I 
come today with the administration's position on H.R. 4071. We 
don't have an administration position on bills that you 
brought--.
    Chairman Baker. Few people do.
    Mr. Fisher. --forward over the last several years. I want 
to be clear about that, and I hope we will get to those issues.
    I would like to be clear also that I think we made three 
important steps over the last few days. First is bringing 
Fannie Mae and Freddie Mac within the 1934 act. That is one 
step.
    A second step we will be considering is with respect to the 
Home Loan Bank System, the Farm Credit System, and Sallie Mae. 
We look to also bring them within the SEC's ambit under the 
1934 act, and we will be working with those GSEs and the 
regulators, and I think that is a big step. And I think that 
with respect to the MBS market, we take on today--and I can 
understand your frustration with studies--but we take on today 
a commitment to come back to you early in the next Congress 
with a very hard look at the disclosure requirements that are 
applicable to all of the mortgage-backed securities market. 
Now, that is a very big issue. Those are three important 
issues.
    Chairman Baker. I don't dispute that, and I certainly join 
with your interest in seeing all GSEs subject to appropriate 
governance. There may be some governmentally sponsored 
opportunities that are not GSEs in the technical sense, that 
also warrant similar analysis, which I would be happy to 
discuss that issue with you at a later time.
    With regard to the study that is contemplated, my 
understanding is that you have today a February report in mind, 
correct?
    Mr. Fisher. That is roughly what we have in mind, yes.
    Chairman Baker. If we could refine it a bit, I would hope 
for the purposes of the committee, we understand there is a 
great deal of work on the library shelf that could be 
referenced. That work could be concluded by the end of the 
calendar year because it gives us a little time. If we get a 
February reporting date, we are going to be very late in the 
year before we can act, and I would hate to see another year go 
by without taking additional action.
    So on this round, I would like to say thank you for the 
inclusion of the additional GSEs for consideration. Thank you 
for considering other regulatory modifications that may be 
required with regard to Fannie Mae and Freddie Mac. And I 
request that you consider moving the initial reporting date to 
the end of the calendar year, as opposed to February, which 
would be of great help to the committee in its work.
    But I would also indicate that, awaiting the outcome of 
OFHEO's assessment which will be public next week, I have grave 
concerns about what they may or may not be able to tell us. 
Pending that outcome, I may have additional recommendations to 
you in the near term that may change the scope of our analysis.
    With that, let me yield back my time. Mr. Kanjorski.
    Mr. Kanjorski. I guess, to be a little facetious, I could 
say that the Bush administration is in support of increased 
regulation, Mr. Fisher.
    Mr. Fisher. We are in favor of Fannie Mae and Freddie Mac 
coming within the 1934 act.
    Mr. Kanjorski. Well, it just makes me feel less lonesome on 
this side of the aisle when we hear the administration supports 
greater regulation. I do not have a dog in that fight. So if 
this policy change accomplishes something, I am certainly for 
it.
    I do have an interest in the Federal Home Loan Bank System, 
as we have previously discussed. I am not sure, because of the 
nature of that system, what we will accomplish and what the 
expense attendant thereto will be by requiring the system to 
conport with the 1934 Act. Has that analysis been made?
    Maybe you can also fill us in how this will impact on the 
Federal Home Loan Banks, and what kind of an expense they will 
incur as a result of increased disclosures. They really are a 
cooperative of existing financial institutions that are fairly 
sophisticated and do not issue stock to the general public but 
only to themselves.
    Mr. Fisher. Yes. We have had some preliminary discussions 
with representatives of the Finance Board, and I think one 
should understand that the Home Loan Banks are in compliance 
with 1934 act-like regime--some components but not all--that 
has been put in place by rule by the Finance Board. But I 
think, again, our objective that we have had here is not maybe 
or kind of compliance with the 1934 act, but 1934 act 
compliance as an objective.
    Now, there are over 7,000, almost 8,000, members of the 
Home Loan Bank System that is divided up among the 12 Homeland 
Banks. I believe some Home Loan Banks have approximately 300 
members; others have over 1,000 members. I personally think of 
that as a widely held equity position, even if it is not 
publicly traded, and I think given the rapid growth of the Home 
Loan Bank System over the last several years, I think there are 
benefits. And it is the administration's position that there is 
no reason why the Home Loan Banks couldn't also be in 
compliance with the 1934 act in providing the corporate level 
disclosures to their members, and I think it would be a good 
step for them to take.
    Mr. Kanjorski. One of the fears that some of us have is 
could increased regulation of the Federal Home Loan Bank System 
encourage a consolidation to occur that may disadvantage 
certain regions of the country? And as you know, I represent 
Pennsylvania, and Pennsylvania has the Pittsburgh Federal Home 
Loan Bank. We certainly do not want regulatory pressure being 
applied from the SEC or their own regulator to cause 
consolidation and, of course, that potentially is a power that 
could be abused. How do you see that we would handle that 
structurally within the government to be certain that there is 
not an undue pressure or expense being applied to the smaller 
Federal Home Loan Banks to encourage them to be consolidated 
into the larger ones?
    Mr. Fisher. I want to assure you that our objective is 
strictly about corporate governance and disclosure to the 
member shareholders of the Home Loan Banks and as a matter also 
of good governance for our capital markets, given their 
presence. As with the SEC and OFHEO relationship, we have been 
striving to make sure that there is a clear distinction on 
functional regulatory grounds; the SEC administering the 
securities laws; OFHEO, safety and soundness. I assume when we 
say put in place a similar arrangement, we would be looking for 
the same division of labor between the Finance Board and the 
Securities and Exchange Commission.
    Mr. Kanjorski. I want you to watch over that concern 
closely so we do not have a consolidation that would 
disadvantage certain regions of the country if that were to 
occur.
    Thank you, Mr. Chairman.
    Chairman Baker. Thank you, Mr. Kanjorski. Mr. Paul.
    Mr. Paul. Thank you, Mr. Chairman.
    I want to follow up on my comments I made at the opening 
part. I do want to challenge your conclusion. You say, ``Our 
system of regulating security markets has served our country 
well.'' and if you look around today, I don't know how many 
people would be convinced that the SEC prevented very many 
problems.
    I understand Enron and WorldCom were supervised and they 
had to make their reports, and it didn't do any good. So I 
don't see how expanding reporting requirements will do much 
good if we ignore the real cause of the bubble.
    The chairman pointed out very clearly where the problem is, 
and there it is. I mean that chart is fantastic, showing what 
is happening. And you need two things to do that. First you 
need a lot of easy credit. That is not the Treasury's 
responsibility, but it is the Fed's responsibility, and they 
have created all the credit that everybody ever wanted. But 
when you provide subsidies to one group of people or 
organizations, then you allocate the credit, and that is where 
the problem is. We are involved in credit allocation. The Fed 
creates the credit and the credit creates the allocation by 
these guarantees, this line of credit, and also this guarantee 
that the Fed will buy up these securities, if need be, and prop 
them up, as well as telling the world that these are guaranteed 
securities as good as a Treasury bill.
    You can expect that kind of artificial debt to grow, and 
this little bit of regulation is going to do zero. And we have 
a bubble, we have a financial bubble which was discovered in 
the dot-coms for some of the same, similar reasons, and that 
has collapsed and now people want to put their money into 
something with a little more safety and has a little bit more 
assets related to it; buy houses, and they have all the credit 
they want, and now we have a housing bubble going.
    So the way I see it, the GSEs are our new savings and loans 
and we ought to be thinking about what we are going to do about 
it when the bubble bursts, because it is going to come. It will 
have a collapsing bubble and someone is going to get hurt. You 
cannot keep a financial bubble going on forever.
    And I was wondering if the administration has ever even 
considered the necessity of dealing with the problem, and that 
is this line of credit which is artificial, as well the fact 
that the Fed can monetize this debt.
    Mr. Fisher. Yes. Well, Congressman, I am afraid I don't 
share some of the opinions you have expressed, but I don't 
think that will surprise you. I feel rather strongly about the 
importance of disclosure. It is a subject I have worked on for 
almost 10 years now. I know that may be a frustration to some, 
but I would like to clarify my view.
    I think disclosure as a form of investor protection is 
something like Winston Churchill felt about democracy as a form 
of government: It is the worst one we can imagine except for 
all others.
    If we are going to have a system in which we ask private 
participants to invest their own capital, then the best we can 
hope for is to give them a clear picture of the risks and 
rewards of doing so. We can have a system of government 
allocation of credit and government investment, and we do that 
all the time. We have NASA. We send rockets to the Moon. We 
build highways. We have an army. We make lots of investments 
for the government. But when we want to have the private sector 
make investments, I think the most forceful thing we can do is 
keep working on improving the disclosure regime so that the 
risks and rewards of making those investments are clear to 
investors, and I think that is the most important statement we 
can make for the subject.
