[Senate Hearing 108-581]
[From the U.S. Government Publishing Office]



                                                        S. Hrg. 108-581


                   NOMINATIONS OF: MARK C. BRICKELL,
                 ALICIA R. CASTANEDA AND THOMAS J. CURRY

=======================================================================

                                HEARING

                               before the

                              COMMITTEE ON
                   BANKING,HOUSING,AND URBAN AFFAIRS
                          UNITED STATES SENATE

                      ONE HUNDRED EIGHTH CONGRESS

                             FIRST SESSION

                                   ON

                            NOMINATIONS OF:

            MARK C. BRICKELL, OF NEW YORK, TO BE DIRECTOR OF
             OFFICE OF FEDERAL HOUSING ENTERPRISE OVERSIGHT

                               __________

            ALICIA R. CASTANEDA, OF THE DISTRICT OF COLUMBIA
              TO BE A MEMBER OF THE BOARD OF DIRECTORS OF
                     FEDERAL HOUSING FINANCE BOARD

                               __________

          THOMAS J. CURRY, OF MASSACHUSETTS, TO BE A MEMBER OF
     THE BOARD OF DIRECTORS, FEDERAL DEPOSIT INSURANCE CORPORATION

                               __________

                             JULY 22, 2003

                               __________

  Printed for the use of the Committee on Banking, Housing, and Urban 
                                Affairs



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            COMMITTEE ON BANKING, HOUSING, AND URBAN AFFAIRS

                  RICHARD C. SHELBY, Alabama, Chairman

ROBERT F. BENNETT, Utah              PAUL S. SARBANES, Maryland
WAYNE ALLARD, Colorado               CHRISTOPHER J. DODD, Connecticut
MICHAEL B. ENZI, Wyoming             TIM JOHNSON, South Dakota
CHUCK HAGEL, Nebraska                JACK REED, Rhode Island
RICK SANTORUM, Pennsylvania          CHARLES E. SCHUMER, New York
JIM BUNNING, Kentucky                EVAN BAYH, Indiana
MIKE CRAPO, Idaho                    ZELL MILLER, Georgia
JOHN E. SUNUNU, New Hampshire        THOMAS R. CARPER, Delaware
ELIZABETH DOLE, North Carolina       DEBBIE STABENOW, Michigan
LINCOLN D. CHAFEE, Rhode Island      JON S. CORZINE, New Jersey

             Kathleen L. Casey, Staff Director and Counsel

     Steven B. Harris, Democratic Staff Director and Chief Counsel

               Peggy R. Kuhn, Senior Financial Economist

              Mark A. Calabria, Senior Professional Staff

             Martin J. Gruenberg, Democratic Senior Counsel

             Jonathan Miller, Democratic Professional Staff

   Joseph R. Kolinski, Chief Clerk and Computer Systems Administrator

                       George E. Whittle, Editor

                                  (ii)


                            C O N T E N T S

                              ----------                              

                         TUESDAY, JULY 22, 2003

                                                                   Page

Opening statement of Chairman Shelby.............................     1

Opening statements, comments, or prepared statements of:
    Senator Sarbanes.............................................     3
    Senator Reed.................................................     4

                                NOMINEES

Mark C. Brickell, to New York, to be Director, Office of Federal 
  Housing Enterprise Oversight...................................     5
    Biographical sketch of nominee...............................    32
    Responses to written questions of:
        Senator Corzine..........................................    58
        Senator Reed.............................................    65
        Senator Sarbanes.........................................    71
Alicia R. Castaneda, of the District of Columbia, to be a Member 
  of the
  Board of Directors, Federal Housing Finance Board..............    25
    Biographical sketch of nominee...............................    38
    Response to written questions of Senator Carper..............    72
Thomas J. Curry, of Massachusetts, to be a Member of the Board of
  Directors, Federal Deposit Insurance Corporation...............    26
    Biograhpical sketch of nominee...............................    46

              Additional Material Supplied for the Record

Letter to Chairman Shelby from William J. Donovan, Senior Vice 
  President, National Association of Federal Credit Unions.......    73

                                 (iii)

 
                            NOMINATIONS OF:

                     MARK C. BRICKELL, OF NEW YORK

                   TO BE DIRECTOR, OFFICE OF FEDERAL

                      HOUSING ENTERPRISE OVERSIGHT

                      ALICIA R. CASTANEDA, OF THE

                          DISTRICT OF COLUMBIA

                           TO BE A MEMBER OF

                         THE BOARD OF DIRECTORS

                     FEDERAL HOUSING FINANCE BOARD

                    THOMAS J. CURRY, OF MASSACHUTTES

                           TO BE A MEMBER OF

                         THE BOARD OF DIRECTORS

                 FEDERAL DEPOSIT INSURANCE CORPORATION

                              ----------                              


                         TUESDAY, JULY 22, 2003

                                       U.S. Senate,
          Committee on Banking, Housing, and Urban Affairs,
                                                    Washington, DC.

    The Committee met at 2:02 p.m., in room SD-538, Dirksen 
Senate Office Building, Senator Richard C. Shelby (Chairman of 
the Committee) presiding.

        OPENING STATEMENT OF CHAIRMAN RICHARD C. SHELBY

    Chairman Shelby. The Committee will come to order.
    We have three nominations this afternoon. I appreciate the 
willingness of the nominees to appear before the Committee 
today.
    Today's nominees, if confirmed, will play a very vital role 
in overseeing the safety and soundness of our Nation's 
financial institutions. As the institutions regulated by the 
Office of Federal Housing Enterprise Oversight, the Federal 
Housing Finance Board, and the Federal Deposit Insurance 
Corporation provide liquidity to our Nation's mortgage and 
business credit needs, strong oversight of their soundness, I 
believe, is essential.
    Two of today's nominees would oversee the regulation of the 
housing-related Government Sponsored Enterprises: Fannie Mae, 
Freddie Mac, and the Federal Home Loan Bank System. These are 
large enterprises. Collectively, Fannie Mae and Freddie Mac 
carry $1.6 trillion in assets on their balance sheets and have 
outstanding debt of almost $1.5 trillion. The Federal Home Loan 
Banks are not far behind, with combined assets of over $780 
billion and outstanding advances to member institutions of $495 
billion.
    I support the role played by all the housing GSE's. Home 
Loan Bank advances are a vital resource for financial 
institutions nationwide. The secondary mortgage market 
liquidity provided by Fannie Mae and Freddie Mac, also serves 
as an important source of funds for our Nation's mortgage 
market. By enhancing liquidity, the Enterprises make possible 
the lending activity that is critical to economic growth and to 
expanding homeownership.
    Due to the importance of the housing GSEs' mission and the 
size of their assets, I believe that better disclosure of 
pertinent financial information, essentially greater 
transparency, is important for the protection of taxpayers and 
investors.
    Last Thursday, this Committee examined OFHEO's oversight of 
Fannie Mae and Freddie Mac and their accounting practices. I 
remain troubled by what appear to be lapses of monitoring at 
OFHEO. I also remain concerned that appropriate accounting 
procedures have not been performed by one of the institutions 
which OFHEO oversees. I believe the integrity of financial data 
is vital to measuring safety and soundness.
    Also of great importance is the safety and soundness of our 
banking system. The Federal Deposit Insurance Corporation has 
served a vital role in assuring depositors that their money, 
often their life savings, is safe. This assurance has prevented 
the banking crises that characterized the first 150 years of 
our country's existence. It is of the utmost importance to 
maintain the public's confidence in the safety of our financial 
institutions.
    While the current Federal Deposit Insurance System provides 
a high level of confidence to the individual depositor, I 
believe the system presently lacks flexibility and contains 
inefficiencies which could lead to costly problems in the long 
run. Reducing these inefficiencies ranks high on this 
Committee's agenda.
    I again want to thank all of the witnesses for appearing 
before the Committee today. Our first panel is Mr. Mark C. 
Brickell, nominated by the President to be Director of the 
Office of Federal Housing Enterprise Oversight. Most recently, 
Mr. Brickell served as the CEO and Director of Blackbird 
Holdings, where he oversaw the company's development of its 
swaps and interest rate derivatives trading system. Over the 
course of 15 years, Mr. Brickell also served in various 
positions with JP Morgan and Company.
    Our second panel this afternoon is Ms. Alicia Castaneda, 
nominated to be a Member of the Board of Directors of the 
Federal Housing Finance Board and Mr. Thomas J. Curry, 
nominated to be a Member of the Board of Directors of the 
Federal Deposit Insurance Corporation.
    Ms. Castaneda has over the course of almost two decades 
worked her way up the ranks at Bank of America. Having started 
as a clerk at the Bank of America's International Desk, she has 
risen to the position of Market Executive in the International 
Private Banking Division and previously as Senior Vice 
President in the Treasury Division. During this time, Bank of 
America has grown to become the world's second largest bank.
    Mr. Curry currently serves as Commissioner of Banks for the 
Massachusetts Division of Banks. Previously, he served as First 
Deputy Commissioner of Banks and as Acting Commissioner of 
Banks. Earlier in his career, Mr. Curry served as assistant 
general counsel for the Massachusetts Division of Banks and as 
an attorney with the Massachusetts Secretary of State.
    Senator Sarbanes.

             STATEMENT OF SENATOR PAUL S. SARBANES

    Senator Sarbanes. Thank you very much, Mr. Chairman. I am 
pleased in joining you in welcoming these nominees before the 
Committee this afternoon. Since we will address both Tom Curry 
and Alicia Castaneda subsequently in a panel, I will reserve my 
comments with respect to their nominations until that time.
    Mr. Chairman, last week you convened an important hearing 
to review the regulatory response to the accounting problems at 
Freddie Mac. That hearing underscored the importance of the 
role of the Office of Federal Housing Enterprise Oversight--
OFHEO--and its Director in supervising the so-called Government 
Sponsored Enterprises, Fannie Mae, and Freddie Mac.
    Today's hearing with our lead-off nominee, Mr. Mark 
Brickell, who has been nominated to be the Director of the 
Office of Federal Housing Enterprise Oversight, goes to the 
point of how effectively will the housing GSE's be supervised.
    In 1992, we passed the Federal Housing Enterprises 
Financial Safety and Soundness Act. In that Act, the Congress 
found that Fannie Mae and Freddie Mac have an important public 
mission to provide housing and to help sustain the Nation's 
economy. And I take it from what was said at last week's 
hearing that we continue to consider Fannie Mae and Freddie Mac 
to be vital in serving these functions.
    The Act states:

    An entity regulating such enterprises should have the 
authority to establish capital standards, require financial 
disclosure, prescribe adequate standards for books and records 
and other internal controls, conduct examinations when 
necessary, and enforce compliance with the standards and rules 
that it establishes.

    This is clearly a critical role whose importance has only 
been heightened by recent events. The Director of OFHEO 
requires a person of exceptional independence, judgment, and 
commitment to OFHEO's regulatory mission.
    Mr. Brickell, who has been nominated for this position, is 
knowledgeable with regard to financial matters. He worked for 
25 years at JP Morgan and has been the CEO of Blackbird 
Holdings, Inc., since leaving Morgan in 2001.
    Serious questions, however, have been raised as to whether 
he is the right person for this position at this time. This 
morning's Washington Post has a strongly worded editorial with 
respect to this nomination, and, Mr. Chairman, I would like to 
take a moment to quote from it.
    Chairman Shelby. Go right ahead.
    Senator Sarbanes. I am quoting from a Washington Post 
editorial this morning.

    The nominee, Mark C. Brickell, a former Managing Director 
at JP Morgan Securities, has a long track record of opposing 
Government regulation of financial services and leaving most of 
the work to market forces. In particular, Mr. Brickell . . . 
led lobbying efforts to prevent regulation of derivatives, the 
arcane financial instruments that are critical to the risk 
management operations of Fannie Mae and Freddie Mac. 
Questionable accounting for derivatives is at the heart of the 
recent troubles at Freddie Mac. Mr. Brickell also weighed in on 
the side of Fannie Mae and Freddie Mac when they argued that 
they should be able to set up their own tests--rather than one 
devised by OFHEO--for whether they had adequate capital on 
hand, a change that OFHEO said would diminish its `regulatory 
independence and rigor.'

    Mr. Chairman, as we review this nomination, it is important 
to scrutinize Mr. Brickell's record closely as we address the 
question of who should be directing OFHEO and carrying out its 
importance regulatory mission.
    Thank you, Mr. Chairman.
    Chairman Shelby. Senator Reed.

                 STATEMENT OF SENATOR JACK REED

    Senator Reed. Thank you very much, Mr. Chairman, for 
scheduling this hearing, and I want to thank Mr. Brickell. We 
had a chance to chat before in my office.
    As Senator Sarbanes has indicated, the position of Director 
of OFHEO has recently taken on added importance. As we all 
know, Fannie Mae and Freddie Mac have played an invaluable role 
in creating a stable, liquid, and national mortgage market in 
our country, and this has resulted in our country having one of 
the highest homeownership rates in the world.
    Strong, effective oversight of Fannie and Freddie is 
clearly important to their continued success, and as we heard 
at the hearing last week from current OFHEO Director Armando 
Falcon, recent events at Freddie Mac have driven this point 
home with some force.
    In addition to being financially sophisticated, I believe 
that the Director of OFHEO needs to have an outlook and 
temperament that will convince the Government Sponsored 
Enterprises, investors, and Congress that he would be a tough 
and rigorous regulator. What concerns me about the present 
nomination of Mr. Brickell is that he has worked for over two 
decades to challenge the very idea of Government regulation of 
financial markets in many, many different ways.
    First and foremost, Mr. Brickell, you have worked to oppose 
any type of regulation of financial derivatives or any type of 
transparency requirements for derivatives dealing or trading. 
You have also staunchly advocated rolling back regulations 
which have helped the Federal Government regulate Fannie and 
Freddie. Let me note a few examples.
    You proposed to deregulate financial derivatives entirely 
and allow sales of them to retail investors. You actually wrote 
a letter to OFHEO in March 2000 arguing that the GSE's should 
be able to choose their own internal models for determining 
their risk-based capital requirements, which is essentially 
arguing that they should be able to regulate themselves. Such 
an approach could only have a multiplier effect on the 
consequence of any financial uncertainties or inappropriate 
assumptions, such as the ones that Freddie Mac has recently 
encountered or the duration gap disclosures that Fannie Mae 
made last year.
    In addition, the use of internal models would have given 
each institution the ability to reduce, at the margin, the 
stringency of the risk-based capital standards.
    Finally, you were in the forefront of the effort to oppose 
the Financial Accounting Standards Board from implementing 
Financial Accounting Standards Board Statement 133 and strongly 
supported legislation to undermine the independence of FASB 
with regard to established accounting rules for banks.
    These are not the types of actions that an individual takes 
if they believe deeply in the role of Government regulators in 
the marketplace, who not only understand the primacy of the 
marketplace but also the critical role of robust, vigorous 
regulation, not as an afterthought but as a primary 
responsibility.
    Now, Mr. Brickell no one doubts your intellectual abilities 
for this job or your great efforts over many years, but I am 
just not sure that someone who has consistently opposed 
regulation, transparency, and oversight in the derivatives 
market should be director of an agency that is designed to 
demand all of the above from the GSE's.
    I look forward to this hearing. I must, with some regret, 
say that I also feel compelled to attend the briefing by 
Ambassador Bremer in a few moments. I was in Baghdad with the 
Ambassador about 2 weeks ago and left there with many more 
questions than were answered then. I will look to review 
carefully the transcript because the questions I pose need 
answers.
    Thank you.
    Thank you, Mr. Chairman.
    Chairman Shelby. Mr. Brickell, will you stand and hold up 
your right hand and be sworn.
    Do you swear or affirm that the testimony that you are 
about to give is the truth, the whole truth, and nothing but 
the truth, so help you God?
    Mr. Brickell. I do.
    Chairman Shelby. Do you agree to appear and testify before 
any duly-constituted committee of the Senate?
    Mr. Brickell. I do.
    Chairman Shelby. Thank you.
    Your written statement, if any, will be made part of the 
record. If you want to introduce your family now, you may do 
so.

