[Senate Hearing 109-552]
[From the U.S. Government Publishing Office]



                                                        S. Hrg. 109-552

 
                  NOMINATIONS OF: RONALD A. ROSENFELD,
                   EMIL HENRY, AND PATRICK M. O'BRIEN

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

                                HEARINGS

                               before the

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

                       ONE HUNDRED NINTH CONGRESS

                             FIRST SESSION

                                   ON

                            NOMINATIONS OF:

   RONALD A. ROSENFELD, OF OKLAHOMA, TO BE A DIRECTOR OF THE FEDERAL 
                         HOUSING FINANCE BOARD

                               __________

   EMIL HENRY, OF NEW YORK, TO BE ASSISTANT SECRETARY FOR FINANCIAL 
             INSTITUTIONS, U.S. DEPARTMENT OF THE TREASURY

                               __________

 PATRICK M. O'BRIEN, OF UTAH, TO BE ASSISTANT SECRETARY FOR TERRORIST 
               FINANCING, U.S. DEPARTMENT OF THE TREASURY

                               __________

                     MARCH 1 AND SEPTEMBER 20, 2005

                               __________

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


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                            senate05sh.html


                                 ______

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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                    THOMAS R. CARPER, Delaware
JOHN E. SUNUNU, New Hampshire        DEBBIE STABENOW, Michigan
ELIZABETH DOLE, North Carolina       ROBERT MENENDEZ, New Jersey
MEL MARTINEZ, Florida

             Kathleen L. Casey, Staff Director and Counsel

     Steven B. Harris, Democratic Staff Director and Chief Counsel

           Mark A. Calabria, Senior Professional Staff Member

               Jennifer Fogel-Bublick, Democratic 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, MARCH 1, 2005

                                                                   Page

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

Opening statements, comments, or prepared statements of:
    Senator Sarbanes.............................................     2
    Senator Martinez.............................................     3
    Senator Allard...............................................    10
        Prepared statement.......................................    13

                                WITNESS

Frank Keating, former Governor, State of Oklahoma................     4

                                NOMINEE

Ronald A. Rosenfeld, to be a Member of the Federal Housing 
  Finance Board..................................................     4
    Biographical sketch of nominee...............................    14

              Additional Material Supplied for the Record

Letter to Senator Paul S. Sarbanes from Al Mansell, President, 
  National Association of REALTORS' dated Febrary 28, 
  2005...........................................................    23

                              ----------                              

                      TUESDAY, SEPTEMBER 20, 2005

Opening statement of Chairman Shelby.............................    25

Opening statement of Senator Sarbanes............................    36

                               WITNESSES

Orrin G. Hatch, a U.S. Senator from the State of Utah............    26
Sue W. Kelly, a U.S. Representative in Congress from the State of 
  New York.......................................................    27

                                NOMINEES

Emil Henry, of New York, to be Assistant Secretary for Financial 
  Institutions, U.S. Department of the Treasury..................    28
    Biographical sketch of nominee...............................    43
Patrick M. O'brien, of Utah, to be Assistant Secretary for 
  Terrorist Financing, U.S. Department of the Treasury...........    30
    Biographical sketch of nominee...............................    51

                                 (iii)


                   NOMINATION OF RONALD A. ROSENFELD
                     OF OKLAHOMA, TO BE DIRECTOR OF
                   THE FEDERAL HOUSING FINANCE BOARD

                              ----------                              


                         TUESDAY, MARCH 1, 2005

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

    The Committee met at 2:13 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 hearing will come to order.
    Sorry I am late. We had a conference, Mr. Rosenfeld, 
Governor Keating, and some days, you cannot get out of it.
    This afternoon, the Committee meets to consider the 
nomination of Mr. Ronald A. Rosenfeld to be a Member of the 
Board of the Federal Housing Finance Board. I appreciate Mr. 
Rosenfeld's willingness to appear before the Committee today.
    Mr. Rosenfeld, as you all know, received a recess 
appointment to the Finance Board and was designated Chairman by 
the President. Given the importance of this position, I think 
we all understood the Administration's need to move quickly on 
this nomination.
    The Federal Housing Finance Board oversees the Federal Home 
Loan Bank System. The 12 member Banks of the Federal Home Loan 
Bank System constitute an important source of liquidity for our 
Nation's financial institutions, helping to indirectly finance 
mortgages, small business and agricultural loans across the 
country. As vital as these institutions are to the financial 
health of our Nation, I believe that it is as vital that these 
institutions have effective regulatory oversight.
    Improving the regulatory oversight of the Federal Home Loan 
Bank System has been an important component of this Committee's 
efforts to strengthen the regulation of the Nation's housing 
Government Sponsored Enterprises, GSE's. It is the Committee's 
intention to bring Mr. Rosenfeld back before the Committee as 
we consider legislative proposals, Mr. Rosenfeld, to improve 
the regulation of the housing GSE's. We talked about this in my 
office. The Committee's intention at that time is to examine 
the overall condition of the Federal Home Loan Bank System, 
among other things.
    Mr. Rosenfeld, you bring a long career of both public and 
private experience to the Federal Housing Finance Board. Most 
recently, you served as President of Ginnie Mae, the Government 
National Mortgage Association. Your previous Federal service 
includes serving as Deputy Assistant Secretary for Corporate 
Finance at the Department of the Treasury.
    You have also had several positions at the Department of 
Housing and Urban Development, including General Deputy 
Assistant Secretary for Housing, Acting Deputy Assistant 
Secretary for Multi-Family Housing and Deputy Assistant 
Secretary for Single-Family Housing. Clearly, you bring a great 
deal of expertise regarding housing and mortgage finance policy 
to the Finance Board.
    Your knowledge of housing and mortgage finance does not 
solely come from the public sector but also from your long-term 
involvement in the development of both single-family and multi-
family homes in this country.
    I would also note Mr. Rosenfeld's service in State 
government. He held the office of Secretary of Commerce in the 
State of Oklahoma. Mr. Rosenfeld is a graduate of the Wharton 
School at the University of Pennsylvania and the Harvard Law 
School.
    Upon his designation as Chairman, you succeed Ms. Alicia 
Castaneda. I want to thank her and acknowledge her service 
chairing the Finance Board. I am also happy to hear that she 
will remain on the Board.
    I want to thank you, Mr. Rosenfeld for appearing before the 
Committee today, and after hearing from Senator Sarbanes, I 
would want to administer the oath to you.
    Senator Sarbanes.