    Mr. Paul. Why couldn't this work in exactly opposite of 
what you would like it to do? Because in a way you are trying 
to get assurance to the market that the SEC is going to do it, 
and then you send this message to the investors that Big 
Brother is going to take care of it and watch after you, and 
you get your stamp of approval from the SEC keeping, buying it 
nonstop. It seems to me that it backfires on you. And right now 
there is a healthy distrust of the markets. They don't trust 
the SEC, and they don't trust the market to help them. I think 
it could work exactly the opposite.
    I know what the intentions are, I know the line, but I 
think we have to consider the fact that it could do exactly the 
opposite of what you want it to do.
    Mr. Fisher. Well, I think we have all known for many years 
that SEC regulation is not a guarantee that a company's stock 
will go any particular way, and that is something we need to 
keep driving home to investors. I think it is important for all 
government officials to make that clear. Our securities laws 
and a lot of our financial supervision are about trying to make 
a system work, and it is not about particular outcomes for 
particular stocks. We certainly can't guarantee those.
    Chairman Baker. Thank you, Mr. Paul.
    Mr. Meeks asked unanimous consent to insert his written 
statement into the record; and, without objection, it is 
inserted. Thank you, Mr. Meeks.
    Mr. Meeks. Thank you.
    Chairman Baker. Mr. Bentsen.
    Mr. Bentsen. Thank you, Mr. Chairman.
    Mr. Fisher, I don't want to put you on the spot, but I 
don't think I heard. Mr. Paul did ask about the question of the 
line of credit that is provided for under the charter for 
Fannie Mae and Freddie Mac, and in my statement I alluded to 
the comments of your predecessor Mr. Gensler a couple of years 
ago and the position of the Clinton administration or the 
Clinton Treasury Department, I guess, at the time.
    Does the Bush administration have a position with respect 
to the charter for the G S Es and the line of credit that they 
have with the Treasury at this point?
    Mr. Fisher. Two points. First, no, the administration does 
not have a position on the issues you raised. And I want to be 
very clear, the line of credit is a misnomer. A line of credit 
in financial markets means that the holder of the line has the 
right to draw on it, against a bank usually. In this case there 
is a facility, a very narrow one, that is entirely in the 
Secretary of the Treasury's discretion whether to, in effect, 
undertake a repurchase agreement for, I think, 2.25 billion for 
each of Fannie Mae's and Freddie Mac' securities. That is not a 
line of credit; it is entirely in the Secretary's discretion.
    There are hosts of things we have buried in the statute 
that are in the Secretary's discretion that Secretaries can use 
or not use if they choose. Some of them are anachronistic. We 
don't have a view on this one. There is no administration 
position on this one, and at present I don't think there is a 
need for one.
    Mr. Bentsen. Thank you.
    With respect to the review proposal that you are going to 
come back with next year, and looking at all the GSEs and 
disclosure for the purpose of whether or not mortgaged-back 
securities or other debt instruments related to mortgages 
should be registered, will you take into consideration at that 
point in time the State and local housing finance corporations 
and the issuance of tax-exempt debt for mortgaged-back 
securities? And if you don't have the answer, you can get back 
with me for the record.
    Mr. Fisher. Our effort is to take a complete blank piece of 
paper and complete open mind of the entire subject. So I am 
not--I want to be clear, one reason we may have to take a fresh 
start is I am not an expert in this subject. We are going to 
take up every aspect that influences the pricing of these 
instruments and try to get every piece of information out. So, 
yes, we are going to have as broad an inquiry as we possibly 
can into all aspects of the mortgaged-back market.
    Now, the first part of your question, I am afraid I have 
lost track of it.
    Mr. Bentsen. No, that was it. But if you would get back to 
me, if you all would look at that and get back to me.
    Mr. Fisher. Yes, we certainly would.
    Mr. Bentsen. Because now they are not currently to be 
registered.
    Mr. Bentsen. The agreement worked out with Fannie Mae and 
Freddie Mac puts their common stock issuance under the 1934 
act, so they voluntarily registered their common stock, And 
that is effectively permanent based upon the rules with which 
one can withdraw. Otherwise the companies would have to go 
through a colossal change. The 1934 act also applies to the 
issuance of corporate debt as well, or any other type of 
security.
    Now, I understand the reason for the carving out mortgage-
backed securities and debt issued for the purposes of holding 
mortgages for your own account. Was consideration given to the 
issuance of corporate debt as a form of capital, operating 
capital, in the same way as equity, or was there a concern that 
by putting corporate guaranteed debt under this, that you would 
trip the wire, if you will, to mortgage-backed securities and 
other forms of guarantees?
    Mr. Fisher. I would like to be clear. I don't think of 
myself as a securities lawyer, and I may be beyond my pay grade 
here. We did talk about the issues you have raised with respect 
to the 1933 act--excuse me. The 1934 Act has a provision for 
bringing one's common stock within that act voluntarily. I 
don't believe there is such a provision for bringing your debt 
within it voluntarily. It is about bringing your common stock. 
So, without the necessity for legislation, the means of 
bringing both of the enterprises stocks within the entire 1934 
act regime was available.
    Now, as a matter of market practice and disclosure, that 
actually accomplishes most of what is necessary for the 
straight debtholders, because the corporate-level disclosures 
of the enterprisers, their balance sheets, their income 
statements, their proxy statements, all of the information that 
influences the value of the firm as a whole will be there as a 
consequence of their registration of their common stock.
    Now, the separate issue has to do with the 1934 act and the 
registration requirements for each new offering, whether of 
debt or equity, and that is where the administration does not 
support repealing that exemption. And we think the substance of 
that issue is really fully addressed by looking at the 
disclosure norms for all mortgage-backed securities that will 
get to the question of what individual investors will know 
about individual pools of mortgage-backed securities in which 
they are investing.
    Mr. Bentsen. Thank you, Mr. Chairman.
    And I want to thank the witness for the specificity in his 
answers, particularly to that question and explaining what the 
intent was. Thank you, Mr. Chairman.
    Chairman Baker. Thank you.
    Mr. Ney.
    Mr. Ney. Thank you, Mr. Chairman.
    Secretary, I am curious about the announcement you made on 
Friday and what that means for the GSE disclosure. Does the 
voluntary disclosure under the 1934 Exchange Act mean that the 
disclosure will be comparable to other financial firms and 
entities?
    Mr. Fisher. Yes. My understanding is that a combination of 
their voluntary registration under 12(g) and the framework that 
the SEC and OFHEO worked out means that all aspects of the 1934 
act will be enforceable by the SEC on the two enterprises.
    Mr. Ney. And another area. What about the liquidity in the 
tight--type pricing on Fannie and Freddie MBS? Is that about 
the suggestion that the investors have critical information 
they need to determine the prepayment? Do you want to comment 
on that?
    Mr. Fisher. There are two different substantive issues, I 
think, on disclosure on mortgage-backed--.
    Mr. Ney. Of the securities they would be purchasing.
    Mr. Fisher. Yeah. The individual security pool, you mean--.
    Mr. Ney. Right.
    Mr. Fisher. --on mortgage-backed securities. There are 
credit risk issues, and there are prepayment risk issues, and 
we will be looking at both of those sets of issues in our joint 
study with the three agencies, looking at current practices by 
all types of issuers, and trying to understand both categories 
and to see what we think will be most useful to investors and 
to the continued smooth functioning of that market.
    Mr. Ney. Back to the 1934 act. Are you able to tell me what 
would be included in the filings of the GSEs and how that would 
defer from other companies? What would be included?
    Mr. Fisher. All of the standard quarterly and annual 
reports that the SEC requires and the material event reports. 
When some extraordinary event happens, they are required to 
come forward. Proxy statements, special shareholder meetings, 
annual shareholder meetings. And the SEC staff will be able to 
review proxy statements in advance of their going out. There 
may be others at a level of detail that I am not familiar with.
    Mr. Ney. Thank you.
    Chairman Baker. Thank you, Mr. Ney.
    Mr. Hinojosa.
    Mr. Hinojosa. Thank you, Mr. Chairman.
    We thank you, Mr. Fisher, for coming to visit with us and 
talk to us and give clarification to some of the questions we 
have. Part of the administration's push to increase minority 
home ownership enlists Fannie Mae and Freddie Mac's assistance 
with reaching this goal. Doesn't this action demonstrate the 
administration's support of the housing's government-sponsored 
entities?