           STATEMENT OF MARK C. BRICKELL, OF NEW YORK

                         TO BE DIRECTOR

         OFFICE OF FEDERAL HOUSING ENTERPRISE OVERSIGHT

    Mr. Brickell. Thank you and Chairman Shelby, Ranking Member 
Sarbanes, and Members of the Committee. I am honored to appear 
before you today, and I thank you, Mr. Chairman, for holding 
this hearing.
    I appreciate the opportunity to introduce my family. I want 
to thank my wife, Anita; my daughter, Amanda; and my daughter, 
Missye; my son, Matt, for joining me here. Since it is July, no 
one here is missing classes in school, but three-fourths of the 
members of the group are employed in the labor force. Those 
among them who are hourly workers are giving up a day's pay to 
show their support. I appreciate that sacrifice, and I 
appreciate the other sacrifices that the family will make if I 
am confirmed.
    The President has nominated me to serve as the Director of 
the Office of Federal Housing Enterprise Oversight. I admire 
President Bush and his leadership of our country in the face of 
great challenges. It is a humbling thing to be called to public 
service, and particularly so to be called by this President, 
for this position, at this time. OFHEO has a brief history and 
challenges of its own, and if you choose to affirm my 
nomination, I will be only the third Director of the Office, 
and it is a responsibility which I take very seriously.
    An important part of the responsibilities of OFHEO Director 
is to work with the Senate Banking Committee. I have had that 
privilege for more than a decade, working closely with Members 
of the Committee and with their thoughtful and talented staff 
on issues relating to banking and financial services activity. 
This Committee plays an important role in establishing a firm 
foundation for the Nation's capital markets and, should I be 
confirmed, it will be an honor to work with you in the years 
ahead.
    Much capital raised in the American capital markets 
finances the homes of American citizens. I believe that housing 
finance is important not only because it makes a large 
contribution to our Nation's economy, but also because 
homeownership strengthens the fabric of our society. For many, 
indeed for most Americans, owning a home is a way to grasp the 
first rung on the economic ladder. In families like my own, 
when I was growing up, it was a way for my parents to send 
their children to the best public schools that they could find. 
I strongly support the fair housing policies, the Minority 
Homeownership Initiative to add more than 5.5 million minority 
homeowners by the end of the decade in this country, and the 
affordable housing goals of President Bush and Secretary 
Martinez. I hope that I can help more families of moderate and 
low income to share those benefits of homeownership by helping 
OFHEO to carry out its regulatory mission. Those benefits were 
certainly important in my family and important to me 
personally.
    OFHEO's mission today is to ensure that Fannie Mae and 
Freddie Mac operate safely and soundly. Congress created OFHEO 
in 1992 in express recognition of the importance of the long-
term financial health of these Government Sponsored 
Enterprises. I understand the importance of that mission, and 
if I am confirmed, I will vigorously enforce the rules and 
regulations of OFHEO to the full extent of the authority which 
Congress entrusts in the Director of OFHEO. I will also work 
closely with this Committee and all Members of Congress to 
improve the statutory framework within which OFHEO operates.
    I believe that my career experience will help me achieve 
those goals. I have spent 25 years working at JP Morgan. I have 
spent the last 2 years as Chief Executive of Blackbird 
Holdings, Inc. It has been an opportunity to learn a great deal 
about the financial markets, financial technology, and risk 
management practices at leading financial institutions. If you 
choose to affirm my nomination, I will use that experience and 
dedicate every ounce of my energy and judgment to pursuing the 
important challenges facing OFHEO and our housing finance 
system at this important time.
    Thank you, and I look forward to answering your questions.
    Chairman Shelby. Thank you, Mr. Brickell.
    You heard Senator Sarbanes' comments and some of his 
concerns about the need for a strong and effective regulator of 
Fannie Mae and Freddie Mac, and I think his view is pretty 
widely shared by a lot of us on this Committee. Mr. Brickell, 
what makes you the right person at this right time for this 
job? We respect that you have been appointed by the President 
of the United States for this job. We respect your education 
and your background and your experience and your success.
    Mr. Brickell. Well, Mr. Chairman, I have spent more than 25 
years in the financial markets, and that has given me exposure 
to complicated financial transactions like derivatives. It has 
given me an understanding of risk management at large financial 
institutions. It has given me the chance to see not only the 
strengths but also the weaknesses of financial markets and 
financial institutions. And while other people on Wall Street 
would be able to say those things, I think there is something 
else that I have, and I have enjoyed very much the opportunity 
to work over more than a decade with policymakers here in 
Washington on regulatory issues. I would hope that that 
experience, both in the markets and with policy discussions, 
would be helpful to OFHEO at this time.
    Chairman Shelby. My understanding is that OFHEO has never 
taken a formal enforcement action against either Freddie Mac or 
Fannie Mae during their existence. Do you believe that OFHEO 
has used the full extent of its enforcement powers? Do you 
believe that OFHEO needs additional enforcement powers? Have 
you thought about that in any depth?
    Mr. Brickell. Fannie Mae and Freddie Mac perform a vitally 
important function for housing finance in this country. They 
bring capital market benefits to housing finance. And in that 
way, they give us the broadest, deepest, most successful 
housing markets in the world. That means expanded home loan 
opportunities. That means reduced costs for homeowners.
    Part of the way that they are able to do that is because 
they are regulated financial institutions. In my career in 
financial services, every day that I have spent at my desk, 
every day that I have worked has been spent at a regulated 
financial institution. I know how important it is for 
depositors or lenders, investors in general, to have confidence 
in the regulator who oversees a financial institution. And I 
think it is essential that OFHEO be strong, fair, rigorous in 
what it does, and be perceived to be those things.
    If I am confirmed, I would look forward to conducting the 
operations of OFHEO in a way that give that confidence to 
investors and working with the Committee to make sure that the 
framework in which OFHEO operates enables them to do that.
    Chairman Shelby. Mr. Brickell, when a hedge is ineffective, 
derivatives could increase risk rather than minimize risk. 
Should that hedging risk, whatever it might be, be factored 
into a GSE's risk-based capital level?
    Mr. Brickell. A risk-based capital rule that achieves its 
objective will be a rule that ensures the institution is not 
too thinly capitalized to support the risks that it takes. So 
the capital rules have to operate in a way that identify the 
real risks that the institution is taking and ensure that the 
right amount of capital is there.
    Chairman Shelby. Fannie Mae and Freddie Mac enter into a 
large volume of derivative trades. The number of counterparties 
with which they trade, however, is quite small. The inability 
of any of these counterparties to meet their side of the trade 
could be a significant cost to either Fannie Mae or Freddie 
Mac.
    Could you explain to the Committee how derivative dealers 
monitor counterparty risk to a purchaser of derivatives?
    Mr. Brickell. Sure. I am glad to do that, Senator. And I 
should say as I do that these are general comments about 
derivatives activity in general.
    Chairman Shelby. Sure. We know.
    Mr. Brickell. Not specific to these two Government 
Sponsored Enterprises.
    Chairman Shelby. That was a general question.
    Mr. Brickell. The contracts we are talking about, these 
risk management contracts, last for many years, and an interest 
rate swap could be 5, 10, or 20 years in length. So the 
participants in swap activity have cared deeply about the 
credit quality of the counterparty on the contract and the 
ability of their counterparty to perform.
    There are several different ways that participants in these 
swap contracts can manage the risks that they are taking. One 
is by understanding carefully the business and the character of 
the firms they are doing business with, and limiting their 
counterparty relationships to well-capitalized, sometimes well-
regulated firms.
    In cases where one sees a limited number of counterparties, 
it may very well be because the party in question has chosen to 
enter into contracts with others that he knows well and trusts 
and whose credit he can judge.
    Another thing that firms can do is to accept collateral or 
post collateral with those with whom they trade, and these 
techniques have been not only effective in keeping credit 
losses in derivatives activity below the level of credit losses 
in other banking activities, but also in giving a level of 
disciple to the swap business that is unusual and a very 
healthy thing.
    Chairman Shelby. Senator Sarbanes.
    Senator Sarbanes. Thank you very much, Mr. Chairman.
    Mr. Brickell, I first want to ask you a bit about the 
capital rules for the GSE's. OFHEO's lead responsibility is to 
establish capital standards for Fannie Mae and Freddie Mac. 
OFHEO's risk-based capital test just went into effect last 
year. In March 2000, you sent a comment letter on OFHEO's 
proposed risk-based capital rule in your capacity as Managing 
Director of JP Morgan. The thrust of your letter, as I 
understand it, was to recommend that OFHEO follow an internal 
models approach with respect to establishing the capital test, 
in other words, allowing Fannie and Freddie to use their own 
models. OFHEO responded to your comment letter by stating that 
allowing Fannie and Freddie to use their own models to 
calculate their own capital requirements could result in a 
weaker and inconsistently applied standard. Models that the 
Enterprises develop themselves would inevitably differ in their 
details, which could result in significant variations and make 
it difficult to apply the stress test consistently.
    OFHEO went on and said that developing its own model is in 
the interest of regulatory independence and rigor and gives 
OFHEO greater flexibility and the ability to independently test 
alternative risk scenarios which ensures the integrity of the 
test.
    What is your view of this OFHEO response, or the broader 
question, your view of the internal model approach based on 
models developed by the GSE's thank-you-very-much as being 
preferable to the approach adopted by OFHEO?
    Mr. Brickell. I am glad you asked that question. There has 
been a robust discussion among financial regulators and 
participants in the financial services businesses over the last 
two decades about how to construct the most useful, healthiest 
capital rules. It is a discussion that has gone on within this 
country where we have different kinds of institutions regulated 
by different regulators and a discussion that Americans have 
had with financial services regulators from other countries, in 
forums like the Basel Committee. So it is not surprising that 
different regulators would have different views about what 
capital approach is best.
    JP Morgan was one of about 20 financial services firms that 
submitted comment letters in response to OFHEO's request for 
comment about their proposed capital rule. And the letter that 
you cite is one that I signed for JP Morgan. I was actually the 
second signature on that letter. The first signer was Tim Ryan, 
who served as the Director of the Office of Thrift Supervision 
at the height of the S&L crisis. I think that anyone who knows 
Mr. Ryan's record would say that he was a fair but a very firm 
regulator.
    Senator Sarbanes. And by osmosis, does that carry over to 
you since you were the second signature on the letter?
    Mr. Brickell. You have the right conclusion, although that 
is not the only reason you would reach it.
    [Laughter.]
    I, too, would strive to be a fair and firm regulator.
    We sent that letter because we thought it would be helpful 
to OFHEO to know our perspective on the framework of capital 
regulation that was being developed by the banking supervisors 
at the same time. And what we did in our letter was described, 
the framework of capital rules being developed under the Basel 
scheme, and being employed by the U.S. banking regulators. That 
system of regulation uses the internal models approach it is 
called. It requires the banks to develop their own models, 
models that meet certain standards, models that accurately 
capture, as we discussed a while ago, the risks of the firm and 
identified the amount of capital that is needed for the firm.
    We encouraged, in our letter, OFHEO to take a flexible 
approach like the approach the banking regulators take, rather 
than take an inflexible approach. I think it is worth saying 
that a rigid regime for capital is not necessarily a tough 
regime. Rigid rules give financial services firms an 
opportunity for regulatory arbitrage.
    When the rules are spelled out with great precision, 
creative, innovative financial minds, and I am proud to have 
worked with many, will sometimes find ways to achieve 
regulatory arbitrage, and when they do the purpose of the 
capital rules is thwarted.
    The approach we talked about in that letter, we believe, is 
more demanding not only of the financial institution, but also 
more demanding of the regulator because the regulator would 
have to satisfy himself that the models being used by the 
financial institution achieve the purpose of the capital 
regulation and do not lead to leakage of capital through 
regulatory arbitrage.
    I think it was something worse considering, and OFHEO has 
not adopted it. Indeed, OFHEO is constrained, in some ways, by 
the statute, which hard wires into law many of the parameters 
of the capital rule. One thing that the Committee may wish to 
consider, as it talks about ways to strengthen OFHEO, is to 
give OFHEO the ability to tailor its capital rules as closely 
as possible to the risks being taken by Fannie Mae and Freddie 
Mac.
    Senator Sarbanes. I take it from that answer that you 
continue to hold to the position that was expressed in your 
March 2000 letter, even though you are now being considered to 
become the Director of OFHEO, which has not followed the 
internal models path; is that correct?
    Mr. Brickell. What I am saying is that the proposal, the 
information that we presented in the comment letter is 
information that was worthy of consideration by OFHEO. It is a 
system of capital regulation which is used by regulators who 
are, I believe with good reason, well-respected: The banking 
supervisors in this country, the Federal Reserve, the 
Comptroller of the Currency, the FDIC. They operate under this 
framework.
    I am not able to say whether this framework or the way they 
do it is tougher, weaker, or whether they are perceived as 
stronger or softer than OFHEO itself, but I think that it is 
important for the Director of OFHEO, it is important for OFHEO 
to be well aware of the approaches to regulation that are being 
taken by other well-respected U.S. financial services 
regulators and to interact with them, give them good ideas and 
take good ideas from them. I think that is a healthy process, 
and I would hope to learn from those other financial services 
regulators and take their best ideas and bring them to bear at 
OFHEO on Fannie and Freddie.
    Senator Sarbanes. So you are entertaining the prospect of 