             STATEMENT OF SENATOR PAUL S. SARBANES

    Senator Sarbanes. Thank you very much, Mr. Chairman. 
Unfortunately, I am going to have to depart because of a 
conflict in schedule, but I did want to be here to join with 
you, Mr. Chairman, in welcoming Ronald Rosenfeld before the 
Committee. As the Chairman said, he is being nominated to serve 
on the Federal Housing Finance Board and has been designated by 
the President to be its Chairman. Mr. Rosenfeld brings with him 
a great deal of relevant experience.
    He has spent much of his career on housing and real estate 
sector and a number of Government positions. In the 
Administration of the first President Bush, Mr. Rosenfeld was 
the Deputy Assistant Secretary for Single-Family Housing and 
the Deputy Federal Housing Commissioner HUD and was the Deputy 
Assistant Secretary for Corporate Finance at the Treasury 
Department. Most recently, he served as President of Ginnie 
Mae.
    The President of the Federal Housing Finance Board, which 
is the regulator of the Federal Home Loan Bank System, has a 
very important and challenging responsibility. The System is 
experiencing rapid growth. The System's assets now total almost 
$900 
billion, compared with $350 billion in 1997, just 8 years ago. 
In addition, the Federal Home Loan Banks are one of the world's 
largest issuers of debt. At the end of June 2004, the System 
had $816 billion in debt outstanding, an increase of more than 
$100 billion from a year earlier. There are now two Federal 
Home Loan Banks, the Chicago and Seattle Banks, that are 
operating under supervisory agreements, so there are obviously 
some real challenges with respect to the Federal Home Loan Bank 
System, and I am hopeful that Mr. Rosenfeld's extensive 
knowledge of the mortgage markets will serve the country well 
in his responsibilities at the Finance Board.
    Thank you, Mr. Chairman.
    Chairman Shelby. Senator Martinez.

               STATEMENT OF SENATOR MEL MARTINEZ

    Senator Martinez. Mr. Chairman, good afternoon. It is a 
real honor for me to participate in this hearing. Mr. 
Rosenfeld, I had the great honor and privilege to have him work 
while I was at the Department of Urban Development as the 
President of Ginnie Mae, and I hold him in high regard, and it 
is really a pleasure to welcome him to the Committee, Mr. 
Rosenfeld, and to also speak on his confirmation.
    I believe one of the most important attributes of the 
Chairman of the Federal Housing Finance Board is that the 
person have an intimate knowledge of the housing market. He 
must also understand the speed at which it changes and can 
effectively oversee both the safety and the soundness of the 
mission compliance of the entities that it regulates.
    I believe that Mr. Rosenfeld is extremely qualified to 
succeed in this position. Under his leadership at Ginnie Mae, 
he developed new programs and implemented several significant 
changes that improved industry process. His accomplishments 
include passage of the Soldiers and Sailors Civil Relief Act, 
which required all mortgage lenders to limit the interest rates 
on mortgage debt to 6 percent for military personnel called to 
active duty. He launched a campaign that saves the industry $27 
million annually by streamlining documentation requirements, 
and internal procedures, and under his leadership, Ginnie Mae 
began securitizing loans guaranteed by the Veterans 
Administration and the Federal Housing Administration.
    The Federal Home Loan Bank System plays a critical role in 
our Nation's housing market. By working with the 8,000 member 
financial institutions across the country, the Federal Home 
Loan Banks ensure that the liquidity needed for residential 
mortgage lending is available and affordable. The Federal Home 
Loan Banks, however, have also grown substantially in size over 
the last decade. The 12 banks together form a $900 billion 
system, and legislative changes implemented during the Gramm-
Leach-Bliley opened up membership in the Federal Home Loan 
Banks, changed the capital structure to a risk-based model and 
also made significant changes to the banks' collateral 
structure to ease the flow of liquidity to our communities.
    I have known you, sir, and I respect you greatly for your 
work, and I look forward to working with you and with this 
Committee after your confirmation so that we can move forward 
also on legislation to strengthen the regulatory oversight of 
the housing Government Sponsored Enterprises. So thank you very 
much for your willingness to continue serving, Mr. Rosenfeld.
    Chairman Shelby. Governor Keating, welcome to the 
Committee. I assume you are here to say a few words about 
someone you know real well, so you proceed as you wish.

                   STATEMENT OF FRANK KEATING

               FORMER GOVERNOR, STATE OF OKLAHOMA

    Governor Keating. Mr. Chairman and Senator Martinez, thank 
you very much for giving me this opportunity to participate in 
the presentation of Ronnie Rosenfeld to the Committee. This is 
Mr. Rosenfeld's second Senate confirmation. You have noted, Mr. 
Chairman, that he was confirmed earlier as President of the 
Government National Mortgage Association. I have known Ronnie 
Rosenfeld since the late 1980's. We served together at HUD. As 
you noted, he was a Deputy Assistant Secretary of HUD as well 
as a Deputy Assistant Secretary of the Department of the 
Treasury.
    He also came to Oklahoma during my first term and served as 
Secretary of Commerce with enormous skill, integrity, and 
ingenuity. I know Congressman Tom Cole would join me, who is 
here today, in encouraging the Committee to act favorably on 
the Rosenfeld nomination.
    I want to note, Mr. Chairman, if I may, that Mr. Rosenfeld 
and I have traveled the world on economic development missions. 
I have known him intimately. He is one of those unique 
persons--I think Senator Martinez knows this--who has been 
extraordinarily successful in business, but he also loves his 
country dearly and deeply and wants to give back as much as he 
can. And to serve the Government, to serve the Administration, 
and to serve the public as he is is a great calling, and in my 
judgment, he will serve with absolute integrity, with energy, 
with ingenuity, with enterprise, and bring great credit to the 
office to which he is seeking confirmation, to his family and 
friends, and to the U.S. Senate, which hopefully will confirm 
him.
    I cannot think of any more wonderful human being than 
Ronnie Rosenfeld to be considered for this position, and I am 
very grateful to the President for nominating him and, of 
course, to this Committee for considering him, and I will now 
turn it over to him for a few remarks, but I will sit back 
where I belong, and I thank you so much, Mr. Chairman.
    Chairman Shelby. Thank you, Governor Keating.
    Mr. Rosenfeld, will you stand and raise your right hand and 
be sworn?
    [Witness sworn.]
    Chairman Shelby. You can be seated. Do you want to 
introduce any members of the family? You can do that for the 
record.