    Mr. Fisher. As I made clear in my opening remarks, we see 
twin objectives here: one for affordable housing in America, 
and another for a sound and resilient financial system. We have 
both of those objectives here.
    Mr. Hinojosa. Well, that is a good answer, because I have 
several requests of the Secretary in HUD to make some things 
happen in my district, so I am pleased to hear your answer.
    Mr. Fisher, some supporters of H.R. 4071 assert that OFHEO 
lacks the resources and authorities needed to effectively 
supervise the GSEs. And Congressman Paul, Ron Paul, certainly 
did address that when he made his remarks. What are the 
administration's views on this issue? Does OFHEO have 
sufficient resources to regulate Fannie Mae and Freddie Mac? 
Does it have sufficient statutory authorities? What are their 
plans?
    Mr. Fisher. Congressman, I don't have an administration 
position on the adequacy of OFHEO's supervisory and regulatory 
ambit at this time. I understand you will be hearing from its 
Director a week from today.
    I think that you may know in the sequence of events that 
led up to Friday's announcement, OMB put out a letter to OFHEO 
asking it to address a number of areas of disclosure. And we 
think that the framework that they worked out with the SEC, 
where the SEC can bring its resources to bear on some of the 
corporate governance and securities disclosure issues is an 
important step toward responding to the President's request 
that we all look at these issues.
    So, that is a partial answer, that we think perhaps some of 
these disclosure issues are best addressed by the Securities 
and Exchange Commission. And that is the extent of the answer I 
have today, sir.
    Mr. Hinojosa. I look forward to a complete one.
    Finally, I am pleased at the announcement that we heard 
Friday, and it is not every day that a company volunteers for 
greater regulation, and Fannie Mae and Freddie Mac will now 
have an unprecedented four layers of oversight. Their example 
should be emulated and not criticized. And so I am pleased that 
we are having this hearing and that we can all better 
understand how we can make this housing goal a reality.
    And, Mr. Chairman, if I may, I came in late because I was 
at another meeting on education, and I would like to ask 
unanimous consent that my opening statement be made a part of 
the record.
    Chairman Baker. Without objection.
    Mr. Hinojosa. Thank you.
    Chairman Baker. Thank you, Mr. Hinojosa.
    Mr. Miller.
    Mr. Miller. Thank you, Mr. Chairman. It is good to have you 
here today.
    Mr. Paul raised some concerns, but I think they were rather 
misplaced as he applied them to Fannie and Freddie when he 
talked about market structure and housing bubbles and 
collapses. The market structure, if it is sound--lines of 
credit don't bother me, available capital. I mean, those are 
very reasonable. But as it applies to the lending institution, 
I don't think there is a concern today about a housing bubble. 
My concern is the housing bubble is an artificially inflated 
market, and for those reasons I guess anything could be 
bothersome. And it has nothing to do with the lending 
institutions; it has to do with what is artificially inflating 
the market today.
    I witnessed this back through the 1980s, 1987 through 1990, 
in California as an example. You had--at that point in time, 
demand just absolutely outpaced supply. We are dealing with the 
same thing in California today. And you have seen many 
communities that homes are inflating 16, 18 20 percent a year, 
and it has nothing to do with the lending industry, it has 
nothing to do with Fannie or Freddie, it has nothing to do with 
lines of credit, it has nothing to do with available credit. It 
has to do with the available process that builders have to go 
through to bring their product on the market. And we are 
witnessing in California situations where there is just no way 
in the world, based on the process they have to go--through not 
only local process, but the Endangered Species Act and all the 
other issues they are having to do, there is no way in the 
world that builders can keep up with the demand being placed 
upon the housing industry. And that is artificially inflating 
the prices of homes, and there is nothing you can do about 
that.
    I mean, you base your appraisals on the market at that time 
and what units are selling for. We witnessed the same thing 
back in the 1980s, And I know homes that sold in 1989 that 
weren't worth what they sold for in 1989 until 2000, because 
the market collapsed and then they had to start from the bottom 
up.
    I am pleased to see that last Friday Fannie and Freddie 
announced to the Security Exchange mandatory financial 
disclosures. I think that is really good. I don't see a problem 
with that at all. The only concern I have, do you feel that 
these additional disclosure requirements will distract the 
Housing GSEs from meeting their federally chartered mission of 
expanding home ownership opportunity?
    Mr. Fisher. No, sir. I think the two are entirely 
consistent, as I said in my prepared remarks. I think, if they 
are going to meet the challenge of expanding home ownership, as 
they have committed to the President, they are going to have to 
draw a lot more capital into these markets overall, and I think 
the best way to do that is to make sure they are in compliance 
with all of the disclosure rules we have for all investments 
more generally.
    So I think the two in this--it is not always the case we 
can say this, but in this case they seem to work together.
    Mr. Miller. The President has proposed a new tax credit for 
single-family housing developments, and I think that is great, 
but we have a low-income housing tax credit targeted towards 
multifamily developments that is currently on the books, but 
that doesn't work in California, as you know, because I haven't 
seen a condo or townhome built in California for 10 years. And 
I am talking to Secretary Martinez about coming forward with a 
bill to try to change this where a developer can process a 
development through HUD, meet all of HUD's requirements, or the 
local requirements if they are greater, and if there are any 
defects--as you know, that has been the problem in California, 
defect litigations--any defects litigation, they are bound by 
mandatory arbitration. And that is the only way we are ever 
going to get the market changed in California to be able to 
really provide entry-level housing, and Freddie and Fannie 
should be behind it. But what is your opinion on that type of 
an approach?
    Mr. Fisher. I am afraid you are beyond my expertise, sir, 
in that question of that tax credit, and I daren't go toward 
the tax side.
    Mr. Miller. Well, then I will make it easy. Do you believe 
that the tax credits as they are proposed can help affordable 
housing in California in general?
    Mr. Fisher. That may be, sir. I really am going to be very 
careful as there are two places I don't go: the dollar and tax.
    Mr. Miller. We are going to get you there somehow. God 
bless you. Thank you very much.
    Chairman Baker. Thank you, Mr. Miller.
    Mr. Shays?
    Mr. Shays. Thank you, Mr. Chairman. And, Mr. Chairman, 
again, thank you for having this hearing; and, Mr. Fisher, 
thank you for being here.
    I would like to hopefully, before we go--we will have 
second and third rounds; is that correct, Mr. Chairman?
    Chairman Baker. Yes.
    Mr. Shays. I would like to talk about the agreement; I 
would like to talk about investor protection; I would like to 
talk about the mortgage-backed securities and the interagency 
review of mortgage-backed securities, if I am able to.
    First, with the agreement, can you walk me through what it 
means to be under the full panoply of the securities laws as it 
relates to the Friday's agreement? In other words, is it all 
aspects of the law? There is nothing that will be exempt from 
the 1934 act?
    Mr. Fisher. That is my understanding. In this regard I am 
relying on SEC staff who I was speaking to to help prepare my 
testimony. They have assured me that this is compliance with 
all components of the 1934 act, and I must rely on them. So I 
believe it is compliance with all aspects.
    Mr. Shays. So in other words, the trade restrictions in the 
1934 act relating to, say, short swing profit disgorgement 
requirements as well as the short sale prohibition, that would 
be part of it?
    Mr. Fisher. That is my understanding. I think this is a 
major step and really a change in the regulatory landscape. 
These two major companies are going to be subject to SEC 
jurisdiction on 1934 act compliance. And I think the 
appropriate thing for me to do is defer to the SEC on the 
interpretation of that as it applies to the two companies.
    Mr. Shays. I would just suggest, Mr. Chairman, that it may 
be appropriate for us to have Mr. Pitt in to just verify what--
since in effect he will have to make that decision.
    Chairman Baker. Mr. Shays, if the gentleman would yield. I 
would like to suggest that we just simply get a copy of the 
written document that represents the understandings. Does the 
gentleman have such a copy of the agreement?
    Mr. Fisher. I do not. It was among the four parties. I know 
that such a document exists as an outline as they go forward to 
try to frame it out. It will require rulemaking on the part of 
OFHEO as Director--.
    Chairman Baker. Sure. I understand. But if I may suggest 
that if there is a copy lying around somewhere, we would like 
to get it. If not, Mr. Shays, what we might do is formally 
request the SEC to forward whatever their understandings are. 
As I understand it, as of this time attorneys for OFHEO and 
attorneys for the SEC are trying to hammer out agreements, but 
I am not exactly sure where the written document exists, and I 
think it is a little premature to celebrate until we get 
something to read. But thank you for yielding.
    Mr. Shays. Thank you.