changing the OFHEO rule with respect to the capital standards?
    Mr. Brickell. We are talking here about an innovative area 
of American finance and one in which advances have come at a 
very rapid rate. The banking supervisors are constantly 
revising and improving the capital rules that they use for the 
banks. And I believe that OFHEO should constantly review and 
upgrade, strengthen the capital rule that it uses for Fannie 
and Freddie. If it does not do that, it will inevitably fall 
behind the quality of regulation done by the banking 
authorities.
    Senator Sarbanes. So you are entertaining allowing the 
Fannie and Freddie to set their own model for their capital 
standards; is that correct?
    Mr. Brickell. If I am confirmed as the Director of OFHEO, I 
will have access to a great deal more information than I have 
had as a co-author of a comment letter on capital regulation, 
and I do not think it is prudent to prejudge or anticipate what 
I would decide when I learn more about Fannie and Freddie, how 
they operate, and the benefits of operating under the OFHEO 
framework.
    What I do think is important is to show you that I would 
enter this job with an open mind, with a willingness to look 
for ways to strengthen OFHEO's regulation of Fannie and Freddie 
because it is essential, in my opinion, and I hope in the 
opinion of the Committee that these two large, world-class 
financial institutions have a world-class financial regulator 
with adequate resources and with the statutory ability to be 
just as rigorous in its approach as the banking supervisors 
are.
    Senator Sarbanes. I see my time for this round has run out, 
and I will come back and revisit some other issues with you. I 
only note again that the Post editorial this morning was pretty 
strong on this very issue about whether these GSE's should be 
allowed to set their own tests, and you are now opening up the 
prospect that that is what they would be allowed to do. And the 
Post goes on to say, ``The Banking Committee needs to assess 
whether he--'' meaning Mr. Brickle ``--has the right attitude. 
Regulators with a preset point of view and a disdain for tough 
enforcement have already done much damage during this 
Administration.''
    Mr. Chairman, I presume there are going to be further 
rounds.
    Chairman Shelby. There will be more rounds.
    Senator Carper.
    Senator Carper. Thank you, Mr. Chairman.
    Mr. Brickell, good to see you again. Thank you for visiting 
with me last week.
    Mr. Brickell. Thank you, Senator.
    Senator Carper. Let me just ask, and I apologize if any of 
these questions have been asked before. If they have been, just 
let me know, and I will move on to another question.
    Let me just ask, what is your view, if you will, of the 
risk-based capital rule finally put into effect by OFHEO, would 
you still prefer the internal model approach that is being used 
in developing the Basel II Accord?
    Mr. Brickell. We have, in fact, talked a little bit about 
that, but I would like to summarize what we have said, 
particularly so that my view is clear.
    OFHEO has a tightly drawn statute under which it imposed 
its capital rule on Fannie Mae and Freddie Mac. It is a statute 
which hard-wires into the law itself many of the parameters 
that would be used to calculate the required capital for the 
two institutions. And our comment letter talked about the 
benefits for the regulator and for the capital strength of the 
regulated institution of having enough flexibility to do what 
the banking supervisors do.
    This is an area of financial theory and practice which is 
evolving very rapidly. We continue to learn new things each 
year about how to make better estimates of the risks being 
taken and of the capital required for financial institutions. I 
think it is important for OFHEO to be able to continuously 
upgrade the capital rules that it uses in its oversight of 
Fannie Mae and Freddie Mac in order to ensure that it doesn't 
fall behind the quality of regulation used by other American 
regulators, and the banking regulators in particular. They have 
spent a great deal of time on capital rules. They use the 
approach we described in the letter, and I think it has been 
beneficial to the banking system.
    Senator Carper. Do you believe the U.S. banking system is, 
at the current time, overcapitalized, undercapitalized, 
appropriately capitalized? Where are we?
    Mr. Brickell. Well, that is a big question.
    Senator Carper. Actually, it is a pretty small one. The 
answers are bigger than the question.
    Mr. Brickell. It would require a very big answer.
    Senator Carper. I only have 5 minutes.
    Mr. Brickell. I will keep it short. I do believe this; 
there has been a tremendous amount of energy and effort 
dedicated to coming up with excellent capital rules by the 
banking supervisors in this country, and there are several of 
them, of course, and banking supervisors in other countries.
    They have worked together in Basel to come up with the 
Basel Framework for Capital Regulation, and there has been a 
cross-fertilization of what the supervisors are learning from 
the regulators in other countries and what the people in the 
banking institutions are doing to improve their internal 
management of risks.
    What is done internally is feeding the regulators. What the 
regulators in the United States learn from overseas is feeding 
back in the form of capital requirements for the U.S. firms. 
So, I think that capital regulation in this country is in 
better shape than it is ever been.
    Senator Carper. Maybe one more.
    Do you think that the Basel II Accord will lower the level 
of capital in the U.S. banking system? And this kind of goes 
back to the last question, but would that be a desirable 
objective? Is your preference for the internal model approach 
for establishing capital standards for GSE's based on a view 
that the internal model approach would result in a lower level 
of capital?
    Mr. Brickell. It is certainly not. As I have just described 
to Senator Sarbanes, in response to his question, the approach 
outlined in the comment letter is the approach used by the 
banking authorities in the United States because it is more 
rigorous in their view than the more rigid, capital rule 
employed by OFHEO.
    So, I do not believe that Basel II will weaken capital 
regulation, and I certainly believe that it is important for 
the regulator of Fannie and Freddie to use a capital rule which 
is strong, every bit as good as the rules used by the banking 
authorities and one which will give confidence to investors.
    Senator Carper. Good enough. Thanks.
    Mr. Chairman, as you know, we have Ambassador Bremer, who 
is addressing us up in a classified briefing. I am going to 
slip up there. I thank you for being here, and thank you for 
your willingness to serve.
    Mr. Brickell. Than you, Senator.
    Chairman Shelby. Mr. Brickell, since its publication, 
Financial Accounting Standard 133 has generated a great deal of 
interest among practitioners and regulators. Do you believe 
that the Financial Accounting Standards Board came to the 
appropriate conclusions with FAS 133?
    Mr. Brickell. I remember the discussions about FAS 133, and 
they went on for many years, and they were vigorous 
discussions. There were hundreds of letters sent----
    Chairman Shelby. A lot of comment.
    Mr. Brickell. --on that rule. Many of them were signed by 
the chief executives of the companies who would be affected, 
and there were concerns expressed even by regulators. I 
remember Fed Chairman Greenspan expressing his concern about 
the rule at one point in the process.
    I worked for institutions that participated in that comment 
process, and I worked hard to make sure that when FAS 133 was 
adopted, it would make it easier for investors and the readers 
of financial statements to understand the business activities 
of the reporting companies.
    Now, FAS 133 is part of generally accepted accounting 
principles. It is GAAP.
    Chairman Shelby. And central to a recent controversy, 
right?
    Mr. Brickell. Indeed, it is, and it is not an option. It is 
not an alternative. There is not room to interpret it in 
different ways.
    Chairman Shelby. It is a must now; is it not?
    Mr. Brickell. It is GAAP, and it has to be used. Fannie and 
Freddie are required, by law, to report their results according 
to GAAP. They have to abide by FAS 133, and if I am confirmed 
as Director of OFHEO, I will make sure that they do comply, not 
only with that one accounting rule, but also with all of the 
GAAP.
    Chairman Shelby. In a copy of today's Wall Street Journal, 
Professor Stephen Ryan is an Accounting Professor at New York 
University, stated that on a fair-value basis, both Freddie Mac 
and Fannie Mae are undercapitalized.
    Do you believe this to be an accurate statement or are you 
not on the inside of all of the information yet; whatever, 
should fair-value accounting be incorporated, Mr. Brickell, 
into Freddie Mac and Fannie Mae's risk-based capital standard?
    Mr. Brickell. I haven't read the article, and I am not 
familiar with the professor or his views. We certainly want to 
make sure that investors, academics, observers of Fannie and 
Freddie, have confidence in their level of capital, and as 
Director of OFHEO, if I were fortunate enough to be confirmed, 
I would want to make sure that we understood why it is that 
some people have doubts of that kind and that we did whatever 
we thought was necessary to address those doubts.
    I do not think it is good for these Government Sponsored 
Enterprises to leave investors in doubt about their 
capitalization. I think the marketplace has to be confident 
that they have the right amount of capital, that they are being 
regulated in a firm, but fair, way, and I would look forward to 
doing that if I were confirmed.
    Chairman Shelby. I know a little of your background in the 
private sector, but if you are confirmed as the Director of 
OFHEO, your position will be totally different from what it was 
in the marketplace; is that correct?
    Mr. Brickell. Absolutely.
    Chairman Shelby. And your obligation and responsibilities 
as Director, among other things, would be to make sure, to the 
best of your ability and your staff 's ability, that Freddie 
Mac and Fannie Mae are run well, run the right way; in other 
words, they would be in a position, you would be coming from 
the private sector, free market, into a job as a regulator to 
make sure that these companies, these GSE's are run right.
    And, hopefully, if they ever got in trouble--I hope they 
will not--that the taxpayer would not wind up bailing them out. 
You see my concerns; do you not?
    Mr. Brickell. I do, indeed. I not only see those concerns, 
but I also share those concerns.
    Chairman Shelby. You would have to be a hands-on regulator 
in your position, assuming that you are confirmed and sworn in 
as the Director. It would be your paramount responsibility, as 
Director, to be a hands-on regulator, to know what they are 
doing that could affect their financial well-being or 
ultimately, as a lot of people think, maybe the taxpayers' 
well-being, considering how large they are, how important they 
are, and that they are GSE's, notwithstanding all of the 
disavowing they are not Government entities. You understand 
what is out there.
    Mr. Brickell. I do, Senator. When I was asked by the 
President to consider accepting this appointment, I thought 
hard about whether this was something that I could usefully do, 
and I believe that what I have learned in the financial 
markets, and what I have learned about public policy will be 
helpful to OFHEO in carrying out its mission of ensuring that 
Fannie Mae and Freddie Mac are run in a safe and sound way.
    And to go a step beyond that, I have tried to pursue all of 
the assignments I have been given in my career with a great 
deal of energy. I do not think anyone who's been working with 
me or worked on the other side would accuse me of passivity or 
a lack of energy.
    Chairman Shelby. I do not believe anybody has ever thought 
that about you.
    [Laughter.]
    We do not want to think that about you later; in a 
different position, as a regulator, because you do bring to the 
table, let us face it, you know what derivatives are. You 
probably created many of them, if not, you have used them, and 
you know what they are. They are hedges against risk, are they 
not, in a sense? They are passing on a risk. Maybe some people 
call it a little insurance in the marketplace, if used 
properly; is that correct?
    Mr. Brickell. Yes, Mr. Chairman. You use these contracts to 
shift risk. Most people, most of the time, use them to get rid 
of the risks they do not want.
    Chairman Shelby. Pass it on.
    Mr. Brickell. And take on some other risk that they do, and 
you have to do it carefully, you have to understand what you 
are doing.
    Chairman Shelby. And you have to pay a premium to do that, 
do you not?
    Mr. Brickell. If you are getting rid of a risk and not 
taking one back in return, then you have to pay somebody else a 
premium, just as you say with an insurance contract.
    Chairman Shelby. But from your background, it seems to me 
that you would perfectly understand, once you got into the 
particulars of the kind of models that Fannie Mae was using or 
Freddie Mac was using to hedge this risk; would you not?
    Mr. Brickell. I think I would be well-equipped.
    Chairman Shelby. And I hope you would be getting into that.
    Mr. Brickell. I want to do that. I understand that is the 
job, the nature of the job is to ensure these entities are run 
safely and soundly, to make sure we have the best capital 
models we can and to think more broadly about the risks these 
institutions face.
    Chairman Shelby. What do you think are the key elements, at 
least as you conceive them, of a strong and effective 
regulator? In other words, what kind of leadership would you 
bring to OFHEO should you be confirmed?
    Mr. Brickell. I think, Mr. Chairman, that for the regulator 
to be strong and be effective, it has to have the right 
statutory authority, it has to have the right powers, it has to 
have adequate resources and the assurance of those resources, 
it has to be able to attract people of stature to help the 
entity carry out its mission, and it needs to be led by people 
who are open-minded and who are fair, but who are willing to be 
firm, strong, and rigorous in the pursuit of the Agency's 
mission.
    And I think that I was called to this task, in part, 
because I would carry out this role in exactly that way.
    Chairman Shelby. Senator Sarbanes.
    Senator Sarbanes. I want to follow up on the Chairman's 
question. I then have a couple of lines of questioning I want 
to ask you.
    Is it your view that you cannot be in an effective 
regulator of these GSE's without substantial statutory change? 
You are constantly making reference to the statutory 
arrangements. I think you are the first person--the current 
Director is seeking some statutory changes, but they are not of 
great extent. Is it your position that you need significant 
statutory changes in order to be an effective regulator?
    Mr. Brickell. No, sir, it is not. I am aware the current 
Director has recommended several possible statutory 
enhancements, he calls them.
    Senator Sarbanes. He is primarily seeking self-funding, but 
we have not had anyone yet who has, in effect, said, well, we 
have not really been able to do the job because of the statute 
under which we are operating.
    Mr. Brickell. And I certainly am not of that view. I 
understand that there are recommendations from the existing 
Director for statutory changes and that there are also 
discussions underway here in the Senate and in other parts of 
Capitol Hill, and I am aware of those and happy to participate 
in them, but I think the time to do that is when I have the 
knowledge that would come as the Director of OFHEO.
    Senator Sarbanes. The Dow Jones Newswire this week carried 
a story, and I just want to read to you a paragraph from it and 
then ask a question on the basis of that.

