[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.