                STATEMENT OF RONALD A. ROSENFELD
                       TO BE DIRECTOR OF
               THE FEDERAL HOUSING FINANCE BOARD

    Mr. Rosenfeld. Let me please begin by introducing members 
of my family. The number one person in my life is my wife, 
Patty, right here.
    [Laughter.]
    Chairman Shelby. Very good.
    Mr. Rosenfeld. Seated next to her is my son, David. David 
is one of our six children. The other five are scattered 
throughout the world along with eight grandchildren.
    Chairman Shelby. Wonderful.
    Mr. Rosenfeld. And I would like to introduce some very dear 
friends and colleagues who serve in public service. We also 
have a number of wonderful friends here who are not in public 
service. Let me confine my introductions to public servants: 
Stillman Knight, the Deputy Assistant Secretary for Multi-
Family Housing at HUD, Congressman Tom Cole from the Fourth 
District of Oklahoma, and I have some colleagues from Ginnie 
Mae, my former home for the past 3 and a half years, Mike Franz 
and Cheryl Owens, and our Counsel, John Kennedy.
    Chairman Shelby. You have them all here.
    [Laughter.]
    Mr. Rosenfeld. I want you to know that in Ginnie Mae, you 
do have a wonderful, first-class organization, and I am really 
very proud to have been associated with them.
    Chairman Shelby. You proceed as you wish. Your written 
testimony will be made a part of the record.
    Mr. Rosenfeld. Thank you, sir.
    Chairman Shelby. We want to confirm you as soon as we can.
    Mr. Rosenfeld. Okay.
    [Laughter.]
    Chairman Shelby. A lot of nominees would like to hear that 
from our Committee.
    Mr. Rosenfeld. Mr. Chairman, Senator Martinez, I want to 
express my appreciation for the opportunity to appear before 
you today and to extend my deepest gratitude to President 
George W. Bush for nominating me to be a Director of the 
Federal Housing Finance Board. It has been just about 3 and a 
half years ago that I appeared before this Committee----
    Chairman Shelby. Bring your mike up closer to you.
    Mr. Rosenfeld. It has been just about 3 and a half years 
ago that I appeared before this Committee seeking confirmation 
to be the President of Ginnie Mae. Let me assure you that I 
approach this new honor with equally great enthusiasm and even 
more relevant experience.
    I realize that in citing one's extensive experience, it 
carries with it an acknowledgement of one's age. Having started 
in my business career as a ``borrower'' by virtue of being a 
real estate developer, then moving on to be a ``provider of 
capital'' by participating in the investment banking industry, 
and then becoming a ``source of credit enhancement'' while 
serving HUD as Deputy FHA Commissioner and most recently as 
President of Ginnie Mae, and now, if I am confirmed, becoming a 
``regulator'' as a Director of the Federal Housing Finance 
Board, it is not unreasonable that this journey has taken 40 
years.
    Chairman Shelby. As Chairman of the Board. Go ahead.
    Mr. Rosenfeld. While bringing experience to the Board is 
valuable, it should not be one's sole contribution. Bringing a 
sense of balance is equally important. We want the 12 Federal 
Home Loan Banks to do business, but that goal needs to be 
tempered by operating in a safe and sound manner, while 
ensuring that the Banks carry out their housing finance 
mission. We want the Banks to take advantage of their GSE 
status, but we do not want them to abuse it. We want the Banks 
to enjoy the fruits of their cooperative structure, but we also 
want them to treat each other fairly. While these statements 
are generalities, they also are the principles that will guide 
us.
    We, in the United States, are the envy of the world when it 
comes to a housing finance system, and the Federal Home Loan 
Banks have been an integral part of that success. Acknowledging 
the wisdom of Congress in creating the FHA in 1934, our success 
in enhancing homeownership opportunities arises from the 
evolving structure of organizations that comprise the housing 
finance system. Having been created in 1932, the Federal Home 
Loan Banks must continue their evolution in response to the 
circumstances that now exist. Meeting today's desire for home 
mortgage credit and community development needs merits our best 
effort.
    The Federal Home Loan Bank System has proven to be a vital 
source of support for community-based financial institutions by 
facilitating their access to credit. It is my belief that the 
viability of local communities and the efforts of small 
business people constitute two of the major pillars of our 
society. Without community financial institutions, this would 
not be the case.
    My belief is based upon two important events in my own 
life. Starting out in business as an undercapitalized home 
builder, I needed a lender that would consider ``character'' 
when making a loan since I did not have much other collateral 
to offer. My early lenders were all community-based 
institutions. The other experience was gained while being 
Secretary of Commerce of Oklahoma. The wonderful people of 
small town and rural America need community financial 
institutions, period. It is absolutely necessary that the 
viability of the Federal Home Loan Bank System be sustained.
    If I am confirmed, I pledge to President Bush and to 
Members of this Committee that I will do my very best to ensure 
that the Federal Home Loan Bank System will be managed in a 
prudent manner, recognizing its purpose in the current 
environment in which it operates.
    Thank you.
    Chairman Shelby. Thank you, Mr. Rosenfeld.
    I have a number of questions. I will try to move them on. 
The future of the Federal Home Loan Bank System, we talk about 
that a lot, and as you well know, we are considering 
legislation dealing with GSE's, including Fannie Mae, Freddie 
Mac, and the Federal Home Loan Bank System, and we are planning 
to ask you to come back up to help us learn more about the 
challenge that we are facing, and you have indicated you would 
do that.
    The Federal Home Loan Bank System has undergone a 
tremendous amount of change since its birth in 1933. You of all 
people know that. With the decline of the thrift industry, 
membership in the System was expanded beyond the savings and 
loans. With this expansion of membership has come an expansion 
of responsibilities and also challenges. What do you see as the 
future direction of the System?
    Safety and soundness has to be number one.
    Mr. Rosenfeld. I think the system will continue to perform 
an enormously significant function in providing liquidity for 
housing needs and community needs in our financial 
institutions, particularly the smaller financial institutions. 
I think that the providing of capital needs, as you indicated, 
in a safe and sound manner, I think there are a number of 
activities in which the Federal Home Loan Banks have been 
involved which merit a review and certainly a constant 
awareness of how they are progressing, and we have to keep in 
mind that this growth must always be tempered with it being 
consistent with our mission and executed, as you point out 
again, in a safe and sound fashion.
    I have no concern about the need for the System nor the 
fact that it will exist, but as a regulator, one is always 
concerned about how it is done and that it be done properly.
    Chairman Shelby. Serving on the Finance Board, I believe, 
is your first experience as a regulator.
    Mr. Rosenfeld. Yes, it is.
    Chairman Shelby. Often in the past, the Finance Board has 
played the role of a cheerleader, in a sense, for the System as 
well as a regulator. Could you distinguish for the record here, 
for the Committee hearing record, what in your mind separates 
the responsibilities of a regulator like the Finance Board from 
an organization like Ginnie Mae.
    Mr. Rosenfeld. In the case of Ginnie Mae, as in the case of 
any business, and Ginnie Mae is a business.
    Chairman Shelby. Sure.
    Mr. Rosenfeld. It is a well-run business, and it makes a 
substantial amount of money every year. And it would like to do 