    A former bank lobbyist nominated the regulate Freddie Mac 
fought an accounting rule that, in part, caused the company to 
restate earnings by as much as $4.5 billion. Mark C. Brickell, 
former lobbyist for JP Morgan and Chase and Company, led an 
effort and helped draft legislation in 1998 to delay and gut a 
derivatives accounting rule known as Financial Accounting 
Standard No. 133.
    ``He fought against the introduction of FAS 133, which was 
an attempt to make derivatives more transparent,'' said Randall 
Dodd, Director of the Derivatives Study Center and former 
regulator at the Commodities and Future Trading Commission.
    The battle over the accounting rule is significant, since 
Fannie Mae and Freddie Mac both are among the largest users of 
interest rate derivatives, holding a combined notional balance 
of $1.3 trillion as of June 30, 2002.

    Now, listening to your responses, first of all, is that an 
accurate statement of the position you took with respect to FAS 
133 back then at the time?
    Mr. Brickell. I thought it was important that FAS 133 be 
written in a way that it would increase the understanding of 
the business activities of the affected firms by investors and 
creditors, and I, along with--I was one of the people at JP 
Morgan, and there were many there who formulated the firm's 
comment on that rule, and there were hundreds of other 
institutions and regulators as well who made comments about it.
    I think it was the focus of a great deal of attention 
because it was going to affect so many enterprises, and that is 
true, of course, because so many of these firms use these risk-
management contracts to manage risk.
    Senator Sarbanes. Well, that may be, but you were amongst 
those that were opposed to it; is that not the case?
    Mr. Brickell. I was among those who recommended changes 
that could, in my view, have improved the rule. There were many 
people who thought there ways to improve it, and indeed FASB's 
comment process solicits the views of those who think that 
there are ways to make the rule better.
    Senator Sarbanes. As I understand your answer here today, 
your position now is in support of FAS 133; is that correct?
    Mr. Brickell. If I am confirmed as Director of OFHEO, I do 
not have any choice about that, and I would pursue it eagerly 
as part of the OFHEO mission. FAS 133 is the law of the land.
    Senator Sarbanes. Do you think it is an appropriate law of 
the land?
    Mr. Brickell. I do not get to think about it. My job is to 
make sure that it is used. Fannie Mae, Freddie Mac do not have 
a choice about this. They have to comply with GAAP, they have 
to comply with FAS 133, and I, as Director----
    Senator Sarbanes. You are their regulator. Do you think 
that this is an appropriate standard that they are being held 
to?
    Mr. Brickell. Yes, I think it is appropriate.
    Senator Sarbanes. Why do you think it is appropriate now, 
when you did not think it was appropriate then?
    Mr. Brickell. It is the right standard because it has been 
adopted by the FASB and made a part of GAAP. When FASB has 
rules under consideration----
    Senator Sarbanes. Is there a substantive argument as to why 
it is the right standard now?
    Mr. Brickell. I do not get to the substantive argument, 
Senator.
    Senator Sarbanes. We had another nominee before this 
Committee who wanted to take that position. Actually, she never 
got confirmed.
    [Laughter.]
    Which was that somehow the regulator does not express or 
have a view on what is the appropriate regulatory framework, 
that somehow the regulatory framework is simply handed to you 
from somewhere else, and your only job is to implement it.
    Most regulators do not come in with that attitude. They 
recognize that they have an important role in shaping the 
framework within which the institutions that they are going to 
be regulating are going to function. So it becomes important to 
probe and understand what your position is on the substance of 
these matters.
    Mr. Brickell. I do not know the case to which you are 
referring and whether the framework of regulation that was 
under discussion in that case was the framework administered by 
the agency that the person would have joined.
    I certainly am willing to consider improvements to the 
statutory framework and to the regulations implemented by OFHEO 
in the proper time and place and in consultation of course with 
the Members of this Committee who would take the lead on any 
statutory change.
    But I am focusing here and responding to your question with 
respect to FAS 133, and there is a time and place for companies 
and regulators to make their comments about the accounting rule 
and those comments have been made. Now, the rule has been 
adopted. It is the law of the land, and it is OFHEO's job to 
ensure that Fannie Mae and Freddie Mac conform with GAAP, and 
that is what I would do as Director of OFHEO.
    Senator Sarbanes. But you do not think it is a very good 
rule, I take it, from that answer. I mean, you will obviously 
have to implement it as the regulator, but you do not think it 
is a good rule; is that correct?
    Mr. Brickell. Sir, in fairness, I do not think it is open 
to question by the Director of OFHEO. I think it is a great 
rule because it is GAAP, and it is the rule that Fannie and 
Freddie are required to use.
    Senator Sarbanes. Do you believe Federal financial 
regulations should prohibit fraud in the OTC derivatives 
market?
    Mr. Brickell. I am opposed to fraud.
    Senator Sarbanes. I would certainly hope so. I think we 
should stipulate that that should be a basic requirement.
    [Laughter.]
    Mr. Brickell. If that were the only hurdle, it would be a 
low hurdle to clear, but as a banker, by profession, for the 
first 25 years of my career at a bank that I was very proud to 
be part of, financial fraud hurts noone more than the bankers. 
So, even as a matter of self-interest, fraud is something I am 
opposed to, and it is illegal to defraud people in the 
financial markets. It is illegal under the law to defraud 
anyone, and it should be.
    I have done some thinking about that, some research. I have 
talked with people in Washington about that issue, and it 
should be illegal to defraud people using derivatives contracts 
just as it is to defraud people with other kinds of financial 
transactions or nonfinancial transactions. It should be 
illegal, and it is, and I am glad that it is.
    Senator Sarbanes. I think I am going to have to ask you the 
question again and focus you on specifically what is being 
asked because fraud may be illegal under other Federal or State 
statutes, which would leave someone engaged and open to 
prosecution.
    My question was do you believe Federal financial 
regulations, which of course you will be involved in 
promulgating, should prohibit fraud in the OTC derivatives 
market?
    Mr. Brickell. If it is already illegal, it is not clear to 
me that what we would gain by making it more illegal, if you 
will. Now, I do not believe that this is only a matter of State 
law, although much of the work that is done to prosecute fraud 
is done at the State level. I believe that there are antifraud 
authorities held by the SEC and by the Commodity Futures 
Trading Commission that could be brought to bear in certain 
cases, and indeed have been brought to bear in some cases, 
where the kinds of contracts that you are talking about were 
used.
    In addition, I know, from experience in the banking 
industry, that the banking authorities, as a matter of 
financial regulatory authority, will prosecute fraudulent 
activity if it is ever committed by bankers.
    I believe that fraud is illegal in many different ways at 
the State and at the Federal level, that there are regulatory 
authorities that can be used against it, and I am glad that is 
the case. I think it gives investors confidence and ensures 
that contracts are more likely to be enforced.
    Senator Sarbanes. Do you believe Federal financial 
regulations should prohibit manipulation in the OTC derivatives 
market?
    Mr. Brickell. I am thinking back to try to recall what the 
extent of Federal authority is in this area today, but it is my 
understanding that there is already a great deal of Federal 
authority to combat manipulation, and it is not limited to the 
financial services markets. You have the authority of the 
Justice Department.
    You have, in addition, within the financial arena, certain 
antimanipulation powers that reside at the Security Exchange 
Commission, that can be brought to bear with certain kinds of 
contracts, securities in particular. And, finally, the 
Commodity Futures Trading Commission has always, well, I can 
remember many times their making the case that the antifraud 
authority of the Commodity Futures Trading Commission is 
extensive and would encompass many of the markets, if not all 
of the markets that you are talking about.
    Senator Sarbanes. Did you oppose the Commodity Futures 
Trading Commission's retention of the antifraud and 
antimanipulation authority in its 1992 rulemaking, exempting 
swaps for most of its regulatory requirements.
    Mr. Brickell. 1992, sir?
    Senator Sarbanes. Rulemaking, yes. Did you oppose the 
retention by the CFTC of antifraud and antimanipulation 
authority when it had the rulemaking exempting swaps from most 
of its regulatory requirements, but it retained antifraud and 
antimani-pulation authority?
    Mr. Brickell. Well, that question would take me back a long 
way. And if you do not mind, I think it deserves a well-
considered answer, and I would like to respond to you in 
writing, if I could do that.
    Senator Sarbanes. I think that would be helpful, and I 
think you are entitled to go back and examine the record 
carefully. There will be other questions that Members I know 
who were not able to be here because of this arising in a 
conflicting time have that they wish to submit, Mr. Chairman, 
to Mr. Brickell. So, obviously, the record will be kept open, I 
take it, for that purpose.
    Chairman Shelby. That is right.
    Senator Sarbanes. Mr. Chairman, I know we have other 
witnesses. I have a few more questions I would like to ask, and 
then I have a number of questions I will submit to Mr. Brickell 
for his response.
    I want to run through how you envision the role of OFHEO. 
There have been proposals put forward to change the regulatory 
structure of OFHEO: To move it to the Treasury, establish it as 
an independent regulator, include the Federal Home Loan Banks 
and its responsibilities. What are your views on those 
proposals?
    Mr. Brickell. Senator, I am aware, first of all, of several 
proposals that are under consideration. I know that a bill has 
been introduced in the House by Congressman Baker, who has 
taken a leading role there on these issues, and I think that 
the location of OFHEO matters, and the proposal that he is 
making is certainly worthy of consideration, but what is even 
more important, in my view, and I think it goes to the heart of 
your question, is that OFHEO must have the authority, the 
powers that are commensurate with the other financial 
regulators if it is going to be perceived as being in the top 
echelon.
    Fannie and Freddie are in the top rank of American 
financial institutions. I guess if you lined them up against 
the banking institutions, they would be the second and fourth-
largest institutions in the country.
    Senator Sarbanes. But those are the only two you have to 
regulate. I am aware of your constant reference to other 
regulators, but they have a multiplicity of institutions. The 
Director of OFHEO has only two major enterprises to follow 
closely.
    Mr. Brickell. I appreciate that, Senator.
    If I were confirmed, my primary mission would be to ensure 
that OFHEO gives rigorous, firm, fair, oversight to Fannie Mae 
and Freddie Mac, so that they are run safely and soundly 
wherever Congress decides that OFHEO should be.
    Of course, I would look forward to conferring with the 
Committee, working with the Committee, if you wanted to 
consider changes in the OFHEO framework, at the appropriate 
time.
    Senator Sarbanes. Do you believe there is a role for Fannie 
and Freddie to continue to play as GSE's or has the secondary 
mortgage evolved to the point where Government Sponsored 
Enterprises are no longer needed?
    Mr. Brickell. We have in this country the best housing 
finance markets in the world, and the housing sector is, today, 
providing one of the brightest spots in the American economy. I 
think I would try to adhere to a principle that I have heard 
regulators put forward before, which is, first, do no harm. I 
do not think it is appropriate to propose any significant 
change in the structure of housing finance without a better 
understanding of the institutions and how safe and sound they 
are.
    But I certainly appreciate the importance of the role that 
Fannie and Freddie play today and the way in which they bring 
the benefits of capital markets, financing costs and 
efficiencies to what was, before they came into existence, a 
more localized, less-sophisticated form of housing finance.
    Senator Sarbanes. In your letter on the OFHEO capital 
regulation, you suggested that overcapitalization, overly 
stringent capital requirements, could be equally dangerous to 
capital requirements, the undercapitalization. What is your 
view on that?
    Mr. Brickell. Are we thinking there of the letter on the 
capital rule?
    Senator Sarbanes. Yes.
    Mr. Brickell. The point that Mr. Ryan and I were making was 
one that I think regulators bear in mind and need to bear in 
mind. When you are making capital rules, you need to get the 
answer exactly right. If the rule is too loose and requires too 
little capital, investors might be perceive a risk that the 
company was undercapitalized, and that is no good.
    Senator Sarbanes. What company are you talking about now?
    Mr. Brickell. Any company that is subject to a capital 
requirement. I am not speaking about any firm in particular. I 
am saying, in general, when you are administering a capital 
rule, you should be sure that you are requiring the right 
amount of capital from whatever firm is subject to that rule.
    Senator Sarbanes. And if you fall short, upon whom does 
that burden then come to rest? If you fall short in your 
capitalization and you confront a stressful situation, and you 
cannot handle it, on whom does the burden then fall?
    Mr. Brickell. Senator, to answer that question, we would 
have to know what kind of institution we were talking about.
    Senator Sarbanes. With respect to Fannie Mae and Freddie 
Mac, upon whom would it fall?
    Mr. Brickell. As the Chairman has indicated, as I 
understood it, there is some ambiguity about that question. The 
securities issued by Fannie Mae and Freddie Mac bear a 
disclaimer that states, in black and white, that they do not 
represent obligations of anyone but Fannie Mae and Freddie Mac.
    In that case, for institutions, let's not talk about those 
specific institutions, but in general, for institutions that 
are not beneficiaries of Federal support, if a firm were too 
thinly capitalized and it were to fail, the burden would fall, 
of course, on the shareholders, and then, second, on the 
debtholders of the Enterprise.
    Senator Sarbanes. Well, now when you made this statement, 
you said, ``The 1990's taught bankers and their regulators the 
importance of getting capital rules right.'' I am now quoting 
your letter. ``At the beginning of the decade, policymakers 
were primarily concerned with ensuring that capital levels were 
not too low. Few imagined that capital requirements could be 
too high. But over the course of the decade, we realized that 
such a perspective is essentially a short-run view.'' And then 
you go on, ``Over the long run, overly stringent capital 
requirements could be equally dangerous.''
    But if we undercapitalize, particularly in the bank 
context, eventually it may fall on the taxpayers, may it not?
    Mr. Brickell. In a context where you are talking about 
enterprises that do receive the benefit of Federal support, it 
is possible that the burden would fall, in the event of their 
failure, on taxpayers or any reserves that have been set aside.
    Senator Sarbanes. If you look at the issue of what capital 
you are going to require these two GSE's, to what extent would 
you have in your mind that the burden, if they fail, may fall 
upon the taxpayer?
    Mr. Brickell. I think it would be prudent to bear that 
possibility in mind, but I am not sure that it should affect 
the conduct of the Director because even though there is 
ambiguity on the point about where the burden falls, there is 
no ambiguity about the responsibility of the Director of OFHEO 
to ensure that Fannie Mae and Freddie Mac are run in a safe and 
sound way. In other words, no matter where the burden would 
fall if they were to fail, it is up to OFHEO to do everything 
it can to ensure that does not happen.
    Senator Sarbanes. Mr. Chairman, you have been very 
generous.
    Chairman Shelby. These are important questions.
    Senator Sarbanes. I have a number of additional questions 
that I wish to ask Mr. Brickell, but I understand we have other 
nominees so I will request them in writing.
    Chairman Shelby. Absolutely. That will be done, and other 
Members, as you said, for the record. And, Mr. Brickell, if you 
could, when these questions will come in fairly soon, if you 
can answer them promptly, it would move the process perhaps.
    I have another question. FAS, Financial Accounting 
Standard, 133--see if I am summing this up right. You did not 
create the rule because that was not your job, and when you 
were in the comment period, you were writing, you and Mr. Ryan, 
of your concerns about the possible rule as they were taking 
comments in the formulation period; is that correct, the 
comment period?
    Mr. Brickell. It is true with respect both to the letter on 
FAS 133----
    Chairman Shelby. Right.
    Mr. Brickell. --and the capital rule.
    Chairman Shelby. But regardless of your views then or even 
now regarding the rule, the rule is the rule, and that is what 
you were saying, and that is the law in the accounting field, 
right?
    Mr. Brickell. Yes, Mr. Chairman.
    Chairman Shelby. And you are saying, as I understand it, 
that if you are confirmed and you are sworn into this job, 
which you would be after you are confirmed, you would swear to 
uphold the law, right?
    Mr. Brickell. That is true, Mr. Chairman.
    Chairman Shelby. And carry out your responsibilities and 
obligations just like some of us might disagree with the law, 
may vote against the law, might fight hard the creation of a 
statute, but at the end of the day, we might be the same ones 
to carry out the law regardless or irrespective. Is that what 
you were saying?
    Mr. Brickell. It is, Mr. Chairman.
    Chairman Shelby. I am asking you, but you were saying it 
better than I would.
    Mr. Brickell. I agree wholeheartedly with the way you have 
described it. The Director of OFHEO has certain statutory 
obligations, and I would carry those out, and one of them is to 
ensure that Fannie Mae and Freddie Mae comply with GAAP. I have 
made my comments, my firm has made its comments, that is the 
law of the land today, and that is the accounting principle, 
the accounting rule that Fannie Mae and Freddie Mac would 
comply with.
    Chairman Shelby. And if you were the Director of OFHEO, how 
involved and how energized would you be, considering what is at 
risk out there--$1.7 trillion or whatever?
    Mr. Brickell. That is a whole lot of money and a whole lot 
of risk, and I think the people who do business--
    Chairman Shelby. You could not be an absent regulator on a 
situation like that.
    Mr. Brickell. It is only two companies, but they are so 
large, and they are so important in housing finance and in our 
economy, that I think it is essential that they have top-
quality regulation that would be rigorous, and I would pursue 
that with all of my energy.
    Chairman Shelby. Let me see if I understand the other you 
were saying. Senator Sarbanes posed the question of there have 
been some recommendations by some of the Congressmen, some of 
the Senators, some of the people down the street that we move 
statutorily, we change the regulator to the Treasury or 
whatever we do or if we do nothing, but what you are saying, as 
I understood it a minute ago, that whatever it is, if those 
proposals come up, you would abide by them, right? You would 
have to.
    Mr. Brickell. Yes, Mr. Chairman.
    Chairman Shelby. We will have questions for the record. It 
will be left open for other Members who have gone to hear 
Ambassador Bremer's comments on Iraq.
    Senator Sarbanes. Mr. Chairman, could I just put a couple 
of questions to Mr. Brickell?
    Chairman Shelby. Yes, sir.
    Senator Sarbanes. The Wall Street Journal reported this 
morning that you helped advise Freddie Mac on some of its 
derivative hedging. Would you describe the length and nature of 
this relationship.
    Mr. Brickell. I am not sure what it is that they would be 
referring to. Is there a source given for the information or 
can we try to identify what they are talking about?
    Senator Sarbanes. It is mentioned in their article. They do 
not give a source. So you do not know what they are referring 
to?
    Mr. Brickell. I do not. I would be happy to work with you 
on it, if we get better information.
    Senator Sarbanes. Obviously, we need to explore that 
matter.
    In an answer to one of the questions on your questionnaire 
to, ``list any lobbying activity during the past 10 years in 
which you have engaged for the purpose of directly or 
indirectly influencing the passage, defeat, or modification of 
any legislation at the national level of Government or 
affecting the administration or execution of national law or 
public policy,'' you said in your answer:

    While serving on the board of the International Swaps and 
Derivatives Association, and thereafter in my capacity as an 
officer of JP Morgan and Blackbird Holdings, I have 
participated in discussions in Washington concerning the 
development and implementation of the regulatory framework for 
swaps and other privately negotiated derivatives transactions.