    On August 14th, the CEOs and CFOs of some of the country's 
largest public trading companies are required by the SEC to 
certify their 2001 financial statements are accurate. Will this 
requirement apply to Fannie and Freddie, the 20th and 42nd 
largest companies?
    Mr. Fisher. I don't know the answer to that. The precise 
timetable as to them coming into compliance with the 1934 act 
is something they will be working out.
    Mr. Shays. Who would know that?
    Mr. Fisher. I believe the SEC is the appropriate place to 
address that question.
    Mr. Shays. Mr. Chairman, I would just renew my request. I 
think we are going to have to have someone from the SEC, and I 
would imagine it would be Mr. Pitt, come in and explain to us 
what that means.
    Chairman Baker. The gentleman's point is well taken. I 
would just suggest that if we can get whatever it is in writing 
first, then that would enable the committee to have 
understandings before we have such a review. But the 
gentleman's point is well taken.
    Mr. Shays. Let me just ask one or two more questions, and 
it may make sense just to defer them to others.
    Turning to, say, investor protection, let us suppose that 
Fannie Mae or Freddie Mac failed to make adequate disclosure. 
In such an instance could you advise me as to whether the SEC 
would have the same enforcement powers as it would for any 
other SEC registrant?
    Mr. Fisher. Yes, that is the case.
    Mr. Shays. Okay. In the same vein, what recourse would farm 
investors have? Would they enjoy the full panoply of legal 
rights and specifically the right to sue?
    Mr. Fisher. I am not certain of that, so I best leave that 
unsaid.
    Mr. Shays. Okay. With regards to the mortgage-backed 
securities, you have--this is a study work in process. I would 
like to ask you, is there any reason why it couldn't be 
completed before Congress takes up the next session, before the 
next session of Congress begins?
    Mr. Fisher. The Chairman asked me the same question. Let me 
assure you both that we haven't yet sat down with the other two 
agencies, and as soon as we do, the first topic on the agenda 
will be your suggestion and that of the Chairman that perhaps 
the study could be finished a little sooner.
    Mr. Shays. With regard to how this came about, I am 
interested to know how this agreement came about, because it 
will help me understand the veracity of the participants in 
terms of their ability to enforce this. It bothers me, it has 
bothered me for a long time, that Fannie Mae and Freddie Mac 
have not been under the 1933 law or the 1934 law. And let me 
just say parenthetically, I think it is huge that they will be 
under the 1934 law. So I am seeing the glass three-quarters 
full, and I am not at all critical of what has happened. I 
think it is a gigantic step in the right direction, and a hats 
off to everyone.
    But what I am interested to know is was this an initiative 
that was among equal partners, or was this basically--in other 
words, did the Treasury Department indicate to Fannie Mae that 
they thought it was advisable for them to be under the 1934 
act?
    Mr. Fisher. I want to respond fully to your question. Since 
I first came to Washington about a year ago, I am just 
finishing my rookie season here, I have been discussing with 
people in the administration and at each of the GSEs how we can 
improve on their disclosures, their corporate disclosures. This 
is something I mentioned in my testimony I have been working on 
since 1994, my prior service, trying to improve disclosures by 
financial intermediaries.
    So over a year ago when I--when people would ask me what I 
thought about the GSEs, I would say let's see if we can't move 
them toward 1934 act disclosures and improving their corporate 
disclosures. The dialogue has gone back and forth.
    Mr. Shays. Can I just interrupt there to not--make sure we 
are precise? Did you at that time say just the 1934 disclosure, 
or did you just say disclosure in general?
    Mr. Fisher. In my prior incarnation, I ran the open market 
desk of the Federal Reserve System. I am intimately aware with 
their securities, how they trade in the market, and with the 
entire subject matter of the mortgaged-back market and their 
debt markets. So I have an acute understanding of their 
longstanding concerns, shared by--.
    Mr. Shays. I don't know if this can be answered yes or no. 
My question was I am getting the sense that Fannie Mae and 
Freddie Mac knew that you were interested in disclosure, but 
you describe it as saying, I am interested in the 1934 
disclosure. There has been a sense that--I just want to be 
clear. Did you say disclosure in general and then settled on 
1934, or have you always only advocated 1934?
    Mr. Fisher. I have understood for several years the 
concerns that they and other participants in this market, non-
GSEs, have with respect to the concept of trying to apply the 
registration requirements of the 1933 act to the mortgage-
backed market. There are many of us who understand the bond 
market and how it works, who understand that that could 
disrupt--and I think it likely that it would disrupt, but we 
are never certain about these things.
    Mr. Shays. Let me ask you, I mean, with all due respect, 
when you say could disrupt, don't we have others who go and 
assemble mortgage-backed securities? Does it disrupt them?
    Mr. Fisher. It is a question of the size and the scale of 
their operations. And I think that even some of the harshest 
critics of these two enterprises will tell you that it is a 
fair question as to whether this would be disruptive to the 
mortgage-backed securities market, and it is my opinion that it 
would be.
    Chairman Baker. Mr. Shays, if I may, we will come back for 
another shot at this.
    Mr. Shays. Sure.
    Chairman Baker. Mrs. Tubbs Jones.
    Mrs. Jones of Ohio. Thank you, Mr. Chairman.
    Following the logic of Mr. Shays, would SEC registration 
have prevented the collapse of Enron, Qwest, Tyco or WorldCom, 
or protected the people involved, the investors involved at 
all?
    Mr. Fisher. No. I think we all understand that SEC 
regulation of compliance with disclosure requirements is no 
guarantee of an investment outcome.
    Mrs. Jones of Ohio. Do you have any idea--based on your 
experience at the Federal Reserve and your knowledge--of the 
requirement or the number of issuances of Fannie Mae or Freddie 
Mac, what SEC regulation or how SEC registration would either 
adversely or not adversely affect the company's housing mission 
and issues on housing affordability?
    Mr. Fisher. I don't think it will adversely affect their 
missions, but I want to be clear, I am not an expert in 
housing. But I believe it would indeed be a hollow victory for 
investor protection and corporate government if I were to think 
that they had done something that was not in their 
shareholders' interest and consistent with their mission that 
they have from the Department of Housing and Urban Development.
    Mrs. Jones of Ohio. Do you want to say that in a different 
way for me, sir, so I have a little clearer understanding of 
what your answer is?
    Mr. Fisher. I have no basis for believing and I do not 
believe it is inconsistent with their mandate. I thought I said 
that clearly, ma'am.
    Mrs. Jones of Ohio. Okay. Well, and upon what do you base 
that answer, sir? You did say you were not familiar with 
housing issues. Is that what you said at the beginning of your 
answer?
    Mr. Fisher. Yes, I did, ma'am.
    Mrs. Jones of Ohio. So are you saying that you don't have a 
basis upon which to answer my question?
    Mr. Fisher. No. I said I was relying on them. And I believe 
that they have a statutory mandate they need to fulfill, and 
they have a duty to their shareholders. And I told you 
candidly, I believe, that I was relying on them. But I also 
believe that by putting forward the testimony of this 
administration, that we have twin objectives. We have 
objectives for affordable housing in America, and we have 
objectives for a sound and resilient financial future, and we 
believe that--.
    Mrs. Jones of Ohio. And you believe that they are not--
based as the missions or the assignments currently exist, they 
can coexist?
    Mr. Fisher. I believe we serve both those objectives here.
    Mrs. Jones of Ohio. And that is why you have proposed the 
1934 registration?
    Mr. Fisher. Yes, ma'am. As my testimony elaborated on, I 
believe that in order to serve their mandate going forward--.
    Mrs. Jones of Ohio. Now, let me ask you, with regard to the 
1933 registration of the--in light of the large number of 
issuances that Fannie Mae and Freddie Mac have, can you see 
that that could have an impact upon their ability to do their 
job, sir?
    Mr. Fisher. Yes. And that is why this administration is not 
in favor of repealing their 1933 act exemptions, and why we are 
going to study disclosure and not registration.
    Mrs. Jones of Ohio. I missed your other testimony, Mr. 
Fisher. Is there anything that you would have wanted to say 
that you did not have an opportunity to say under any other 
questions?
    Mr. Fisher. No.
    Mrs. Jones of Ohio. Well, I thank you very much.
    And I thank you, Mr. Chairman, for yielding the time.
    Chairman Baker. Thank you, Mrs. Tubbs Jones.
    We will take a brief second round here, Mr. Fisher.
    By not requiring registration of debt offerings, by 
allowing their debt offerings to be utilized as collateral for 
public deposits, by allowing federally insured deposits or 
institutions to hold without limit the only--besides the U.S. 