more business, and it would like to make more money. I am very 
familiar with what it is to run a profit-making business. It is 
an entirely different world from being a regulator. The 
objectives, are, quite frankly, quite different. The purpose is 
quite different.
    Chairman Shelby. And should be quite different.
    Mr. Rosenfeld. They should be quite different, and I think 
that a regulator has a lot of responsibilities.
    By all means, they should be supportive, but they should 
not be a cheerleader. And if I may use the term, as a 
regulator, I will tend to be, if I am confirmed, a strict 
constructionist in sticking close to the book as opposed to 
being an advocate of unsound growth.
    Chairman Shelby. There has been some concern about the 
concentration of advances within the Federal Home Loan Bank 
System. Something like 2 percent of members account for over 40 
percent of all advances. Could such a high concentration of 
advance usage present any safety and soundness concerns for the 
System?
    Mr. Rosenfeld. I really do not believe that they present 
safety and soundness issues. I think--you are raising, a very 
significant point here, and that is that if you look at--in 
terms of dollar advances, there is an enormous concentration of 
dollar loans to big banks. On the other hand, if you look at 
concentration in the sense of the number of banks with which we 
deal, as we sit here, we deal with about 5,000 banks who 
currently, as we speak, are doing business with one of a number 
of Federal Home Loan Banks.
    So we do have a concentration of dollars but not 
necessarily a concentration of business relationships. The 
reason I am not concerned about the safety and soundness in the 
sense of those advances is the advance business is 
fundamentally a very secure business. You are advancing funds 
against appropriate security. The purpose that those 
institutions serve in terms of providing liquidity to home 
finance is consistent with our mission. So that, in and of 
itself, does not present a safety and soundness issue, as far 
as I am concerned.
    Chairman Shelby. Does it present anything dealing with 
corporate governance of the individual Federal Home Loan Banks?
    Mr. Rosenfeld. Yes, it does, given the nature of the 
governance structure of the boards, and from time to time, 
these larger banks may have some disproportionate either 
bargaining power or governance power that is something one has 
to be very cognizant of.
    Chairman Shelby. Senator Martinez. I want to call him the 
Secretary, but we will stop that.
    Mr. Rosenfeld. I might.
    Senator Martinez. I am just getting used to not being 
called Secretary. Anyway, thank you, Mr. Chairman.
    Mr. Rosenfeld, shortly after your nomination to the Federal 
Housing Finance Board, there was an announcement by you of new 
appointments or rather not making new appointments but simply 
reappointing or extending those directors whose terms would 
expire in the year 2004 for 6 months, and then, shortly after 
that, it was rescinded. Would you care to explain to the 
Committee the circumstances surrounding that?
    Mr. Rosenfeld. Yes, Senator. I could respond to a friend by 
saying it was my way of getting away from obscurity but----
    [Laughter.]
    --there is really more to it than that.
    When I got to my position as an appointee under the recess 
process program, it became very apparent that the appointment 
of public interest directors or outside directors, is another 
way to put it, the process was not working in the context of 
what the banks had become. The banks had become much larger, as 
was noted earlier, and certainly, they had become much more 
sophisticated.
    And the process of appointments of outside directors and 
public interest directors historically had been really more in 
the nature of an honorarium type thing or a reward for some 
particular relationship or service. That simply was not a 
prudent basis of providing governance for these institutions. 
When I got there, I was informed that approximately 30 outside 
directors terms were expiring on December 31. And we felt that 
it was not prudent, given lack of an appropriate process to 
merely reappoint them or somebody else in their place with whom 
we had not had the opportunity of really venting their 
qualifications.
    So based upon the opinion of my deputy counsel and the head 
of our Office of Supervision, we made a determination that we 
would have the retiring directors hold over for a period not to 
exceed 6 months, the theory being that it would give us the 
opportunity to perhaps work out a more appropriate process and 
yet not lose the benefit of the experience and talent that was 
currently sitting in these seats. Particularly, there were, I 
believe, 9 of the 30 expiring terms were either chairmen or 
vice-chairmen of their respective bank boards.
    Having made that determination, I believe it was December 
30 that we then sent out a notice to the banks indicating that 
these bank directors whose terms were expiring could be held 
over for a period not to exceed 6 months. Thereafter, I 
received a call from White House Counsel asking me if I would 
have any objection to forwarding a copy of what we had done to 
the Justice Department, which my answer, of course, was I would 
be happy to do it, and we did.
    And sometime thereafter, the Justice Department notified 
White House Counsel that we did not have the authority to 
create holdover positions. We were so advised that that was the 
situation. At that point, the board agreed with me that we 
needed to rescind that order, and we did rescind it.
    We are now in the process of attempting to develop an 
appropriate process for public interest or outside directors. 
While we are not waiting until legislation occurs, because it 
may not occur, I would make note to you, Senator, that in the 
legislation, as we have seen it, it suggests that the 
appointment process not be done by the regulator but by the 
banks and that the salary caps on the directors be removed. 
Those are very significant improvements in the structure if 
they were to occur.
    Senator Martinez. Mr. Rosenfeld, one further question in 
the remaining moments I have. The Federal Housing Finance Board 
normally has the authority to preapprove new products and 
programs that the Banks wish to engage in also but also 
designates a trial period to make sure that those programs will 
be successful before full implementation. So prior to it 
undertaking a program, they seek your approval, and then, there 
is even a trial period before it can be fully implemented.
    And I wanted to find out from you how long it takes for 
this process, if you know, and additionally, whether or not, in 
any sense, has there been any feedback that this process 
stifles innovation or in any way diminishes the Banks' ability 
to compete in the marketplace.
    Mr. Rosenfeld. Senator, I do not know how long it takes. 
That issue has not come before me at this point. But I think I 
can respond to your question in that I think it is very 
important that a regulator, including the Federal Housing 
Finance Board, have the ability to approve new business 
activities on the part of the 12 Banks.
    It is important for a variety of reasons; number one, I 
think it is important that the new activity be consistent with 
our basic business mission; number two, it is something that 
can be operated and governed in a safe and sound way; and 
number three, it does not expose us to excessive risk. Does it 
slow down progress or the ability of an institution to make 
money? Probably, it does, but I think that is a worthwhile 
cautionary analysis that is well-taken, because at the end of 
the day, as I think we all realize, we are dealing in a large 
sense of the word with our money. It is not their money; it is 
our money, and our money, I think, merits a kind of scrutiny 
and review that we would all like to see our money have when 
people are thinking about doing something with it.
    So, I do think a regulator needs that approval.
    Senator Martinez. Thank you, Mr. Chairman.
    Chairman Shelby. Senator Allard.