    In fact, when you were nominated for this position, in one 
of the articles, it was said that ``Derivatives lobbyist 
nominated to regulatory position.'' Is it not fair to say that 
you were the lead lobbyist on derivatives issues over a fairly 
sustained period of time here in Washington?
    Mr. Brickell. As I indicated earlier in the hearing, I 
started working in the derivatives business back in 1986. These 
were new products, and they got the attention of people in 
Washington and in other cities, as I indicated in the 
questionnaire. I have been to Washington and to those places 
many, many times, probably too many times to count in the 
period since 1988.
    And we have worked on regulatory proposals to make sure 
that derivatives were well-regulated, we worked with the 
banking authorities and other agencies on that. We have worked 
with legislators, particularly with this Committee, on netting 
legislation, on modifications to the Commodity Exchange Act. We 
have worked on other legislation.
    I have been here many, many times to talk about financial 
services, and in almost every single case, those meetings were 
related to derivatives, to swaps, and other privately 
negotiated derivatives contracts.
    Senator Sarbanes. So you would not quarrel with the 
headline that declares, ``Derivatives lobbyist in line to head 
Fannie and Freddie regulator.'' I mean, given the activities 
you are engaged with, that would be an apt description, would 
it not?
    Mr. Brickell. I do not like to quarrel with anybody, even 
with the reporter who wrote those words, but I think it would 
be perhaps an incomplete description of what I have 
accomplished in my 28 years in financial services.
    Senator Sarbanes. Thank you, Mr. Chairman.
    Chairman Shelby. As I recall at this point, and we do not 
have all of the information regarding Freddie Mac yet, and we 
had a hearing on this last week, but I do not recall the 
problem at this point, at least our knowledge of it, being the 
use of derivatives. It was accounting, at least up to now, and 
how they account for things under FAS 133, but I do not know 
what you know, and I do not know if we know enough at this 
point, Mr. Brickell, but I would point that out.
    And although you may have lobbied, and I assume you did, 
and you have a right to lobby for a position on derivatives or 
anything else, I think one of the spokesmen, and I certainly 
would not want to call him a lobbyist, but one of the powerful 
spokesmen would be Chairman Greenspan, sitting right here at 
this same table on many occasions, saying basically that 
derivatives have a place in our financial institutions, and 
properly used are a positive thing.
    We appreciate your appearance here today, and as I have 
said, we will have additional questions from Senator Sarbanes 
and any others perhaps myself. And you have some other 
information you are going to get back to him anyway.
    Thank you.
    Mr. Brickell. Thank you very much.
    Chairman Shelby. I now want to call up the second panel, 
Mrs. Alicia Castaneda of the District of Columbia, nominated to 
be a Member of the Board of Directors, Federal Housing Finance 
Board; and Mr. Thomas J. Curry of Massachusetts, nominated by 
the President to be a Member of the Board of Directors, Federal 
Deposit Insurance Corporation.
    If I could get you both to raise your right hands and be 
sworn.
    Do you swear or affirm that the testimony that you are 
about to give is the truth, the whole truth, and nothing but 
the truth, so help you God?
    Mr. Curry. I do.
    Ms. Castaneda. I do.
    Chairman Shelby. Do you agree to appear and testify before 
any duly-constituted committee of the Senate?
    Mr. Curry. I do.
    Ms. Castaneda. I do.
    Chairman Shelby. Thank you. Please have a seat.
    I am going to submit my written statement for the record. I 
alluded to your nominations earlier and how important they 
were. And I am going to submit your written statements for the 
record because we have already been here a while and we want to 
move the hearing on.
    Chairman Shelby. Senator Sarbanes.
    Senator Sarbanes. Mr. Chairman, I appreciate that. I wanted 
to just say that I am pleased to welcome these witnesses: 
Thomas Curry, who has been nominated to be on the Board of 
Directors of the Federal Deposit Insurance Corporation, and 
Alicia Castaneda, who has been nominated to be a Member of the 
Federal Housing Finance Board.
    Tom Curry has been Commissioner of Banks in the State of 
Massachusetts. He graduate cum laude from Manhattan College, 
his J.D. degree from New England School of Law. He has spent 
his entire professional career working for the State of 
Massachusetts, as an Attorney in the Office of the 
Massachusetts State Secretary and then with the Massachusetts 
Division of Banks, where he has risen steadily through the 
ranks of that office, from the General Counsel's Office to 
Deputy Commissioner, Acting Commissioner, and now Commissioner. 
He is a Member of the Board of Directors of the Conference of 
State Bank Supervisors and was Chairman of the Board of all of 
the State bank supervisors in 2000 and 2001. He was recommended 
to the President by Senator Daschle. The way the statute is 
written, you have to have some balanced membership on the FDIC.
    Chairman Shelby. I am sure he is a good Democrat.
    Senator Sarbanes. Well, no, actually he is not. I think he 
is an Independent.
    Chairman Shelby. Okay.
    Senator Sarbanes. I know Senator Daschle conducted an 
extensive search in order to make his recommendation to fill 
this office. It was required by the statue that the spot be 
filled by someone with State bank supervisory experience, and 
inquiries around the country indicated that Tom Curry was 
probably the most highly respected State Banking Commissioner 
in the country. We are pleased he is willing to take on this 
assignment. I think he is an excellent choice for the board. I 
intend to support his nomination.
    Ms. Castaneda is, of course, being considered for the 
Federal Housing Finance Board. That is very important. That 
Home Loan Bank system is growing like topsy, if I may so 
observe. Over the last 5 years, the system's assets have more 
than doubled. They are one of the world's largest issuers of 
debt. At the end of 2002, debt outstanding totaled $673 
billion, a $52 billion increase over the previous year. It is 
just growing exponentially, and so there are very important 
challenges there.
    Ms. Castaneda brings with her a wealth of banking 
experience. She began her banking career 27 years ago as an 
International Clerk with American Security Bank here in 
Washington. Shortly thereafter, she was selected for the bank's 
executive development program. She was the first woman in the 
history of American Security Bank to be promoted to Senior Vice 
President, a position in which she had responsibility for all 
of the bank's funding programs as well as balance sheet 
liquidity, liability pricing, and interest rate risk 
management. She currently holds the position of Market 
Executive for Bank of America's International Private Banking 
Division. I am confident that her extensive knowledge of day-
to-day banking practices will prove useful on the Finance 
Board, and I intend to support her nomination as well.
    Chairman Shelby. Thank you, Senator Sarbanes.
    Ms. Castaneda, you go first, if you will just sum up 
briefly your statement.

                STATEMENT OF ALICIA R. CASTANEDA

                  OF THE DISTRICT OF COLUMBIA

            TO BE A MEMBER OF THE BOARD OF DIRECTORS

                 FEDERAL HOUSING FINANCE BOARD

    Ms. Castaneda. Thank you, Mr. Chairman.
    Good afternoon, Mr. Chairman, Senator Sarbanes, and other 
distinguished Members of the Committee. Thank you for the 
opportunity to appear before you today. I am honored that 
President George W. Bush has nominated me to be a Director of 
the Federal Housing Finance Board, and I am very pleased to 
appear before you at this confirmation hearing.
    Before I begin my statement, I would like to take this 
opportunity to introduce my husband, companion, and best friend 
for over 33 years, Rolando Castaneda. I am profoundly grateful 
to him for having played such an influential role in my 
decision to immigrate to the United States from Colombia in 
1970. Almost 33 years ago, I came to this land of freedom, 
security, and unlimited opportunities as a 22-year-old young 
professional immigrant with a limited knowledge of the English 
language and almost without any money. My gratitude to this 
great country is beyond words. Not only was I given the 
opportunity to get a job at a bank, but also in time to become 
the first female ever promoted there to Senior Vice President. 
Nowhere else in the world can immigrants enjoy such 
opportunities.
    And that brings me to the subject of housing and the 
Federal Housing Finance Board. All of us need somewhere to 
live. And many of us either own homes or aspire to do so. In 
fact, it is at the core of the American Dream.
    The Federal Home Loan Bank System makes it easier for small 
banks to lend money to hard-working Americans for mortgages. In 
the early days of banking, banks could only lend out what they 
had on bank in deposits. Later, they acquired the ability to 
borrow from other sources to make loans to others. The 8,045 
members can now, through the Federal Home Loan Banks, take 
advantage of pooling their requests for funds to achieve lower 
rates, which get passed on directly to the consumer.
    Today, about 68 percent of American households own homes. 
But the rate for minorities is far lower, with fewer than half 
of Hispanics and African-American households owning homes. It 
is the goal of President Bush's Administration and that of the 
Federal Housing Finance Board to raise these levels. Projects 
are under way to assist more of our countrymen, minorities, and 
new immigrants in particular, to realize the security of 
homeownership.
    In current literature about the U.S. economy, we see the 
housing sector described as a beacon of strength, a rising tide 
lifting other economic boats. Thus, our vibrant housing market 
must be preserved and must continue to thrive.
    Should I have the honor of being confirmed, I will work to 
strengthen and improve the flexible and secured financial 
system that America has and to make it possible for more 
Americans, especially minorities, to take full advantage of 
this system.
    Twenty-seven years in commercial banking have prepared me 
to accept this challenge. My experience in the bank's Treasury 
Division, in particular, involved managing liquidity. Ensuring 
liquidity for the benefit of the homebuying public is the very 
reason Federal Home Loan Banks exist. In addition, I will bring 
to the job my leadership and management skills, a healthy 
respect for the trust placed in me, and a strong advocacy for 
fairness and common sense.
    In conclusion, I want to acknowledge my family and my 
strong belief in personal accountability as the foundations of 
my own value system. I am a hard-working and God-fearing person 
who strives to give back the many blessings that have come my 
way in this great country.
    Mr. Chairman, Senator Sarbanes, and other distinguished 
Members of the Committee, I respectfully ask for your favorable 
consideration of my nomination. If confirmed, I will be the 
first female and Hispanic Director of the full-time Federal 
Housing Finance Board, and I will be the only banker to serve 
in the current Board. I consider this nomination a great honor 
and privilege and a wonderful opportunity to begin my first 
tour of public service to my beloved adopted country. And, 
finally, if confirmed, I promise to work closely with this 
Committee and with Congress to ensure the safety and soundness 
of the Federal Home Loan Bank System and the fulfillment of the 
system's housing finance and affordable housing missions.
    I will be delighted to respond to your questions.
    Chairman Shelby. Mr. Curry.