Treasury, the only security which falls with that designation, 
as of the last time I looked at the numbers about 40 percent of 
the institutions federally insured in the country held 100 to 
500 percent of the total capital in GSEs securities. My concern 
is that if there were to be a stumble, not necessarily the 1979 
bankruptcy, but merely a deterioration in quality of assets, a 
short-term run-up of rates, the impact that would be adverse 
not to Fannie shareholders, but to Federal depositories would 
be rather dramatic. That has been the principal reason for my 
insistence over the years on having adequate regulatory 
oversight.
    Today's developments, sir, are deep and official, and I 
don't want to minimize them at all. Apparently somebody has 
been able to at least get this done when I have been unable to 
achieve it. So congratulations. My point is that it clearly 
does not go far enough to give me--and I modestly suggest many 
others--comfort that we truly understand the risks inherent in 
the management of these portfolios.
    For example, I don't have it on that chart, but I have a 
chart somewhere that shows Fannie's size in relation to Freddie 
with debt issuances and the amount of hedges in place, where 
Fannie is almost twice the size of Freddie, but has half as 
much hedging in effect. Just on its face, there appears to be 
reasons to enhance our regulatory adequacy, and I don't know 
how we get there, but the other sort of measure that imbalances 
market equities is in response to the line of questioning by 
Mr. Bentsen relative to the line of credit and characterizing 
it as not truly a line of credit that could be called on as a 
traditional corporate line of credit. It is true that market 
participants view that line of credit and its relation to the 
values of the GSEs as an implicit government guarantee, and 
even though the debt issuances are clearly stamped and the line 
of credit is clearly conditional, that the perception by the 
markets that the Federal Government stands behind these does 
create an imbalance in the marketplace.
    If somehow we find out that all the concerns I have raised 
are without foundation, I would be very happy and very 
relieved. If, however, there is any possibility for some 
sideways movement in the market that results in a housing 
surplus and interest rate run-up and an inability of the 
agencies to spread their risk in new and innovative ways, we 
really need to have a regulator on deck who can come to the 
committee and tell us that our concerns are not warranted. And 
as I said--and not to prejudge the outcome of next week's 
hearing, because we have to see what the work product looks 
like, but it certainly appears to me that values have been 
created that may or may not be accurate. And given the current 
corporate environment where restatements are all too common and 
the consequences far too dramatic, one holds his breath 
contemplating what would happen should either of these agencies 
find themselves in a similar circumstance.
    And I appreciate your testimony and your willingness to 
examine these issues, but it adds some level of concern that we 
are not able to come to conclusions in light of what the 
obvious market conditions are like.
    I don't really have a comment with regard to the 1933 
registration. I understand the reasons why you think it ill-
advised. I don't necessarily agree, but I understand your 
explanation. I don't understand how private label and triple-A-
rated M B S should be viewed any differently. As I understand 
your philosophy, all corporations should look the same to the 
investor, and although we are getting closer, I still think 
there are distinctions of significance from the outside looking 
in with respect to GSEs.
    I don't have a specific question in this round, I really 
wanted to facilitate Mr. Shays' questions, but just to express 
the overall concerns about where we are and the need for us act 
in a more timely manner, hoping that a study won't be all that 
we see in the coming months, that there will be some reason to 
act beyond what I believe is an appropriate and advisable step, 
but certainly not the last.
    I don't know if you have a comment or not.
    Mr. Fisher. If I could comment, Mr. Chairman. I want to be 
clear that I think all of the issues that you have just touched 
upon are important ones, and I think they are ones that are 
deserving of yours and our attention. And while we don't have 
an administration position on the bills that you have put 
forward with regard to those broader issues, I want you to know 
that I think those are important topics, and I hope that we can 
at some point have an administration position on those issues, 
and it is one I would heartily enjoy working on.
    I should be clear, certainly before this committee there 
are many speeches I have given and talks I have had with 
bankers in this town and around the country. People know that I 
am frustrated with the state of regulation in general in 
America, well beyond GSE issues, looking at all of our 
financial services regulation. I think there are some simple 
propositions that we all can aspire to that, like products and 
like services, should get a like regulatory treatment. And we 
are so far away from that that I don't think there are a lot of 
people in this country who understand that we really look silly 
from the rest of the world, where we have so many different 
financial regulators. People from abroad looking in can't 
figure out who is on first.
    When you look with that broad issue, I think it is 
dramatic, and important and deserving of all of our attention. 
I am not a fan of saying let us all roll it up into one single 
all-powerful regulator. I don't think Americans will ever 
tolerate that; I don't think we should. But I also don't think 
we can sit by and have the fractured system we have today 
endure.
    Now, in a microcosm I think that some of the issues you are 
touching on are the same with respect to our thrift and our 
housing finance industries in this country. Now, we have 
several different regulators. It isn't looked at in a coherent 
way. And I think of the question of housing and thrift finance 
in America as a coherent issue, particularly looking at it 
through the prism of the growing importance of the mortgage-
backed securities market, is certainly worthy of your 
attention.
    I think the substance--if you will give me one more moment, 
Mr. Chairman. The substance of these concerns is the question 
of the functioning of the mortgage-backed securities market 
among investors, and that is an area where I think if we hadn't 
even made the other steps we are making today, I think the 
agreement of the SEC, OFHEO, and the Treasury to work together 
on that issue alone would be deserving of recognition as a 
major accomplishment.
    Chairman Baker. Thank you, sir.
    Mr. Bentsen?
    Mr. Bentsen. Thank you, Mr. Chairman. And a couple more 
questions for Mr. Fisher, and I want to follow up on Mr. 
Baker's comments with respect to debt.
    In my previous line of questioning, Mr. Fisher, you did 
state that--if I recall correctly, that following the 1934 act 
and registration of common stock would, in fact, provide 
investors with a significant amount of information they may not 
already have access to in the form of the stock prospectus, 
proxy, 10(k)s and 10(q)s. So--which would be similar, except 
for the particular offering information with respect to a 
common debt issuance, except for the fact that presumably and I 
think practically they--Fannie and Freddie have to put debt 
issuance papers out there anyway.
    And you mentioned one other thing that caught my ear, and 
that is your experience on running the open market operations 
for the Feds; that you had a chance to see this debt in action, 
if you will. And would it be your--based upon your experience, 
impression that there is a good deal--maybe not a sufficient 
level, but a good deal of transparency within the GSE mortgage-
backed securities market, given that it does appear to--there 
is a lot of debt out there, and it does trade quite a bit?
    Mr. Fisher. Let me try to draw a couple distinctions. I 
think you have touched upon some very important questions, and 
I want to be very careful with them.
    I think that the corporate disclosures that their 
compliance with the 1934 act will now engender will provide a 
standardization of disclosure that will permit the enterprises 
to be comparable with any other company in America, which is 
particularly important for assessing credit risks. While some 
people, some commentators, have observed this is not a, quote, 
big deal, I think it is a big deal because the comparability 
improvement is particularly important for the assessment of 
credit risk. And I think that will help the debt market, the 
straight debt market, by being subject to the 1934 act 
disclosures.
    The mortgage-backed securities market is something that has 
both a credit component, as I mentioned earlier, and a 
prepayment component. There is something of a debate going on 
about what is the necessary level of disclosure. It is a fair 
debate, the necessary and appropriate level of disclosure on 
both of those components to tell you about the particular 
credit attributes and prepayment attributes of a given 
mortgage-backed pool. The more disclosure you make, the better 
informed an investor is. But at some level, if pools are 
entirely different, one may impair the liquidity and the 
functioning of that market.
    Now, that is a very delicate trade-off, and I think that 
may be at the heart of some of the issues that we try to look 
at. I think there is a fair argument that more information is 
better. I am usually a proponent of that, but because of my 
experience with these debt markets, liquidity also is 
important, and it helps all investors in the market get in and 
out of securities if they like. That is also something that 
benefits the individual investor, the liquidity of an 
instrument. So we will be looking at all of those issues in our 
study.
    Mr. Bentsen. If I might, because my time is about to run 
out. Three quick questions that I would ask you. One is as a 
follow-up to what you just said, though, is it has become a 
pretty mature and sophisticated market with information that is 
posted on--in terms of liquidity and prepayment and all that as 
compared to maybe some other debt markets.
    The second thing I would ask is--and you can just restate 
this for the record because I think this is correct-- the 
administration's position with respect to OFHEO and its funding 
is that you would prefer to see it become a mandatory funding 
item, not subject to annual appropriations, that would free up 
some of the shackles on OFHEO so that we could treat them 
somewhat similar that we do to the SEC?
    Mr. Fisher. Yes. Thank you for bringing that up. That was 
in the President's budget, and, of course, that is part of the 
administration's position.
    Mr. Bentsen. That is one of the items of the President's 
budget I agree with myself.