               STATEMENT OF SENATOR WAYNE ALLARD

    Senator Allard. Mr. Chairman, thank you. I do have some 
comments I would like to put in the record.
    Chairman Shelby. Without objection, it will be made part of 
the record.
    Senator Allard. So, Mr. Rosenfeld, generally, I think you 
are good nominee, and that is basically what I have said in the 
comments I have just submitted in the record. I think you have 
a proven record, and I think you will do a good job at the 
Federal Housing Finance Board.
    My question is one of concern on the secondary mortgage 
markets. You have had some experience there. And I have always 
felt that we needed to have more competition in that area. Even 
from an economic development point of view in the State, I do 
not like to see you put all the eggs in one basket, or even in 
business, I do not think it is a good idea to put all your eggs 
in one basket.
    In effect, that seems to be what is happening now, where we 
are putting maybe too many eggs in just a few basket, as far as 
the secondary markets are concerned. As you know, I have 
introduced proposals such as the Ginnie Mae Choice legislation 
to promote greater competition. As we are considering reform of 
the GSE's, many Members are considering various proposals to 
promote competition.
    I want to hear your general views about competition. Do you 
think it benefits consumers, and would you comment on how you 
think competition might help us in the secondary market, if at 
all?
    Mr. Rosenfeld. Senator, first of all, let me thank you for 
your kind words, but as a general matter, I believe that 
competition is good. I think in the vast majority, not 
necessarily all, but the vast majority of cases, competition 
has benefitted the consumer.
    I think when you are dealing with GSE's, you are dealing 
with a very special creation of the Congress, and I think that 
that creation must be looked at in the context of what Congress 
wants the system to be like. This is not a question of a 
retailer being added to a market that may have been a 
quasimonopoly. This is a different structure. And I think 
specifically what we are talking about here is in the secondary 
mortgage market, you have Fannie Mae, Freddie Mac, and Ginnie 
Mae, and in the conventional market, you have Fannie Mae and 
Freddie Mac.
    I think, quite frankly, that whether that field should be 
broadened with another participant doing roughly the same thing 
is really a matter for the Congress. I have enormous respect 
for what Congress has created, and to materially change the 
relationship that creates the secondary mortgage market, I 
think should go back to the architect of the original project, 
which is the Congress.
    Senator Allard. You know, there is an implied guarantee 
there, because they have just gotten so big and so important 
that they fall into the issue of too big to fail. I think many 
of us worry about future obligations out here. I am not saying 
that we are anywhere near a crisis or anything with these 
organizations; in fact, I think they have done a lot to make 
sure that we have adequate housing in this country. We have to 
recognize the role that they have played in making sure that we 
have enough housing. We are at historic homeownership rates 
right now.
    But I guess I would like to have some assurance that you 
would be willing to work with us, lend some suggestions, maybe 
some criticism as we work on some of these proposals.
    Mr. Rosenfeld. Not only, Senator, would I be willing to 
work with you, but I would also enjoy working with you. One of 
the great privileges of having the opportunity that I will have 
if I am confirmed is to do exactly that, so I would look 
forward to it.
    Senator Allard. Now, let me get down to the Federal Home 
Loan Bank's Affordable Housing Program. It has been, I think, 
an important source of affordable housing and ownership in this 
country. I would like to have your assessment of the program, 
whether you believe it is working well or not. Do you believe 
there are any areas of the program which we could improve? And 
I think the second part of that question is the most important. 
I would really like to get your honest assessment about it and 
if there are any areas that you think could improve. I would 
also like to know if there is improvement that is needed, 
whether there is something we can do in this Committee that 
would help that happen.
    Mr. Rosenfeld. I think that as a general proposition, what 
you refer to is our Affordable Housing Program, which for the 
benefit of those, perhaps in the audience, who do not know what 
that is, 10 percent of the profits of the Federal Home Loan 
Bank System go to affordable housing in the form of grants, low 
interest rate loans, or some subsidy.
    It is my understanding, and again, I have only been there a 
relatively short time, is that this program has really been 
enormously successful. We had the privilege of meeting with 
some community groups not too long ago, and by and large, their 
feeling was almost unanimous that these programs have worked 
quite well. I think one of the benefits of our program and our 
structure is the fact that we deal in dollars. We make dollars, 
and we spend dollars as opposed to making dollars and trying to 
meet some mission goal, which is a little tougher to do. And I 
think our program is relatively clean and crisp.
    Senator Allard. From a safety and soundness standpoint, you 
are comfortable with it, then.
    Mr. Rosenfeld. Oh yes.
    Senator Allard. Is that what you are saying by clean and 
crisp?
    Mr. Rosenfeld. Well, we have a clean, competitive program--
    Senator Allard. I see.
    Mr. Rosenfeld. --of people who want the benefits of these 
funds that will be given out. They are dealt with in a 
businesslike way. Their proposals are well-screened, well-
thought-out and so on. So it is well-executed. And, quite 
frankly, of the various issues that have come under some degree 
of criticism since I have been at the Federal Housing Finance 
Board, the Affordable Housing Program has not. It is almost 
universally well-regarded.
    However, in answer to the second part of your question, 
yes, I think it can be improved. I can tell you we are bringing 
some people on board, and we are looking very carefully at 
exactly the appropriateness of where some of these dollars are 
going, how much leverage we are getting out of them. We are 
finding that in some of the Banks, they have come up with 
criteria that may be inconsistent with other programs. One of 
my friends, Gabe Mehreteab, from the NHP Foundation pointed out 
to us the other day that there are some serious inconsistencies 
between the programs of various banks and HUD programs, so we 
are looking at that thing.
    The other area that I think merits some attention: As you 
know, bank charters have tended to move around in the last 
number of years, and the AHP contributions normally go where 
the charter is as opposed to where the bank may do its 
business. And there is some potential there for some 
improvement in terms of how the benefits of the program, 
perhaps can be more equitably assigned.
    Senator Allard. Thank you. Since I brought up the safety 
and soundness, you are comfortable with safety and soundness 
provisions that we have in that program right now?
    Mr. Rosenfeld. You mean in the AHP?
    Senator Allard. Yes.
    Mr. Rosenfeld. Yes, I am generally comfortable with that.
    Senator Allard. Generally with the Federal Home Loan Banks, 
you are okay?
    Mr. Rosenfeld. Senator, as a regulator, I suspect I will 
never be comfortable, but I will sleep tonight.
    [Laughter.]
    Senator Allard. Thank you for being willing to serve. I 
appreciate it, and thank you, Mr. Chairman.
    Chairman Shelby. Mr. Rosenfeld, I have another question for 
you and maybe a couple for the record.
    Mr. Rosenfeld. Sure.
    Chairman Shelby. But I will not hold up your confirmation.
    Perhaps the largest financial risk that I see facing all 
the housing GSE's is the interest rate risk. It is always 
there. In the recent past, the Federal Home Loan Banks began 
purchasing mortgages from their members. This has increased 
their risk profile. The management of interest rate risk has 
presented several Federal Home Loan Banks with accounting and 
financing difficulties, as you are very aware.
    Are you satisfied at this point, or maybe you have not been 
there long enough, with the risk management techniques of the 
Federal Housing Finance Board, of the members, and are you 
going to be getting into the details of all of this as a 
regulator?
    Mr. Rosenfeld. Senator Shelby, let me assure you we will be 
very active in getting into these programs. I concur with your 
opinion that the major risk in the Federal Home Loan Bank 
System is interest rate risk in these mortgage programs, and 
they are a matter of concern to us as they should be, but I 
assure you that we will be very vigilant in really getting into 
them and making sure that they do not create a risk beyond what 
may be appropriate.
    Chairman Shelby. And we look forward to having you come up 
at a properly called hearing as we formulate the GSE 
legislation, because your input, I think, would be welcome.
    Mr. Rosenfeld. Thank you.
    Chairman Shelby. Thank you for your appearance today. We 
will expedite your nomination as soon as we can.
    The hearing is adjourned.
    [Whereupon, at 2:52 p.m., the hearing was adjourned.]
    [Prepared statement, biographical sketch of nominee, and 
additional material supplied for record follow:]