         STATEMENT OF THOMAS J. CURRY, OF MASSACHUSETTS

            TO BE A MEMBER OF THE BOARD OF DIRECTORS

             FEDERAL DEPOSIT INSURANCE CORPORATION

    Mr. Curry. Thank you, Chairman Shelby, Ranking Member 
Sarbanes, and Members of the Committee. It is a personal 
privilege to appear before the Committee today. I am very 
honored to have been nominated by President Bush to be a Member 
of the Board of Directors of the Federal Deposit Insurance 
Corporation.
    If I may, I would like to take this opportunity to briefly 
summarize my professional qualifications and to express my 
commitment to the FDIC's important mission as the Nation's 
Federal deposit insurer, if I were confirmed as a Board member.
    It has been my privilege to serve the Commonwealth of 
Massachusetts for over 17 years in several senior financial 
regulatory positions. I have also had the honor of serving five 
Governors as the Commonwealth's Commissioner of Banks for a 
span of approximately 10 years. On a national level, as Senator 
Sarbanes mentioned, I was elected by my State regulator 
colleagues to be their past Chairman in the year 2000. I also 
have served as a Member of the State Liaison Committee of the 
Federal Financial Institutions Examination Council. On a very 
technical level, my State official status satisfies the FDIC 
Act's specific requirement that one FDIC Board Member possess 
State bank regulatory experience.
    My public service career coincided with an extraordinary 
period of tremendous economic, technological, and competitive 
changes within both the Massachusetts banking industry and the 
larger national financial services sector. The regulatory 
experience that I gained during this period has provided me 
with invaluable perspective that I hope will serve me well if I 
am confirmed as an FDIC Board Member.
    For example, my firsthand experience grappling with the 
effects of the New England banking crisis of the late 1980's 
and early 1990's had a profound impact upon me and our 
communities in Massachusetts and underscored the vital 
importance of the FDIC's deposit insurance guarantee in 
maintaining public confidence in our financial system, 
particularly in times of stress. It also reinforced the 
fundamental importance of a safe and sound banking industry to 
our economy. The New England regional experience demonstrates 
how economic recovery, or prosperity in general, requires a 
healthy, independently regulated banking system that has both 
the financial capacity and confidence to extend credit to 
individuals and businesses.
    Unprecedented levels of industry consolidation, intense 
competition, and technological change also have marked the last 
decade. As a State bank regulator, I confront many of the same 
supervisory and policy issues faced by the FDIC and the other 
Federal regulators. I believe we share a common goal of 
fostering sound financial practices, competition, and product 
innovation in the banking industry while at the same time 
ensuring wider access to credit and financial services to 
individuals, businesses, and communities. As Bank Commissioner, 
I have been fortunate to be able to help develop and implement 
Massachusetts' regulatory and legislative responses to these 
trends from both a financial supervision and a consumer 
protection standpoint. My hope is that if I am confirmed, my 
experience as a State bank regulator will assist the full FDIC 
Board in developing the most sound and effective Federal 
supervisory policies.
    In conclusion, I believe my 21-year public service career 
has given me the necessary financial safety and soundness and 
public protection regulatory experience and judgment to capably 
serve as a member of the FDIC Board of Directors, if confirmed.
    Chairman Shelby, Ranking Member Sarbanes, and Members of 
the Committee, thank you again for allowing me this opportunity 
to appear before you, and I am glad to answer any questions 
from the Committee.
    Chairman Shelby. Thank you.
    The Federal Home Loan Bank System has undergone, as you 
well know, a tremendous amount of change since its birth in 
1933. With the decline of the thrift industry, membership in 
the system was expanded beyond savings and loans. With this 
expansion of membership has come an expansion of 
responsibilities. What do you see as the future direction for 
the Federal Home Bank System? Where are we going in the future? 
Where do they need to go? What is their challenge?
    Ms. Castaneda. I think we have a lot of challenges in front 
of us. One of the greatest challenges is how are we going to 
address all the different programs that the Federal Home Loan 
Banks are trying to get into. The multidistrict issue also will 
be a tremendous challenge that as a Member of the Board I will 
have to address, if I have the honor of being confirmed.
    Chairman Shelby. You mentioned in your testimony the 
Board's commitment to expanding homeownership, which Senator 
Sarbanes and I certainly share. Can you share with the 
Committee, tell us some of the Board's activities and some of 
your own in regard to your ideas of expanding homeownership, 
especially in the African-American community, the Hispanic 
community, because those are the two that are trailing behind 
in America, as you know, and I know that this Administration is 
committed to that. And we are committed to it because we 
believe that homeownership is a center point and generally a 
person's first wealth in America.
    Ms. Castaneda. You are right, Senator. As I mentioned in my 
opening statement, the affordable housing programs are a 
critical issue in this country. I know the Administration, the 
Federal Housing Finance Board, and the Federal Home Banks are 
committed to make more funds available for the purchase of 
mortgages.
    For the year 2003, the goal is $200 million. Since 
inception in the 1990's, they have allocated $1.7 billion. But, 
again, we have to work harder to increase the percentage of 
housing available, especially for minorities, as I said, 
Hispanics and African-Americans.
    Chairman Shelby. Absolutely.
    Mr. Curry, while supervisory responsibility for financial 
institutions is dispersed across the Federal banking 
regulators, the Federal Deposit Insurance Corporation has sole 
responsibility for the insurance funds. Because of the 
potential taxpayer liability, I myself believe that the Federal 
Deposit Insurance Corporation has a very serious responsibility 
here. The very nature of the system, I think, requires the FDIC 
to work with other regulators that we have up here--and when 
Senator Sarbanes chaired the Committee, he did the same thing--
to carry out your responsibilities.
    Can you just quickly provide the Committee your views 
regarding the importance of successful cooperation between the 
FDIC and the other regulators?
    Mr. Curry. I think, Chairman Shelby, that regulatory 
cooperation is really essential to our system and ultimately to 
the Federal Deposit Insurance Fund.
    Chairman Shelby. Safety and soundness, right?
    Mr. Curry. That is right. And it is critical that 
regulatory agencies with different missions work together 
toward the goal of protecting that system and the Deposit 
Insurance Fund.
    Chairman Shelby. And running an efficient banking system 
for the American people.
    Mr. Curry. Most definitely.
    Chairman Shelby. In 1996, Mr. Curry, the General Accounting 
Office recommended including a representative from the Federal 
Reserve System on the FDIC Board. Do you think--or have you 
thought about it, had a chance to, do you think including the 
Fed on the FDIC Board would increase interagency cooperation 
and ultimately enhance the effectiveness of banking regulation?
    Mr. Curry. I have not thought specifically about including 
an additional member on the FDIC Board, but, again, I can 
attest to the critical importance of having cooperation. For 
example, the Conference of State Bank Supervisors has been 
working very closely--the State supervisors--with both the Fed 
and with the FDIC to ensure that there are protocols and 
agreements to have the maximum cooperation and coordination of 
activity, particularly on an interstate basis.
    Chairman Shelby. I do not know if you have had a chance to 
flesh this out yourself, but do you have any views regarding 
the present supervision of industrial loan corporations, or 
ILCs? Do you believe, in other words, that the FDIC and the 
State banking regulators have the ability to provide adequate 
supervision of these entities? This is a big issue coming up.
    Mr. Curry. I have limited professional experience with 
ILC's. They are not authorized under Massachusetts law. Again, 
however, the overriding goal of a supervisor, is to ensure that 
both the insured financial institution and any affiliates 
operate in accordance with safe and sound practices.
    Chairman Shelby. Do you believe there is a need at the 
moment to raise the coverage level of Federal Deposit 
Insurance?
    Mr. Curry. I understand that it is a significant issue 
before Congress and with the FDIC and the industry.
    Chairman Shelby. On one side.
    Mr. Curry. Yes. I have not yet formed an opinion. 
Massachusetts, again, is unique in that we do have an option of 
a private, industry-sponsored insurance fund that does insure 
beyond the Federal limit.
    Chairman Shelby. How does that work?
    Mr. Curry. Basically it is a mutual fund, established by 
State-chartered banks, of a particular type that insures funds 
or deposits in excess of Federal FDIC limits.
    Chairman Shelby. Does it work?
    Mr. Curry. It has worked, and it worked through the New 
England banking crisis.
    Chairman Shelby. Oh. So it has been tested.
    Mr. Curry. It has been tested, and it was very significant 
in maintaining confidence in our system as well.
    Chairman Shelby. I would be interested in anything you can 
send me on that personally and maybe to the Committee to see 
what you have.
    Mr. Curry. I would be more than happy to do that, Chairman 
Shelby.
    Chairman Shelby. Senator Sarbanes.
    Senator Sarbanes. Thank you very much, Mr. Chiarman.
    Ms. Castaneda, this Committee held a series of hearings on 
predatory lending practices in the mortgage industry, and we 
heard from a number of hard-working Americans who had the 
equity stripped out of their homes. In fact, one witness even 
lost her home, a tragic story.
    There has been a general growing recognition in a number of 
States as well as among Federal regulators that we really have 
to put an end to these practices. The Federal Reserve Board has 
tightened its regulations. HUD has proposed a rule to address 
mortgage broker abuses. The Office of Thrift Supervision has 
recognized the power of States to address certain predatory 
lending practices, which a number of States are doing.
    Several years ago, HUD, working with Fannie Mae and Freddie 
Mac, developed a set of guidelines to help prevent these 
Government Sponsored Enterprises from buying the worst 
predatory loans. And the Atlanta Home Loan Bank, within the 
Home Loan Bank System, developed a policy to ensure that it is 
not supporting loans with predatory characteristics.
    The Finance Board recently put out a proposed regulation 
that, among other things, requests comments on steps the Board 
could take to help combat predatory lending. And I think those 
comments are due back in early September.
    Do you regard predatory lending as a problem that needs to 
be addressed? And would you be open to trying to promote 
efforts as a Member of the Board in order to address this 
issue?
    Ms. Castaneda. I think predatory lending is unacceptable, 
sir. My experience in banking has taught me that it should not 
exist, and an agency like the Federal Home Loan Banks 
definitely should not do that. I will definitely, if I have the 
honor of being confirmed to the Federal Housing Finance Board, 
look into that and I will make sure that predatory lending is 
not acceptable.
    Senator Sarbanes. Good. Thank you very much.
    Mr. Curry, I want to follow up on something Chairman Shelby 
asked of you. Are the State bank supervisors--and you were 
their national head just a year ago, as I understand it--
generally satisfied with the level of cooperation amongst the 
regulators? How do they view their interaction with the Federal 
regulators?
    Mr. Curry. Overall, Senator Sarbanes, I would agree that it 
is a positive relationship, but like any relationship, it 
requires a deep commitment to make sure that it works. 
Occasionally, there are differences of opinion, but I think the 
underlying goal is to have the best possible supervisory 
policies and relationship and to have a safe and sound system. 
Certainly there could be improvements, but the basic foundation 
is there, I believe.
    Senator Sarbanes. Do you expect, when they perceive that it 
is not working, that they are going to come knocking on your 
door?
    Mr. Curry. I hope not.
    Senator Sarbanes. Well, maybe they should. After all, you 
are on there in part because of the statutory requirement that 
you have State bank supervisory experience.
    Mr. Curry. Oh, I misunderstood.
    Senator Sarbanes. It gives you both a perspective, but it 
also gives you the contacts with all of your former colleagues 
in terms of strengthening our system.
    Do you see any pressing, outstanding issues on safety and 
soundness facing the banking system today?
    Mr. Curry. I do not think there is any issue that is as 
significant as those issues that we saw, for example, with the 
New England banking crisis and the regional economic 
differences. What I think is today we have an industry that is 
far better capitalized than it was a decade ago. I think we 
have management that is tested in terms of dealing with 
economic downside. And I think supervisors themselves have 
adopted much more refined approaches to the supervision of 
financial institutions.
    Senator Sarbanes. Did you find the banks in Massachusetts 
making heavy use of derivatives and similar arrangements?
    Mr. Curry. Not in the Massachusetts industry that I 
regulate, which is predominantly a community banking industry.
    Senator Sarbanes. Thank you, Mr. Chairman.
    Chairman Shelby. I want to thank both of the nominees for 
appearing here today. You have been nominated by the President 
to two very, very important jobs, and we appreciate your 
patience in going through the first panel. So we will try to 
expedite your hearing, your markups, as soon as we can.
    Thank you.
    Ms. Castaneda. Thank you so much.
    Senator Sarbanes. Sometimes when the first panel takes a 
long time, the second panel can be very short.
    Ms. Castaneda. So that is better. Is that what you are 
trying to tell me?
    Chairman Shelby. It is always better.
    Senator Sarbanes. It is probably better to suffer through 
hearing the other panel than suffering through it as the panel 
yourself.
    [Laughter.]
    Ms. Castaneda. Senator Sarbanes, I will always remember 
your wise words.
    [Laughter.]
    Chairman Shelby. Those are not just flippant words. Senator 
Sarbanes has been on this Committee a long time. He has chaired 
the Committee. I am glad he is not chairing it right now, but 
who knows in the future.
    Thank you.
    The hearing is adjourned.
    [Whereupon, at 3:59 p.m., the hearing was adjourned.]
    [Biographical sketches of nominees and response to written 
questions supplied for the record follow:]



        RESPONSE TO WRITTEN QUESTIONS OF SENATOR CORZINE
                     FROM MARK C. BRICKELL

Capital Adequacy
Q.1. The Enterprises' minimum capital requirement specified in 
the statute is 2.5 percent of on-balance sheet assets and 0.45 
percent of off-balance sheet assets. Is this adequate? Please 
explain.

A.1. I believe that it is important that the Enterprises are 
managed in a safe and sound manner, and are perceived to be 
sound. If confirmed, I would fully enforce the existing capital 
standard that has been mandated by statute. I have no reason, 
based on what I now know, to believe that current capital 
levels are inappropriate. I would look forward to working with 
Congress as requested to discuss any legislative proposals 
regarding the statutorily mandated minimum capital requirement, 
should I be confirmed and after I have had the opportunity to 
more fully explore the effects of the current capital 
requirements on the Enterprises.

Q.2. In explaining your preference for allowing internal models 
of risk-based capital to the external model OFHEO has had in 
effect, you imply that the internal model reflects the most 
advanced thinking of U.S. and international regulators. In 
fact, isn't it fair to say that OFHEO is differently situated 
than the other regulators because it has only 2 financial 
institutions it has to regulate, both of which are in the same 
business? Indeed, the use of internal models in Basel II may 
simply be a less preferred compromise position necessitated by 
the large number of institutions other regulators must oversee. 
How do you respond? Given this specific fact, OFHEO argues it 
is better able to maintain the ``integrity'' of the rule, 
ensure its evenhanded impact, and ``independence and rigor.''

A.2. You make a good point, and I agree with you that OFHEO is 
differently situated than other Federal financial regulators in 
that it oversees fewer institutions. It is my understanding 
that the banking supervisors use the internal models approach 
not because they supervise more institutions, but because they 
believe that a ``rigid'' approach to capital rules is not 
necessarily a ``tough'' approach, and that the flexibility of 
the internal models approach leads to greater precision in 
measuring capital needs than alternative approaches would. If I 
am confirmed as the Director of OFHEO, I will approach this 
matter with an open mind and with a willingness to look for 
ways to strengthen OFHEO's regulation of Fannie Mae and Freddie 
Mac because it is essential, in my opinion, and I believe in 
the opinion of the Committee, that these two large, world class 
financial institutions have a world class financial regulator 
with adequate resources and with the statutory authority to be 
just as rigorous in its approach as the banking supervisors.

Q.3. You raise concerns numerous times in your testimony 
regarding the ``hard-wired'' nature of the capital standard. 
Please outline and explain specific changes you would like to 
see made to the risk-based capital statute.

A.3. I have no specific changes in mind for the risk-based 
capital requirements in the statute, although I support the 
Administration's recent call for greater flexibility in 
monitoring and establishing capital standards for the 
Enterprises.

Q.4. Are the derivative counterparty ``haircuts'' used in 
OFHEO's risk-based capital rule appropriate? Did you make any 
comments to OFHEO on this topic on your own behalf, or on 
behalf of JP Morgan, ISDA, or any other group? If so, please 
provide those comments. Please explain your current views on 
this topic.

A.4. I do not recall having made comments about the capital 
requirements for derivatives in the capital rule and, while I 
do not believe that it would be appropriate to prejudge any 
matter that is within the purview of the duties of the Director 
of OFHEO, I am willing to consider ways to strengthen OFHEO's 
regulation of Fannie Mae and Freddie Mac, including measures to 
ensure that regulation of their derivatives activity encourages 
safe and sound operation of the Enterprises.
FAS 133
Q.5. In response to a question regarding FAS 133 from Chairman 
Shelby, you said that, ``It is GAAP, and it has to be used.'' 
However, the preference you have expressed in the past is that, 
``the derivatives rule [FAS 133] is only GAAP for banks if the 
Federal banking supervisors certify that it should be,'' which 
is what you told the Bond Buyer on November 24, 1997 was your 
reason for supporting Senator Faircloth's bill, S. 1560. Your 
testimony clearly indicates that you understand that you must 
enforce FAS 133 as a regulator because it is now part of GAAP. 
However, is it still your view that a better course of action 
would have been to allow the banking regulators to be able to 
decide if whether or not to apply FAS 133 to the banks?

A.5. I believe that the article to which you are referring was 
published on November 24, 1997, in CFO Alert, a newsletter 
published by the same company that publishes the Bond Buyer. In 
that article, I was quoted as saying, ``This legislation could 
assure that the derivatives rule is only GAAP for banks if the 
Federal banking supervisors certify that it should be.'' This 
statement was a description of what, in my judgment, was the 
principal, possible effect of the legislation, not an 
assessment of that result. As I indicated in my testimony 
before the Committee, if confirmed, I will enforce the existing 
requirement that the Enterprises report using GAAP, including 
FAS 133.

Q.6. Would you have the same preference with regards to the 
GSE's?