    The third thing is, and Mr. Baker--I think Mr. Baker 
underestimated some of the work that he has done. A year or a 
couple of years ago, Mr. Baker and others were able to reach an 
agreement with the GSEs to have them get ratings on their 
subordinated debt and follow other, you know, stand-alone 
ratings on their subordinated debt and make some other 
disclosure requirements.
    A lot has been written recently about another GSE, Farmer 
Mac, which is in a somewhat different business, but I think 
there should be sufficient concern within the GSE world that if 
one GSE is maybe going the wrong direction, that could impair 
other GSEs either economically or perhaps politically. It is my 
understanding that whereas there is--there have been ratings 
given on the housing GSEs, that has not been the case with 
respect to Farmer Mac; that it has not--in fact, it apparently 
was refused to get some sort of rating or stand-alone rating 
even though, as our discussion earlier, Farmer Mac is under the 
1933 and 1934 acts as per the legislation back in the 1980s.
    Given the amount of press and issues that have been raised 
with respect to Farmer Mac, is the administration and in 
particular is the Treasury Department taking a look at its 
operations based upon what has been written in the press?
    Mr. Fisher. No. We have all been observing the press 
reports that have been going on and are familiar with Farmer 
Mac's operation. We have a role in reviewing some semiannual 
reports, but I wouldn't say we have taken an initiative in that 
area. But it is certainly an issue worthy of consideration.
    Mr. Bentsen. Well, I would just--Mr. Chairman, if I might, 
I would just--I mean, I think some of the press--I mean, 
obviously--and, you know, just because there is a story in the 
newspaper doesn't mean everybody should jump through hoops, but 
when there are numerous stories in the credible press, it does 
raise a concern that ought to be looked at. And I would hope 
that you all might well take a look at some of this and get 
back to the committee. We don't actually have jurisdiction, but 
we do look at GSEs.
    Chairman Baker. It has never bothered this committee.
    Mr. Bentsen. Well, it shouldn't. It shouldn't, Mr. 
Chairman.
    Chairman Baker. Thank you, Mr. Bentsen.
    Mr. Ney?
    Mr. Ney. Thank you. Mr. Chairman--and I wanted to prestate 
before I ask this question, I am not trying to be a wise guy 
with this question. It might come off that way to my colleague 
from Connecticut. I want to ask, I think, a legitimate 
question. Everybody is worried about transparency these days 
and disclosures, and there is complex companies, complex 
entities. And if you look at G.E. Capital and if you look at 
what Fannie and Freddie said, and the writing has got to come 
yet, as the Chairman said, where does that put those companies 
that are looked at by a lot of people and questioned? Where 
does that put them on par of disclosure with each other, those 
three entities?
    Mr. Fisher. I am confident that General Electric 
Corporation is in compliance with all aspects, I mean, that 
they fall under the jurisdiction of the SEC.
    Mr. Ney. Oh, yeah. I am not saying -.
    Mr. Fisher. I don't mean--about to make a value judgment.
    Mr. Ney. I am not, either.
    Mr. Fisher. Under the 1934 and 1933 act, I would not want 
to represent that I would know precisely the status of G.E. 
Capital, which I believe is a fully-owned subsidiary, with 
respect to whether it comes forward independently and to what 
extent. I am just ignorant of that subject. But with respect to 
General Electric Corporation, I do assume that this puts Fannie 
Mae and Freddie Mac in compliance with the 1934 act. I can only 
but presume that G.E. Corporation is under the jurisdiction of 
the SEC with respect to both the 1933 and the 1934 act, but I 
would not present myself as an expert in that subject.
    Mr. Ney. That is fair. I am just trying to get clear in my 
mind that they--after the announcement they have basically in 
general about the same amount. And once the--you know, the Ts 
are crossed, they have about the same amount of regulation and 
disclosure for that particular area of the stock? That is what 
I am trying to say.
    Mr. Fisher. Yeah. At the level of corporate disclosure 
about the company coming out of the 1934 act and the normal 
quarterly and annual and proxy results, they would be 
comparable, entirely comparable.
    Mr. Ney. Okay.
    Mr. Fisher. With respect to individual security issuance, 
which is a 1933 act matter, there would still be a distinction.
    Mr. Ney. You want to clarify that, that distinction?
    Mr. Fisher. I am now beyond my expertise, but I am going to 
presume that when General Electric Corporation brings new 
issues of securities and debt to market, they fall under the 
1933 act, whereas Fannie Mae and Freddie Mac continue to have 
their exemption to the 1933 act.
    Mr. Ney. Thank you.
    Chairman Baker. Thank you, Mr. Ney.
    Mrs. Maloney?
    Mrs. Maloney of New York. Thank the Chairman for his 
leadership on this issue and so many others, and for allowing 
me to ask a question since I am not even on this subcommittee. 
I would have liked very much to have been on it. But, first of 
all, I want to certainly welcome Under Secretary Fisher, who 
happens to be a constituent from the great State of New York 
before he decided to move to Washington. And congratulations on 
your appointment.
    Fannie and Freddie have shown responsible leadership, in my 
opinion, in their disclosures beginning in October of the year 
2000 when they said they would disclose credit risk and 
interest rate risk, and would publish a corporate rating, by 
rating agency. And this is somewhat similar to what Mr. Ney was 
asking about G.E. Now they have offered to give up part of 
their statutory exemption from securities registration by 
voluntarily registering their common stock with the SEC. So 
this means they will file the same regular financial reports 
with the SEC that every other public company files, and I 
applaud these companies for their efforts in financial 
disclosure. Transparency is something that both sides of the 
aisle are particularly interested in these days.
    In addition, they are required to meet the strongest risk-
based capital standards; yet we know that the housing GSEs are 
investing in probably the safest asset in the world of people's 
homes and their mortgages.
    Under Secretary Fisher, what I am concerned about are the 
unregulated financial entities who are engaged in lending and 
banking activities of every sort, and they have no regulation. 
And I will give the example of Enron. Enron is--actually was 
bigger than most banks; yet I would say most banks will be 
regulated possibly in 14 different ways. And the growth in 
these nonbank lending institutions and their lack of disclosure 
means that we have an inability to assess the financial 
stability of these firms, and we really have no way to ensure 
that they are capitalized adequately to meet their obligations. 
And is this something that the Treasury Department has looked 
at? Is this something that you are concerned about?
    Mr. Fisher. I certainly share a concern with respect to 
what I will call aggressive financial activities of 
nonfinancial companies, and I think it is a fair area of 
inquiry for us all, for this committee and for us all to think 
long and hard as more and more companies look at the question 
of becoming, in effect, financial brokers of one type or 
another. But I think that is a fair inquiry.
    Now, I don't have a simple answer to that, and I don't 
think there is one, because there is always going to be a 
distinction between banks and their customers, and there is 
kind of a level of activity challenge that we face. At some 
level of activity, financial activities of nonfinancial 
companies appear to go over a line.
    I want to be clear with you, I have thought a lot about 
that issue, and I have not been able to come to an answer that 
satisfies me, but I think it is a fair subject matter.
    Mrs. Maloney of New York. Well, I know that you have a 
particular experience with nonbank financial service companies 
and the risks that they pose, given your experience with long-
term capital. And I know that it is not really the focus of 
this hearing today, so I would appreciate it, if you would, an 
expanded reply in writing to the Chairman. I know that I wrote 
Treasury earlier on this aspect. I know you have been busy, but 
I was hoping if you could give me your best thoughts on it. 
Thank you very much.
    Mr. Fisher. I would be happy to do that.
    Mrs. Maloney of New York. And I yield back the balance of 
my time.
    Chairman Baker. Thank you, Mrs. Maloney.
    Mr. Shays.
    Mr. Shays. One of the amazing things for me is to be a new 
member of this committee. I realize that I am not ready for 
prime time yet, but coming in as someone who has spent 10 years 
on the Budget Committee and has an MBA and an MPA, I find it 
amazing that when we looked at Enron, we saw a breakdown of the 
directors, the management. The employees didn't even speak out, 
the banks didn't do diligence, the rating agencies weren't 
doing their job. Every professional--lawyers were in there 
sucking up money as well. No profession looked good. I don't 
see anyone who looks good at WorldCom, either.
    So, we as a Congress decide we are going to have more 
disclosure, and we are going to clamp down. And, guess what? 
Fannie Mae and Freddie Mac don't come under either the Sarbanes 
bill or under CARTA. They don't really kind of show up as being 
impacted in any real way. In fact, when we wanted to do it, 
there was a lobby that made an impact on CARTA to make sure 
that we didn't have that kind of oversight.