               PREPARED STATEMENT OF SENATOR WAYNE ALLARD

    I would like to thank Chairman Shelby for convening today's 
hearing. I appreciate that, as always, he remains dedicated to moving 
nominees forward promptly.
    I am pleased to welcome Ronald Rosenfeld back to the Banking 
Committee. Mr. Rosenfeld has spent the last 3 years as the President of 
Ginnie Mae, where he has performed admirably. As Chairman of the 
Housing Subcommittee, I have had many opportunities to hear about the 
good work he has done in that capacity. He has an extensive background 
in housing and finance, and it is to our benefit that he has agreed to 
continue his service to America as Director of the Federal Housing 
Finance Board.
    Mr. Rosenfeld, you will be taking on a significant challenge at the 
Federal Housing Finance Board. The last decade has been a time of 
tremendous change at the Federal Home Loan Banks: The changes enacted 
in Gramm-Leach-Bliley, industry consolidation, and now regulatory 
reform have shifted the challenges before the Finance Board.
    In light of these changes, though, I want to mention one consistent 
theme: Safety and soundness. No matter what particular issue the Board 
or any subsequent regulatory entity may consider, it must be done 
through the lens of safety and soundness.
    The Federal Home Loan Banks are an important source of liquidity 
for many financial institutions, particularly small, independent, 
community banks, such as those in Colorado. To neglect or ignore safety 
and soundness at the Federal Home Loan Banks could be detrimental to a 
number of entities.
    America is fortunate to have a record high homeownership rate. I 
look forward to working with you to find ways that the Federal Home 
Loan Banks can continue to help create new homeowner families in a 
safe, sound manner.
     Again, welcome, and I look forward to your testimony.
    