A.6. My thinking with respect to the GSE's is no different from 
my thinking about banks as indicated in my response to Question 
5. As I indicated in my testimony before the Committee, if 
confirmed, I will enforce the existing requirement that the 
Enterprises report using GAAP, including FAS 133.

Q.7. Did you or do you believe that only the derivatives rule 
(FAS 133) should apply to banks at the regulators discretion, 
or should this discretion extend to all GAAP accounting rules? 
Please explain why or why not.

A.7. I see no reason to single out the derivatives rule for 
special treatment. As I indicated in my testimony before the 
Committee, if confirmed, I will enforce the existing 
requirement that the Enterprises report using GAAP, including 
FAS 133.

Q.8. Given your belief that regulators should have this 
discretion, wouldn't this result in the return of regulatory 
capital for financial institutions separate and apart from 
GAAP? Do you have concerns about this? Please explain.

A.8. As I understand the question, as to whether this method of 

establishing accounting principles for banks would have created 
differences between regulatory accounting and GAAP it is my 
understanding that such differences existed already between the 
accounting by banks for regulatory purposes and their 
accounting for GAAP, so that this would not have been a new 
situation.

Q.9. The Dow Jones Newswire reported (July 16) that you 
prepared a memorandum for the House sponsor of the legislation, 
Mr. Baker. Is this accurate? If so, please provide a copy of 
this memorandum.

A.9. A memorandum containing the language quoted in the Dow 
Jones story was sent to Ted Beason on February 1, 1998. I 
believe the memorandum was drafted for his benefit, but it is 
certainly possible that it may also have been shared with 
Representative Baker. A copy is attached.

Q.10. Please describe fully your lobbying activities on FAS 133 
on behalf of the legislation introduced by Representative Baker 
and Senator Faircloth.

A.10. I attended meetings in New York and Washington and 
communicated with others to discuss the proposed rule and some 
of the concerns expressed by major businesses (including JP 
Morgan), as well as the Federal Reserve Board and the 
Department of the Treasury.

Q.11. The Faircloth and Baker bills would have had the effect 
of undermining the independence of the accounting standards 
setting body--the Financial Accounting Standards Board--whose 
independence was recently affirmed in the Sarbanes-Oxley Act. 
Efforts like the Faircloth and Baker bills, and other 
proposals, have sought to undo FASB accounting standards via 
legislative fiat. Do you agree with that analysis? If not, 
please explain your reasons for your disagreement with that 
analysis.

A.11 It is my understanding that Congress has from time to time 
addressed accounting issues, both through its grant of 
authority to the Securities and Exchange Commission to require 
U.S. securities issuers to use the GAAP rules of FASB, and 
occasionally by addressing individual accounting issues such as 
stock option accounting, and as Congressman Baker and Senator 
Faircloth sought to do. I would not characterize those 
Congressional endeavors as legislative fiat, however, since 
that I believe that Members of Congress undertook them after 
reasonable deliberation.

Q.12. One of the problems that led to the passage of the 
Sarbanes-Oxley bill was the undue influence of industry 
interest groups on FASB, either directly or by bringing 
political pressure to bear. Wouldn't the Faircloth and Baker 
bills have exacerbated this problem? Please explain your views.

A.12. I understood that the Sarbanes-Oxley bill was passed, in 
part, because Congress concluded that the accounting industry 
needed closer Federal oversight, and Congress created an 
oversight board to address that need. While I do not have 
direct knowledge about the source of the problems that Congress 
acted to remedy, I note that Congress did ultimately conclude, 
as Baker and Faircloth had earlier, that legislative action was 
appropriate to address them. It is not clear to me that 
legislation, such as that introduced by Senator Faircloth, 
which was apparently intended to give Federal banking 
supervisors a role in the accounting standard setting process 
for the institutions they regulated, or such as that introduced 
by Congressman Baker, which was apparently intended to 
incorporate FASB standards into actual SEC regulations, should 
be characterized as legislation that would have exacerbated 
undue influence of industry groups on FASB.

Q.13. Do you have a view today as to whether your support for 
the Baker and Faircloth legislation was wise? Please explain.

A.13. I stand by the views expressed above. As I indicated in 
my testimony before the Committee, if confirmed, I will also 
rigorously enforce the existing requirement that the 
Enterprises under my supervision report using GAAP, including 
FAS 133.
Derivatives and Systemic Risk
     In testimony to the House Banking Committee in 1993, you 
said, ``it was hard to find justification for the view that 
derivatives pose a greater systemic threat than other financial 
activities.'' The next year, ISDA published a critique of a GAO 
study on derivatives. The critique claims that, ``there is no 
concentration of credit exposures among [derivatives] 
dealers.'' In a Dow Jones News Service story on May 19, 1994, 
you were quoted as saying, ``These exposures aren't of a new 
kind, they are not particularly large, and they are not 
particularly concentrated. So where's the big threat to the 
system?'' Since that time, Warren Buffet, in Berkshire 
Hathaway's 2002 annual report described derivatives as 
``financial weapons of mass destruction . . . .''
     One of the risks that Mr. Buffet cites is the systemic 
risk created by the concentration of derivatives: ``Large 
amounts of risk . . . have become concentrated in the hands of 
relatively few . . . dealers, who . . . trade extensively with 
one another. The troubles of one could quickly infect the 
others. [T]hese dealers are [also] owed huge amounts by 
nondealer counterparties, [s]ome of [which] are linked in ways 
that could cause them to contemporaneously run into a problem 
because of a single event. Linkage, when it suddenly surfaces, 
can trigger serious systemic problems.'' In fact, the GSE's are 
some of the largest nondealer counterparties.
    A Business Week article (March 2003) explained, ``exposure 
to derivatives is highly concentrated. The OCC says seven U.S. 
banks own nearly 96 percent of the derivatives in the banking 
system. And because most derivatives are traded directly 
between the parties and not on exchanges, they are almost 
entirely unregulated.''
    Even Federal Reserve Chairman Greenspan, who disagrees with 
Mr. Buffett's conclusions, has acknowledged the problems 
associated with systemic risk: ``One development that gives me 
and others some pause is the decline in the number of major 
derivatives dealers and its potential implications for market 
liquidity and for concentration of counterparty credit risks . 
. . . When concentration reaches these kinds of levels, market 
participants need to consider the implications of exit by one 
or more leading dealers. Such an event could adversely affect 
the liquidity of types of derivatives that market participants 
rely upon for managing the risks of their core business 
functions.''
    One example of such concentrations is U.S. dollar interest 
rate options, which are used extensively by both Fannie Mae and 
Freddie Mac.
    In your testimony, you appear to minimize this concern. You 
say that the limited number of counterparties, ``may very well 
be because the party in question has chosen to enter into 
contracts with others that he knows well and trusts and whose 
credit he can judge.''
    While such behavior may be rational on the part of 
individual market participants, regulators must look after the 
health of the institutions and the markets as a whole.

Q.14.a. Have the events of the past 10 years, since you made 
your comment on the GAO report, or the concerns raised by Mr. 
Greenspan, changed your attitude regarding the potential 
systemic risks of derivatives? Please comment in detail.

A.14.a. No. In fact, I believe that the events and comments of 
the past 10 years tend to validate the judgment that the risks 
of derivatives are similar to the risks of other, related 
financial and trading activities, and that they should be 
managed with similar care. By making it easier for those who 
are already exposed to risk in their existing business 
activities to manage those risks with greater precision, 
transferring to others those risks they do not wish to take, 
and taking on those risks that they would prefer, derivatives 
tend to strengthen the position of individual firms and, in the 
process, tend to strengthen the financial system and the 
economy. As Chairman Greenspan said on April 22, 2002:

    Financial derivatives, more generally, have grown at a 
phenomenal pace over the past 15 years. Conceptual advances in 
pricing options and other complex financial products, along 
with improvements in computer and telecommunications 
technologies, have significantly lowered the costs and expanded 
the opportunities for hedging risks not readily deflected in 
earlier decades. The performance of these increasingly complex 
financial instruments, especially over the past couple of 
stressful years, has been noteworthy. These financial products 
have contributed importantly to the development of a far more 
flexible and efficient financial system--both domestically and 
internationally--than we had just 20 or 30 years ago.

Q.14.b. You have been quoted often to the effect that market 
discipline is the best regulator of swaps and derivatives. My 
fear is that the GSE's, as such enormous users of derivatives, 
could trigger the kind of liquidity crisis both Warren Buffett 
and Chairman Greenspan have discussed in recent months, if they 
are not effectively regulated. In your view, what role ought 
OFHEO play in terms of regulating the use of derivatives by the 
GSE's in order to avoid systemic risk to the financial system, 
or will you simply rely on market discipline, whatever the 
consequences to the rest of the economy?

A.14.b. I understand your concerns. I understand that 
regulation can be especially appropriate where there is any 
weakening of the discipline that market forces bring to 
financial activity. I believe that the Office of Federal 
Housing Enterprise Oversight should supervise and address 
activities of Fannie Mae and Freddie Mac that could threaten 
the safety and soundness of those institutions--including their 
derivatives activities--and as I indicated at the July 22 
confirmation hearing, if confirmed I will provide vigorous 
oversight as Director of OFHEO.



         RESPONSE TO WRITTEN QUESTIONS OF SENATOR REED
                     FROM MARK C. BRICKELL

Q.1. Do you have any concerns about the growth of the GSE's, 
especially of their debt?

A.1. I am concerned about any adverse impact that the growth of 
the Enterprises might have on their safety and soundness. If 
confirmed as the Director of OFHEO, I will work to ensure that 
the Enterprises do not engage in any activities or grow in a 
fashion that threatens safety and soundness.

Q.2. Do you believe that Fannie and Freddie still have a role 
to play today as Government Sponsored Enterprises, or has the 
secondary mortgage evolved to the point where Government 
Sponsored Enterprises are no longer needed?

A.2. As I indicated in response to a question at the July 22 
confirmation hearing, Fannie Mae and Freddie Mac perform a 
vitally important function for housing finance in this country. 
They bring capital market benefits to housing finance and, in 
that way, they give us the broadest, deepest, most successful 
housing markets in the world. That means expanded home loan 
opportunities, and it means reduced costs for home loans. These 
are important benefits and, if confirmed, I would work to 
ensure that they are preserved.

Q.3. Should any of the Enterprises' ties to the Federal 
Government be modified or discontinued? Please explain.

A.3. While I am unable to make specific recommendations at this 
time, I support the changes in regulatory structure and 
oversight recently proposed by Secretaries Snow and Martinez in 
testimony before the House Financial Services Committee.

Q.4. Are the derivative counterparty ``haircuts'' used in 
OFHEO's risk-based capital rule appropriate? Did you make any 
comments to OFHEO on this topic on your own behalf, or on 
behalf of JP Morgan, ISDA, or any other group? If so, please 
provide those comments, and explain your current views on this 
topic.

A.4. I do not recall having made comments about the capital 
requirements for derivatives in the capital rule and while I do 
not believe that it would be appropriate to prejudge any matter 
that is within the purview of the duties of the Director of 
OFHEO, I am willing to consider ways to strengthen OFHEO's 
regulation of Fannie Mae and Freddie Mac, including ensuring 
that regulation of their derivatives activity encourages safe 
and sound operation of the Enterprises.

    A 1994 GAO report on derivatives (Financial Derivatives, 
May, 1994) recommended that the ``SEC registrants that are 
major end-users of complex derivatives products establish and 
implement'' 
requirements for internal controls and the publication of those 
controls, including assessments of derivative risk-management 
systems. ISDA put out a response to the report suggesting that 
there is no more reason to monitor controls on derivatives than 
there is to have the SEC ``monitor controls on new marketing 
campaigns or research projects.''
Q.5.a. As the chief lobbyist and spokesperson for ISDA at this 
time, did you think it was accurate to compare controls on 
derivatives risk-management with corporate research projects or 
marketing campaigns? Is that your view today?

A.5.a. While I was a member of ISDA's Board for much of 1994, I 
was not ``the chief lobbyist and spokesperson for ISDA at 
[that] time.'' Nonetheless, to the best of my knowledge, that 
recommendation of the 1994 GAO report was not adopted at that 
time or since, and I am not uncomfortable with that result. The 
risks of derivatives are similar to the risks of other, 
related, financial and trading activities, and they should be 
managed with similar care.

Q.5.b. If confirmed, would you require that the Enterprises 
establish and implement internal controls for the use of 
derivatives? Would you monitor those controls? Would you 
require that those controls be made public?

A.5.b. I believe OFHEO has both safety and soundness regulatory 
authority and authority to enforce compliance with the 
standards and rules that it establishes. Using this authority, 
OFHEO should ensure that the policies of Fannie Mae and Freddie 
Mac limit risk taking and enhance risk management 
appropriately, and determine that those policies have been 
carried out. If confirmed, I intend to provide vigorous 
oversight of Fannie Mae and Freddie Mac, including oversight of 
their derivatives activities.

Q.6. Were you involved in the effort to block the regulation of 
energy or metal derivatives during the debate on the CFMA? Did 
you take any position on this specific issue, or lobby anyone 
on this issue? If so, please fully describe your activities.

A.6. Although questions about energy and metals were part of 
the larger bill, I do not recall having taken a position or 
lobbied on this specific issue.

Q.7. You are currently the CEO of Blackbird Holdings, which, as 
I understand it, is a specialized inter-dealer electronic 
trading system for OTC financial derivatives. Blackbird's 
website states that it has 40 international dealers installed 
and trading on its system in North America and an additional 35 
dealers across Europe, and that the Blackbird ``trading network 
has consistently expanded over time.'' But the website 
specifically declines to release any volume records. And no 
press releases are listed on the website for this year, 
although 8 are listed for 2002 and 12 for 2001.
    The Wall Street Journal reported on February 18, 2003, a 
company named eSpeed, which is an affiliate of Cantor 
Fitzgerald, was entering the same businesses as Blackbird. The 
Journal article stated:

    If successful, eSpeed's planned move into electronic 
trading for dollar and euro-denominated interest-rate swaps 
would make it the only formidable player in the wide-open area 
of online swaps trading. Only one firm, Blackbird Holdings, so 
far has launched an online swaps platform. But it has failed to 
gain a foothold, despite what was seen as a novel technology. 
[Emphasis supplied.]

    What is the state of Blackbird's business now? Why did both 
Blackbird's two large institutional investors, Reuters and ICAP 
PLC sell out their Blackbird investments?

A.7. Blackbird continues to market its service to potential 
customers in several countries. Other aspects of the business 
are proprietary information. I understand that Reuters sold its 
Blackbird shares as part of a realignment of its business 
activities. By terms of a settlement agreement with ICAP PLC, 
Blackbird is not allowed to disclose any details of our 
settlement arrangements with that firm.

Q.8. During the CFMA debate you were very public about that 
fact that you thought a company should be able to ``opt for 
regulation.'' It was your view then, is it your view now? Is 
this something you believe would work for Fannie Mae and 
Freddie Mac?