    So, I am just saying to you that I have a little bit of 
uneasiness when I think of Fannie Mae and Freddie Mac because 
they play by different rules. And I love Frank Raines. I think 
he did a terrific job as Budget Director. He is doing a good 
job right now running the company, I expect. But both Fannie 
Mae and Freddie Mac simply want to play by different rules, and 
what I want to do is understand the substance, and then I want 
to understand the process of how they came under it. The 
substance obviously is more important than how this all 
happened, but that is still important to me.
    So, dealing with the substance, you have said pretty 
uncategorically, I mean, pretty clearly, that they are under 
the 19--1934 act, period, and that you affirmed that when you 
spoke with the SEC. Now, you are saying that you didn't put 
this agreement together, but you were the host of it Treasury-
wise, the host of it. So you had the four parties come 
together, and you rightfully saluted Chairman Pitt and Director 
Falcon and Frank Raines and Leland Brendsel. You congratulated 
them. But some of this is going to be worked out by the SEC, 
and OFHEO is getting involved.
    What is not clear, and I will have to wait to ask the head 
of the SEC, what is the time schedule for getting them under 
this? That is not something you have the expertise. But, 
regretfully, you did have a--make a comment that in your 
opinion--and that is your opinion. And, I mean, I respect your 
opinion. Regretfully, you have made the point, though, you 
don't think they should be under the 1934 act--1933 act. Excuse 
me, the 1933 act.
    The 1933 act is the act, I gather, that requires mortgage-
backed securities to be registered; is that correct?
    Mr. Fisher. If it applied. It applies to individual 
security issuance--issues coming to market.
    Mr. Shays. And you have already in a sense kind of not 
prejudged it, but you have said you want to have a study, but 
don't think they should come under it. And so I just want to be 
clear as to whether you speak with expertise on this, or 
whether it is a general opinion. I want to examine what under 
the 1933 act you don't think Fannie Mae and Freddie Mac should 
be under. And then I would love you to explain to me why they 
shouldn't be under it, but everyone else in the Fortune 500 
should be.
    That is what I wrestle with. I just don't see the logic. 
Wells Fargo has to go out and they have to register their 
mortgage-backed securities. Whether they are jumbo loans or not 
jumbo loans, they have got to do it. And why is it--and by the 
way, you have the private sector creating lots of opportunity 
for housing here.
    So, I just want to be clear first, under the 1933 act, you 
have said they shouldn't be under it. Do you mean until the 
study is done, or period?
    Mr. Fisher. I mean period is my current judgment. As my 
testimony makes clear, one can see there are potential 
benefits. One could--.
    Mr. Shays. But let us explore it then. Why? Why not?
    Mr. Fisher. The--.
    Mr. Shays. And I want to ask if you speak with expertise on 
this, or is it just an opinion, because you didn't have certain 
expertise in housing. I want to know if it is your fear, or you 
are speaking as a professional telling this committee they 
shouldn't be under it, period.
    Mr. Fisher. I believe that trying to move the mortgage-
backed market that the GSEs issue to the 1933 act, as my 
testimony says, could--would be likely to create disruptions 
that would serve neither of this administration's objectives in 
this area.
    Mr. Shays. Why?
    Mr. Fisher. Because of the way that these securities come 
to market and the volume with which they come to market. The 
requirements for registration as they currently exist would be, 
in my view, disruptive.
    Mr. Shays. What is the--.
    Mr. Fisher. Now, the Chairman has put up a chart but I 
don't have the figures in my head. Mr. Shays, Congressman 
Shays, I believe that most of the substantive issue that 
concerns me is that I am in favor of a more level playing field 
with respect to all mortgage-backed security issues. Most of 
the substance has to do with differential disclosure 
requirements that could improve a level playing field for all 
investors. That is what--.
    Mr. Shays. If you gave me a choice between the 1933 or 1934 
act, I would probably say to have them under the 1934 act, but 
I don't understand why we have that choice and the reason why--
why they are mutually exclusive. The reason why I wanted to ask 
you how much mortgage-backed securities we are talking about is 
that the more it is, it would strike me, the more reason to do 
it, not the less reason to do it. If it was just a few, who 
gives a darn? But it is so much money. We are talking 
potentially about trillions of dollars that we have no 
disclosure on.
    Chairman Baker. Mr. Shays, just for the sake of 
clarification, it is--in 2002, it is approximately--or in the 
year preceding 2002, approximately 1.5 trillion in total MBS 
between Fannie and Freddie.
    Mr. Shays. Right. And so my point is--I am not trying to 
put you on the spot, I am just trying to understand it, 
because, unfortunately, Fannie Mae and Freddie Mac are going to 
use you for the next 10 years. And I just want to understand, 
explore with you, why you think such a trillion dollars of 
nondisclosed collection of securities shouldn't have to be 
disclosed. It blows me away to think of that.
    Mr. Fisher. I have not said that there should not be 
additional disclosures. I want to be very clear.
    Mr. Shays. Okay.
    Mr. Fisher. The 1933 act provides some mortgage-related 
securities exemptions to all of the provisions of the 1933 act 
that the SEC administers. So non-GSE issuers are not currently 
the under the full force of the 1933 act, but have their own 
exemptions.
    Now, with respect to disclosures that all issuers make of 
mortgage-backed securities, GSE and non-GSE, that issue is what 
the three agencies are going to study.
    So we are going to take on the issue you have just 
identified with a complete fresh look, and take that on to 
consider all of the disclosures that securities issuers today 
make, that they might make, that anyone who wants to the talk 
to us thinks they should make, and we will try to create as 
level a playing field as we can with respect to disclosures.
    With respect to registration, I would like to be clear with 
the consistency in my views. In 1992, the Federal Reserve, the 
Securities and Exchange Commission, and the Treasury, as part 
of a study they did at the time of our government's securities 
markets, reiterated the view at that time, which had been of 
some standing already, that bringing the mortgage-backed 
securities market into the registration process would be 
counterproductive.
    So the view I am expressing today with respect to mortgage-
backed securities is that it would be potentially disruptive 
and not useful to bring mortgage-backed securities into the--.
    Mr. Shays. So there is part of the 1933 act that you do 
think they potentially should be under?
    Mr. Fisher. I just--.
    Mr. Shays. I want to explain to you, I am not trying to--I 
want you to be a friend here. I am not trying to back you 
against the wall, but I just don't want you to be 
misinterpreted and misused for the next 10 years.
    Mr. Fisher. I appreciate that. There is a linguistic 
problem here. Let me try to pinpoint it. For some people, the 
word ``registration'' as applied to our security laws conjures 
up all of the good things that our securities and investor 
protection regime brings to bear in protecting investors. So 
when you say the word ``registration,'' that means the whole 
process. For others--and I would say myself included--the word 
``registration'' conjures up a much narrower subject matter, 
simply the act of registering, of bringing your documents to 
the SEC and saying, may I issue these securities.
    Now, the topic that I think is in the broader subject, but 
not the narrower, is that of disclosure to investors. What 
should investors know when they buy mortgage-backed securities? 
That issue is front and center of our concerns, and I think it 
is the overwhelmingly important subject when you look at the 
MBS market.
    Mr. Shays. So that very helpful answer is a yes? In other 
words, some parts to the 1933 act Fannie Mae and Freddie Mac 
should be under?
    Mr. Fisher. I have not reached that conclusion.
    Mr. Shays. But you are not saying conversely that they 
should not be under any part of the 1933 law? That is--.
    Chairman Baker. With that, your time has expired.
    Mr. Shays. The word was yes?
    Mr. Fisher. That is correct.
    Mr. Shays. Okay. Thank you.
    Chairman Baker. Thank you, Mr. Shays.
    Mrs. Tubbs Jones?
    Mrs. Jones of Ohio. But you haven't reached the conclusion 
that they should be either, have you, sir?
    Mr. Fisher. No, I have not.
    Mrs. Jones of Ohio. And let me be clear so the record is 
clear. Mr. Shays said to you that you would be used by Fannie 
Mae or Freddie Mac for the next 10 years. You are not being 
used by anybody in your testimony. In your testimony it is the 
truth as you know it is to be; is that correct, sir?
    Mr. Fisher. That is correct.
    Mrs. Jones of Ohio. And would you allow anybody to use you 
for purposes of your testimony in this hearing, sir?
    Mr. Shays. How can he stop it?
    Mrs. Jones of Ohio. Mr. Shays, I didn't interrupt you, sir.
    Mr. Fisher. Well--.
    Mrs. Jones of Ohio. I am, too. I am having a great time.
    Mr. Fisher, would you answer my question, please?
    Mr. Fisher. No, I would not, and I have given my views as I 
believe them to be.