    
    
                             NOMINATION OF:
                        EMIL HENRY, OF NEW YORK,
                       TO BE ASSISTANT SECRETARY,
                       FINANCIAL INSTITUTIONS AND
                       PATRICK O'BRIEN, OF UTAH,
                       TO BE ASSISTANT SECRETARY,
                          TERRORIST FINANCING


                    U.S. DEPARTMENT OF THE TREASURY

                              ----------                              


                      TUESDAY, SEPTEMBER 20, 2005

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

    The Committee met at 10:06 a.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 hearing will come to order. This 
morning, we will consider nominees for two very important 
positions at the Department of the Treasury: Mr. Patrick 
O'Brien for the position of Assistant Secretary of the Treasury 
for Terrorist Financing and Mr. Emil Henry, Jr., for the 
position of Assistant Secretary of the Treasury for Financial 
Institutions.
    Mr. O'Brien, you have been nominated by the President to be 
Assistant Secretary for Terrorist Financing at an absolutely 
critical period. As the events of September 11 recede from 
immediate memory, your job will be to help provide the 
leadership and clear guidance necessary to maintain and 
continue the efforts to ensure that this Nation's financial 
system will not be exploited by those who would do us harm.
    It will largely be your responsibility to bring Treasury's 
vast but not limitless resources to bear on the tasks involved 
in finding, following, fracturing, and sometimes freezing the 
money supply lines used to support terror. Your considerable 
experience at the Department of Justice should serve you well 
in meeting the challenges that are before you.
    Mr. Henry, the Assistant Secretary for Financial 
Institutions, your position, must also handle very significant 
issues. Our financial markets are the envy of the world. They 
are also highly complex and dynamic. The regulation and 
oversight of the markets must ensure fairness, transparency, 
and certainty while at the same time remaining flexible enough 
to allow for innovation and growth. This involves establishing 
a balance where both safe and sound operations and 
profitability are possible. Achieving and maintaining this 
balance is not easy. It requires considerable thought and 
constant attention.
    Mr. Henry, as someone who has spent the better part of 20 
years in the private sector, I am sure you recognize the 
importance of this balance and it would be my hope that through 
your tenure in public service, you would remain constantly 
mindful of it.
    I am looking forward to hear from our nominees, but first, 
we have some important people here with us, Senator Hatch, my 
colleague and friend, will introduce, I believe, Mr. Pat 
O'Brien.
    Senator Hatch, do you want to proceed?

                  STATEMENT OF ORRIN G. HATCH
             A U.S. SENATOR FROM THE STATE OF UTAH

    Senator Hatch. Thank you, Mr. Chairman. This is a rare 
privilege to appear before the Banking Committee and especially 
before you.
    Chairman Shelby. Thank you.
    Senator Hatch. But it is my pleasure this morning to 
introduce to you Patrick O'Brien, the President's nominee to be 
Assistant Secretary of the Treasury for Terrorist Financing. I 
think they should change that title a little bit, Secretary for 
Terrorist Financing. That is interesting.
    [Laughter.]
    I strongly support his nomination and urge you to vote 
favorably so that he may be confirmed as quickly as possible.
    Pat is here this morning with his parents Jack and Terry 
and his lovely family, his wife, Maureen, and their daughters, 
Molly and Margaret. Pat is a graduate of the University of 
Notre Dame and the University of Minnesota Law School. He has 
had a variety of professional experience as a Federal law clerk 
and in private practice, as an officer in the U.S. Army Reserve 
and as a prosecutor and of course has had an experience with 
us. I first met Pat in 1999, when I invited him to join the 
staff of the Senate Judiciary Committee.
    During his time with the Committee, he worked on a variety 
of important oversight and law enforcement issues. He proved 
himself to be smart, intelligent, a capable lawyer, with sound 
judgment and an ability to work well with others.
    Pat left the Committee in July 2001 to join the Department 
of Justice, where he has held a number of significant positions 
over the last several years. He was the principal Deputy 
Assistant Attorney General for Legislative Affairs during the 
tumultuous times following September 11, 2001. He later served 
at the FBI as Counsel to FBI Director Mueller, where he worked 
on a number of important national security issues, including 
the initial standup of the Terrorist Threat and Integration 
Center and as the primary contact for the FBI with the 
September 11 Commission.
    In September 2004, Pat returned to Main Justice as Senior 
Counsel to the Deputy Attorney General. Since then and to the 
present day, Pat has worked daily on counterterrorism issues 
for the Justice Department. Among other things, he represents 
the Justice Department on the Interagency Terrorist Financing 
Policy Coordinating Committee, the PCC, chaired by the National 
Security Council. The PCC is the policy body dedicated to 
targeting and disrupting terrorist financing networks and 
building international coalitions to cut off financial flows to 
terrorists.
    Now, this background, coupled with his strong character, 
his integrity and leadership skills make him very well-suited 
to be successful as the future Assistant Secretary for 
Terrorist Financing. I know Pat really well. I was proud to 
have him work with us. He did a great job on the Judiciary 
Committee. You could rely on him. He is somebody that I have 
total faith in of his integrity and honesty, and I think we are 
lucky to have him in this particular position, and I urge the 
Committee to support his nomination, and I know, Mr. Chairman, 
you will do everything you can to see that he is approved as 
soon as possible.
    Chairman Shelby. I will. That was a good introduction. 
Thank you, Senator Hatch.
    Senator Hatch. Thank you so much.
    Chairman Shelby. Congresswoman Kelly, you are here to 
introduce, I understand, Mr. Henry.

                   STATEMENT OF SUE W. KELLY
               A U.S. REPRESENTATIVE IN CONGRESS
                   FROM THE STATE OF NEW YORK

    Mrs. Kelly. I am.
    Thank you, Chairman Shelby. I appreciate your inviting me 
to testify on behalf of my good friend, Emil Henry, in his 
nomination for Assistant Secretary of the Treasury for 
Financial Institutions. I have known Emil for a number of 
years, and I can testify to his character, common sense, and 
commitment to our community.
    Emil is a cum laude graduate of Yale University. He 
received an MBA from Harvard Business School. He has had a 
spectacular career in finance, pioneering new developments in 
the venture capital and business development areas and is very 
well respected by his peers.
    As a member of the Small Business and Financial Services 
Committees in the House, I can honestly say that the ideas 
pioneered by Emil Henry have created thousands of jobs in this 
country. Emil shares a commitment to eradicating lyme disease 
in our area, which is a very large problem. Senator Dodd, who 
is a Member of this Committee, knows very well what I am 
talking about.
    Emil has raised a number of funds. He has made the 
community aware. He has done a great deal of effort in terms of 
making our community and quality of life good. His credentials 
in terms of financial services are impeccable. His credentials 
in terms of community service are equally impeccable. Emil is a 
family man, he has been devoted to his wife since they first 
met in their freshman year in college. I urge this Committee to 
act swiftly in favor of his confirmation to allow him to begin 
to put his mind and his character into a new career of public 
service for our Nation.
    Thank you very much, and I know you will consider him 
carefully and well. I hope you will consider him very 
favorably.
    Chairman Shelby. Thank you, Congresswoman.
    Mrs. Kelly. Thank you.
    Chairman Shelby. If Mr. Henry and Mr. O'Brien will stand, 
raise your right hands and be sworn.
    [Witnesses sworn.]
    Chairman Shelby. Thank you. Your written testimony, both of 
you, will be made part of the record in its entirety. Which one 
of you wants to go first? Just sum up.
    Mr. O'Brien. At your pleasure.
    Chairman Shelby. Okay. Mr. Henry, go ahead.