A.8. Congress adopted this approach in the Commodity Futures 
Modernization Act (CFMA). The CFMA, in part, assures that swap 
activity will be subject to Commodity Futures Trading 
Commission (CFTC) regulation when a participant seeks and the 
CFTC agrees to provide that regulatory oversight. Members of 
the President's Working Group on Financial Markets, including 
Treasury Secretary Summers and Federal Reserve Board Chairman 
Greenspan, supported the legislation, which was enacted into 
law. I shared the view of the regulators and Congress that this 
approach was appropriate then, and I still do today.
    I believe that the Office of Federal Housing Enterprise 
Oversight (OFHEO) already possesses the authority to supervise 
and address activities of Fannie Mae or Freddie Mac that could 
threaten the safety and soundness of those institutions--
including their derivatives activities. Stated plainly, swap 
activity oversight by OFHEO is mandatory, not optional.

Q.9. According to an article published online by the American 
Banker (July 16), you own stock of American International Group 
(the parent of mortgage insurer United Guaranty), General 
Electric (the parent of GE Mortgage Insurance); and HSBC 
Holdings (the parent of Household International). You also hold 
a number of other bank stocks and stocks of other companies 
that have significant finance affiliates.
    You have agreed to divest certain of your holdings within 
90 days. Given the role of some of the companies in which you 
hold shares--especially JP Morgan Chase--in the derivatives 
markets, do you think it is appropriate for you to wait up to 
90 days before divesting your interest? How do you plan to 
divest yourself of your holdings in other banks or companies 
with significant finance affiliates? Do you plan to do so 
immediately? Did you consider simply placing all of your shares 
in a blind trust for the duration of your government service?
    Rather than dispose of your wife's holdings of more than $1 
million dollars in Citigroup shares and options, you have 
chosen to recuse yourself during your service ``from 
participating personally and substantially in any particular 
matter that will have a direct and predictable effect on the 
financial interests of Citigroup.'' Citigroup is the Nation's 
largest financial institution, and it is also a substantial 
participant in the Nation's derivatives and mortgage markets. 
Given the nature of your responsibilities, and the size and 
importance of Citigroup, how can you perform your post 
effectively and satisfy the terms of your recusal? Even if 
technical compliance is possible, why have you chosen to allow 
a situation to arise that many may view as tantamount to the 
appearance of a conflict of interest?

A.9. If confirmed, I will comply fully with the terms of my 
Ethics Agreement and all applicable laws and regulations. It is 
my understanding that, after undertaking a thorough review of 
my financial holdings, the Office of Government Ethics and the 
U.S. Department of Housing and Urban Development have 
reconfirmed that the terms of my Ethics Agreement meet or 
exceed the requirements of applicable laws and regulations, and 
will not impair my ability to perform effectively the duties of 
Director of OFHEO.

Q.10. Do you believe that the secondary mortgage market needs 
Federally chartered institutions, instead of private financial 
institutions to maintain a stable, liquid, and reliable source 
of mortgage financing, or could it be maintained by private 
financial institutions alone? Describe in detail why or why 
not.

A.10. As I indicated in response to a question at the July 22 
hearing, Fannie Mae and Freddie Mac perform a vitally important 
function for housing finance in this country. They bring 
capital market benefits to housing finance and, in that way, 
they give us the broadest, deepest, most successful housing 
markets in the world. That means expanded home loan 
opportunities, and it means reduced costs for home loans. These 
are important benefits and, if confirmed, I would work to 
ensure that they are preserved.

Q.11. What are the three most important challenges you believe 
the Office of Federal Housing Enterprise Oversight (OFHEO) 
faces at the moment? If confirmed, describe in detail how you 
will address such challenges.

A.11. My first objective, if confirmed, would be to ensure that 
OFHEO, or its successor entity, continues its swift evolution 
into a world-class financial regulator of the Enterprises under 
its supervision. I will dedicate my energies to the completion 
of this task. Second, OFHEO must provide rigorous, continuing 
oversight of the entities under its jurisdiction to ensure that 
they operate safely and soundly. Third, OFHEO must ensure that 
it has the necessary resources, authority, and enforcement 
power to respond to the concerns raised by the recent 
accounting and management difficulties at one of the 
Enterprises. I look forward to helping to pursue these 
important goals.

Q.12. Under what circumstances, if any, would you ever 
recommend formally rescinding the GSEs' line of credit with the 
Federal Treasury? Describe those circumstances in detail. Are 
there any other Federal benefits that GSE's currently have that 
you would consider eliminating? Please explain in detail.

A.12. The mission of OFHEO is to work to ensure that Fannie Mae 
and Freddie Mac operate in a safe and sound manner. While I am 
unable to make specific recommendations at this time, any 
policy recommendations by OFHEO concerning the Enterprises 
should be based on their impact on the safe and sound operation 
of the Enterprises.

Q.13. On your Statement for Completion by Presidential 
Nominees, in answer to Question 4 in the ``Potential Conflicts 
of Interest'' section, you are asked to list any lobbying 
activity during the past 10 years you have engaged in. In your 
brief answer, you state that you have, ``participated in 
discussions in Washington and, to a lesser extent, in London, 
Paris, Basel, and Tokyo, concerning the development and 
implementation of the regulatory framework for swaps and other 
privately negotiated derivative transactions.'' Please list, to 
the most complete extent possible, all of your lobbying 
activities between 1993-2003.

A.13. During that time I filed lobbying reports, as required by 
law, describing that activity. I would be happy to obtain 
additional copies for you, if necessary.

Q.14. Given what you currently know about OFHEO and the GSE's, 
do you believe the current risk-based capital rule is 
identifying the real risks that Fannie and Freddie are taking? 
Describe in detail why or why not. Which specific changes, if 
any, would you propose to the risk-based capital rule? Describe 
in detail why you believe such changes are necessary.

A.14. I believe that it is important that the Enterprises are 
managed in a safe and sound manner, and are perceived to be 
sound. If confirmed, I would fully enforce the existing capital 
standard that has been mandated by statute. I have no reason, 
based on what I now know, to believe that current capital 
requirements are ineffective, but I would look forward to 
working with Congress as requested to discuss any legislative 
proposals regarding the statutorily mandated minimum capital 
requirement, should I be confirmed and have had the opportunity 
to explore more fully the effects of the current capital 
requirements on the Enterprises. I support the improvements 
outlined in testimony by Secretaries Snow and Martinez before 
the House Financial Services Committee.

Q.15. Given what you currently know about OFHEO and the GSE's, 
do you believe that the GSE's are overcapitalized? Please 
describe in detail why or why not. What level of capitalization 
do you believe is necessary in order to ensure the safety and 
soundness of the GSE's? Describe in detail your rationale for 
the level of capitalization specified and how it could be best 
accomplished.

A.15. I believe that it is important that the Enterprises are 
managed in a safe and sound manner, and are perceived to be 
sound. If confirmed, I would fully enforce the existing capital 
standard that has been mandated by statute. I have no reason, 
based on what I now know, to believe that current capital 
levels are inappropriate, but I would look forward to working 
with the Congress as requested to discuss any legislative 
proposals regarding the statutorily mandated minimum capital 
requirement, should I be confirmed and have had the opportunity 
to explore more fully the effects of the current capital 
requirements on the Enterprises. I support the improvements 
outlined in testimony by Secretaries Snow and Martinez before 
the House Financial Services Committee.

Q.16. While at JP Morgan and Blackbird Holdings, did you have 
any interactions, discussions or written communications with FM 
Watch/FM Policy Focus? If so, with which individuals did you 
interact, to what extent, and specifically, on which issues did 
you work with them?

A.16. While I know personally and professionally some 
individuals who are associated with that organization, and have 
worked with them on other matters, I do not believe that I have 
worked with them on matters involving the Enterprises.

Q.17. Dow Jones reported recently (February 6, 2003) that, 
during the effort to pass the Commodity Futures Modernization 
Act (CFMA), you ``pushed for legislation allowing so-called 
Granny swaps--derivatives that can be sold to ordinary 
investors.'' Do you believe that retail swaps should be 
completely unregulated? Describe in detail why or why not.

A.17. The CFMA was enacted, in part, to increase legal 
certainty for counterparties in swap contracts. I believe that 
the benefits of legal certainty should be available to all such 
counterparties, and that was my view during the discussions 
that lead to the passage of the CFMA.

Q.18. Describe in detail your experience at the International 
Swaps and Derivatives Association (ISDA), both as a Director 
and as Chairman. Describe in detail why you left the 
Chairmanship. Was there a term limit to the position? If so, 
how long is it and when was the term limit instituted? If not, 
did you have the support of a majority of the Directors when 
you left the Chairmanship?

A.18. I served on the Board of the International Swaps and 
Derivatives Association for most of the period from 1986 to 
1999. During that time I spent 4 years as Chairman and 2 years 
as Vice Chairman of the organization. I served as Chairman in 
four consecutive terms from 1988-1992, the first person to be 
elected to that post for more than 1 year. Although ISDA did 
not have, and does not have today, a term limit policy, I 
voluntarily stepped down as Chairman after 4 years of service. 
I enjoyed serving on the Board for another year until 1993, 
departing voluntarily at the end of that term. While there was 
no formal measure of the support of the Board when I resigned 
as Chairman or left the Board, I was pleased that I was 
reelected to the Board in 1994 and that the Board Members 
elected me Vice Chairman of the organization at that time.

Q.19. Have you had any management complaints filed against you 
from any employee of JP Morgan or Blackbird Holdings, Inc.? If 
so, please describe the outcome of such complaints.

A.19. Not to my knowledge.

Q.20. Did you communicate, verbally or in written form, with 
the Commodity Future Trading Commission (CFTC) about Blackbird 
to the Chairman, or its enforcement personnel? If so, describe 
in detail such communications, and provide documentation, if 
available.

A.20. I do not recall having discussed Blackbird with the 
Chairman of the CFTC or with CFTC enforcement personnel during 
my tenure as Chief Executive Officer of Blackbird.

Q.21. In testimony to the House Commerce Committee in 1999, you 
said, ``Hedge funds are not regulated and . . . let me say I am 
glad that they are not regulated.'' There have been growing 
concerns in recent months about the retailization of 
unregulated hedge funds. Is it still your view that hedge funds 
should remain unregulated? In your view, should there be any 
limits on the net worth of people who may invest in hedge 
funds? Please explain in detail.

A.21. I am not familiar with any policy proposals in this area, 
and thus have no comment with respect to any such proposals.

Q.22. You have testified as recently as April 2000 that you 
believe that futures exchanges should be unregulated. Is that 
still your position? Please explain in detail.

A.22. I do not recall having given such testimony. I am 
comfortable with the current regulatory framework for futures 
exchanges.

Q.23.a. In a response to a question from Chairman Shelby, you 
said, ``In my career in financial services, every day that I 
have spent at my desk, every day that I have worked has been 
spent at a regulated financial institution.'' My understanding 
is that Blackbird Holdings is not a regulated entity. Is that 
correct?

A.23.a. Blackbird is a regulated enterprise. Blackbird's 
operating companies, Blackbird North America, Inc., and 
Blackbird Europe, Limited, are regulated by the NASD under the 
supervision of the Securities and Exchange Commission, and the 
Financial Services Authority of the United Kingdom, 
respectively.

Q.23.b. In fact, my understanding is that you have worked hard 
to prevent Blackbird and its core business from being 
regulated. Is that correct? Please describe in detail any 
lobbying or other actions you have taken to keep Blackbird from 
being regulated.

A.23.b. The regulatory status of Blackbird, as described above, 
was established before I joined the company, and I have not 
attempted to change or modify those arrangements. I have worked 
to ensure that Blackbird complies with its regulatory 
obligations.

       RESPONSE TO WRITTEN QUESTIONS OF SENATOR SARBANES
                     FROM MARK C. BRICKELL

Q.1. In response to my question 4, you state in 1994 you 
jointly headed a JP Morgan project for Freddie Mac. You 
identified the project as, ``a risk management advisory project 
that focused principally, as I recall, on the quality of 
Freddie Mac's management of the credit, market, legal, and 
operational risk of its derivatives activities.'' Please 
provide the Committee with any documents in your possession, 
including any presentations or reports, regarding the project. 
In addition, please identify any individuals who you believe 
may be in possession of any documents related to the project.

A.1. There are no documents regarding the project in my 
possession. For further information about the project and 
related documents, the Committee may wish to contact Tim Ryan 
or Courtney Ward of JP Morgan, who are responsible for the 
firm's relationship with Freddie Mac.

Q.2. Did you or your team at JP Morgan at any time advise 
Freddie Mac on how to use derivatives to structure financial 
transactions in a way that achieved desired results, that is 
manage earnings?

A.2. I have never provided advice to Freddie Mac about using 
derivatives to manage earnings, and have no knowledge regarding 
any advice of such a nature that others may have provided.

Q.3. Were you at any time a participant in any presentation or 
briefing of Freddie Mac officials regarding the project? If so, 
please identify the date(s) of such presentations or briefings, 
and the individuals present.

A.3. Yes. I participated in a briefing to members of the 
Finance Committee of the Freddie Mac Board, most likely during 
the third or fourth quarter of 1994. I do not recall all the 
names of the Finance Committee members and others who may have 
been present at the time, but do recall that Tim Ryan and Steve 
Thieke from JP Morgan participated along with me in the 
briefing.

        RESPONSE TO WRITTEN QUESTIONS OF SENATOR CARPER
                    FROM ALICIA R. CASTANEDA

Q.1. What is your view of multidistrict membership? What 
factors do you believe are most important to consider when 
deciding this issue?

A.1. I understand the Federal Housing Finance Board began 
considering this issue after four Federal Home Loan Banks filed 
petitions seeking clarification on whether a member institution 
can be a member of two or more Federal Home Loan Banks.
    With any action a regulator considers, the statutory 
authority for options under review must be a prime 
consideration.
    In addition, as with all issues that come before the 
Federal Housing Finance Board, multidistrict membership must be 
considered in the light of safety and soundness, that is, 
whether a change in membership enhances or harms the safety and 
soundness of the Federal Home Loan Banks.
    I would also consider the question of whether any change 
serves the housing finance and affordable housing missions that 
Congress has given the Federal Home Loan Banks, as well as the 
effect of any change on business choices the Banks make in 
serving these missions.

Q.2. What is your position on requiring the Home Loan Banks to 
register with the Securities and Exchange Commission under the 
Securities and Exchange Act of 1934? As you may know Section 
12(i) of the 1934 Act provides the bank regulatory agencies 
with the powers, functions, and duties vested in the SEC to 
administer and enforce the disclosure and reporting provisions 
of the 1934 Act. What is your view of having the Federal Home 
Loan Banks register under 12(i) with the Finance Board?

A.2. I am aware of the Administration's position that all 
Government Sponsored Enterprises, including the Federal Home 
Loan Banks, should voluntarily register with the SEC under the 
Securities and Exchange Act of 1934.
    The 12(i) concept is one that I have not had the 
opportunity to familiarize myself with, but I intend to do so. 
If confirmed, I will study all the factors involved with the 
disclosure issue.
    My experience at the Bank of America has led me to 
appreciate the importance of disclosure, and as a regulator, I 
would be a strong supporter of transparency, of full 
disclosure. My duty is, ultimately, to the public, and the 
public is well-served through a clear and consistent regime of 
disclosure.



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