    Mrs. Jones of Ohio. Thank you.
    There seems to be some question of the GSE's agreement to 
comply with all the provisions of the 1934 act. Could you 
explain how the 12((g) provision works, please, sir?
    Mr. Fisher. My understanding as detailed in my written 
testimony is that the 1934 act provides that any issuer not 
subject to the act can bring its common stock within the 1934 
act by voluntarily registering that stock with the SEC. Now, 
that will bring them as a matter of Federal law into compliance 
under the jurisdiction of the SEC with most but not all of the 
terms of the 1934 act.
    There are two other sections of the act, sections 14 and 
16, which would not be so covered, and that is of importance in 
the regulatory framework that the SEC worked out with OFHEO 
that now will bring those areas into compliance as well.
    Mrs. Jones of Ohio. The fact is that the GSEs are 
voluntarily complying; is that correct, sir? They didn't have 
to do any of this. This is voluntary compliance that they have 
entered into--and let me strike that question. In fact let us 
go back for a moment.
    I recall earlier in Mr. Shays' questioning some question 
about motivation or inclination. Do you see some nefarious 
motivation on behalf of the GSEs to agree to enter into some 
kind of voluntary compliance, sir?
    Mr. Fisher. No.
    Mrs. Jones of Ohio. And the agencies along with your own 
agency sat down with the GSEs and you all reached a voluntary 
agreement that in your opinion is in the interest of all the 
parties involved; is that a fair statement, sir?
    Mr. Fisher. I rely on the other parties to state their 
interest. I believe their voluntary initiative to come into 
compliance with the 1934 act is in the public interest.
    Mrs. Jones of Ohio. But when you sit at the table as a 
member of Treasury, you are sitting there on behalf of the 
public interest; is that correct? So therefore you are sitting 
at the table accepting this voluntariness as a basic public 
interest, as good for the public interest for lack of a better 
term?
    Mr. Fisher. Yes. I believe, as I said earlier, there are 
three major steps that we have made in the last few days. One 
is their self-initiated compliance with the 1934 act; two is 
the administration's position that all other GSEs should do the 
same; and three, our commitment to a zero-based review of 
disclosure requirements for the mortgage backed market. All 
three of these things are in the public interest in my view.
    Mrs. Jones of Ohio. So the record is clear, Mr. Shays, I am 
having as much fun as you are with this and I am just running 
back between hearings. If I offended you in any way, please let 
the record be clear that I did not intend to offend you, but I 
think it is very important that the record be clear that there 
is no one involved in this process intended by their conduct to 
be nefarious in any way.
    And I yield back the balance of my time. If you are going 
to do another round, holler at me so I can run back would you, 
please?
    Chairman Baker. Certainly. With that, I would suggest we 
leave the record open--.
    Mr. Shays. I have more--.
    Chairman Baker. You do?
    Mr. Bentsen. Mr. Chairman, I just have a comment in 
response to Mr. Shays if I can.
    Chairman Baker. Mr. Bentsen.
    Mr. Bentsen. I want to follow up Mr. Shays because even 
though I don't always agree with him I think Mr. Shays is 
sincere in what he is trying to get at. I would remind him, 
though, to keep in mind a couple of facts. One is that the GSEs 
did not occur by immaculate conception. They were created by 
Congress, in fact after the 1933 and 1934 acts. So 
theoretically Congress knew what it was doing at the time it 
exempted. They were also created with a specific mission in 
mind, and while it is a much maligned agency, perhaps unfairly 
I would say, they do have their own regulator that Congress 
created in addition to having HUD, which was their initial 
regulator, and there are rules for at least institutional 
purchasers of mortgage backed securities as per either FDICIA 
or FIRREA in looking at the risks associated with that.
    So I think the record needs to be clear that these are not 
wholly unregulated entities out there that are somehow exempted 
from all of the securities laws and make them up as they go 
along, but I do think the gentleman is sincere in his pursuit 
figuring out what is the most appropriate needs of disclosure.
    And I yield back.
    Chairman Baker. Thank you, Mr. Bentsen. Mr. Shays, you have 
one supporter and one critic. The time is yours.
    Mr. Shays. That was a modified supporter. I want to say for 
the record that when we sought to have Fannie Mae and Freddie 
Mac come under all the laws that everyone else has to come 
under that in the process of talking to different groups, we 
had some people say we support the bill but we can't be for it 
publicly because Fannie Mae and Freddie Mac are so big that we 
think we will be hurt in the marketplace.
    Now, that is said sincerely because it happens to be the 
truth. And when I told my wife at around 11 o'clock at night in 
bed that I was thinking of introducing a bill requiring Fannie 
Mae and Freddie Mac to register, I got a call about 10 o'clock 
the next morning from Fannie Mae saying can we meet, what is 
this about your introducing a bill wanting us to have to 
disclose? So I called up my wife and said is there anything you 
need to tell me?
    But each is significant. They are respected by so many and 
I respect them, and in the State of Connecticut they have been 
the finest organization to work with. That doesn't negate the 
fact that they have been given a special privilege in which 
they are allowed to be private but not have to deal with the 
requirements of the private side, and that is the basis for 
this, and frankly it is the very reason why you wanted to 
encourage Fannie Mae and Freddie Mac to come under the 1934 act 
and they have resisted it for 10 years. That is also a fact, or 
longer.
    So hats off to you and everyone else, but I want to 
understand how it happened. I want to understand if it is 
Fannie Mae and Freddie Mac telling the government what they are 
willing to do, what they should do and forget it, drop dead, if 
you want them to do more, or I want to know if this was a 
healthy dialogue among participants who basically were able to 
go toe to toe. Was the government kind of wimpish in this 
effort just allowing Fannie Mae and Freddie Mac to do it? If 
they had said no, was the government interested in encouraging 
them to do it or were they saying fine, if you want to 
register, fine; if you don't it is up to you? I want to know.
    Mr. Fisher. Those are very fair and important questions, 
Congressman, and there has been some good levity in the last 
few moments. I hope you wouldn't think me flip if I say I think 
you have probably met Secretary O'Neill and I don't think he is 
someone who is going to be anybody's--I don't remember the word 
you used, patsy or whatever. Secretary O'Neill and I have 
strong feelings--
    Mr. Shays. Let me interrupt a second. The dialogue about my 
good friend Secretary O'Neill and Mr. Raines, that they are 
close personal friends, it does bother me a little bit that 
there is that kind of dialogue and there was this concern and I 
am being serious, there was this concern that that relationship 
might get in the way so, yes, let us throw it out.
    Mr. Fisher. Sir, over 2 months ago, I believe, Secretary 
O'Neill was being interviewed on a television show and he said 
he thought that the GSEs would come forward and be able to do a 
lot more disclosure on their own initiative that would improve 
matters considerably. This is something we have been working on 
for some time. This was not something that was a flash in the 
pan last week. This is a serious matter of public policy. My 
whole career is premised on disclosure.
    Paul O'Neill's career in the corporate sphere has been one 
of rectitude on matters of disclosure and good corporate 
governance, and I think he is respected around the world in 
that regard. This is not something where the administration 
rolled over, sir. There is everything that I think is important 
in the sphere of disclosure and to help make our securities 
markets trade more efficiently is on the table here, and that 
has been achieved.
    Mr. Shays. I am told you are a protege of Alan Greenspan. 
When Alan Greenspan is finished in the Budget Committee, both 
sides go away thinking that he agreed with them. You weren't 
quite speaking in tongues but can you be more specific? Did the 
Department of Treasury initiate meetings encouraging Fannie Mae 
and Freddie Mac to come under the 1934 law?
    Mr. Fisher. Yes, we have, and I think I have been clear 
about that.
    Mr. Shays. Fine, that is all I needed. Thank you.
    Chairman Baker. Thank you. Is Mrs. Tubbs-Jones within 
hearing distance? I know she is very busy. I wouldn't want to 
overlook her. Is that fair, Mr. Shays?
    Mr. Shays. That is fair.
    Chairman Baker. Mr. Bentsen, any further comments?
    Let me express to you, Mr. Fisher, my appreciation for your 
introduction to GSE Governance 101. I am sure it is a topic 
that you will return to with eager enthusiasm as the months 
roll by, but assure you, as I stated once long ago, I feel like 
I was previously alone in the dark in front of a very large 
iceberg holding a hand-held blow dryer of 400 watts. I am proud 
to report to you that for the first time in my legislative 
career I now see two drops of water and for that I am 
appreciative.
    Thank you sir. The hearing is adjourned.
    [Whereupon, at 4:10 p.m., the subcommittee was adjourned.]



                            A P P E N D I X



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