              STATEMENT OF EMIL HENRY, OF NEW YORK
         ASSISTANT SECRETARY FOR FINANCIAL INSTITUTIONS
                U.S. DEPARTMENT OF THE TREASURY

    Mr. Henry. Thank you.
    Thank you, Chairman Shelby, Ranking Member Sarbanes, 
Members of the Committee. Thank you for the opportunity and the 
privilege to appear before you today to discuss my nomination 
to become the Assistant Secretary of the Treasury for Financial 
Institutions. And before my formal statement and with your 
indulgence, if I could introduce the members of my family that 
are here today.
    Chairman Shelby. That would be ideal. We would like that, 
both of you.
    Mr. Henry. And behind me in the second row, my wife Jody. 
She and I graduated from Yale together. She is my best friend, 
and she is a full-time mother. And next to her is my father. My 
father was the Chairman of the Federal Communications 
Commission under Presidents Kennedy and Johnson; and then, my 
daughter, Madeleine, who is 13; my mother, Sherry Henry. She 
was a President Clinton appointee at the SBA running the 
women's office and has long been an advocate for women's 
issues; and my daughter Parker, who is 12. I have another son, 
who is Parker's twin brother, and he is pursuing his dream at a 
tennis academy in Florida today. He wished he could be here, 
but he could not.
    Chairman Shelby. Okay.
    Mr. Henry. I would like to begin by expressing my thanks to 
President Bush for nominating me for this important position. I 
am truly honored to have his confidence and, if confirmed, I 
will focus daily upon earning and re-earning the trust he has 
placed in me. I would also like to thank Secretary Snow, Under 
Secretary Randal Quarles, and the other fine individuals the 
President has nominated to the Treasury for their support. If 
confirmed, I look forward to working with them on the many 
important issues currently before the Treasury, and many more 
to come.
    My thanks also to my friend and Congresswoman Sue Kelly for 
taking the time to come here today, and for her very thoughtful 
and kind introduction. Representative Kelly and I share a 
beautiful hometown, Katonah, New York. Her constituents, 
including myself, hold her in very high esteem for her 
attention to her district and for her measured wisdom on the 
House Financial Services Oversight and Investigation 
Subcommittee and for her leadership on terrorist financing 
issues.
    Last, I would like to thank my parents behind me for 
inspiring me to enter public service. From the time I could 
recognize my own name, I have believed that public service was 
not only a high calling but also a natural part of one's 
productive life.
    I come before you today in the longstanding tradition of 
one who has spent his entire career in the private sector 
before being called to service. As my resume shows, I have no 
formal public service experience. Yet, I do have over 20 years' 
experience on Wall Street and in the financial community, and 
much of my time has been spent at a senior level in some of the 
more sophisticated and complex sectors of the capital markets.
    All of the firms I have been associated with have the 
highest regard of their peers and of the financial community. 
At First Boston, my first job after graduating from Yale, I was 
fortunate to be picked to work in the Capital Markets Division, 
which, at the time, was at the forefront of the advent of early 
derivatives, such as interest rate swaps, options, and futures. 
And then, at Morgan Stanley, I was a member of a team charged 
with building a preeminent principal investment business, a 
business involving management buyouts, equity and debt 
financings, mergers, and acquisitions and bank financings. For 
the past 15 years, I have been at Gleacher Partners, where I am 
now Managing Director and also Chairman of our core investment 
business and a member of our Investment Committee. Our 
businesses invest in a sophisticated array of alternative 
investments, including private mezzanine debt, private equity, 
and hedge funds, where our investments are exposed to most of 
the products and services offered in today's capital markets.
    I believe my experience has given me a broad and deep 
understanding of the activities of the financial institutions 
that participate in today's increasingly complex and very fast 
moving capital markets. As founder and chairman of an 
investment business, I appreciate the essential importance of 
safety and soundness in our markets and institutions. I 
understand the value of disclosure and transparency, and I am 
sensitive to the importance of balancing the costs and the 
benefits of regulation.
    If confirmed, I believe my role as Assistant Secretary 
would benefit from my extensive experience and I would hope to 
complement the extraordinary reservoir of talent at the 
Treasury, and, in my judgment, the most effective organizations 
are those populated by individuals whose skills and experience 
truly do complement each other.
    I would also look forward to working closely with the 
Members of this Committee and the House Financial Services 
Committee on crucial issues such as GSE reform and terrorism 
risk insurance. I will also devote myself to the oversight of 
the critical infrastructure of our Nation's financial 
institutions. The recent disaster in the Gulf States highlights 
the vital need to be prepared for natural or man-made 
disasters, and if confirmed, I expect to spend a significant 
amount of my time focusing on the preparedness of the U.S. 
financial system.
    Thank you again for the honor and the privilege to appear 
before you today, and I would certainly be pleased to answer 
any questions you may have.
    Chairman Shelby. Mr. O'Brien, do you have some people you 
would like to introduce?

           STATEMENT OF PATRICK M. O'BRIEN, OF UTAH,
       TO BE ASSISTANT SECRETARY FOR TERRORIST FINANCING
                U.S. DEPARTMENT OF THE TREASURY

    Mr. O'Brien. Yes, I do. Good morning. With your permission, 
I would like to introduce, in the second row, first of all, my 
mother and father, Jack and Terri O'Brien from Minneapolis, 
Minnesota; my wonderful wife, Maureen, and our two daughters, 
whom you have probably heard a little bit from already, Molly, 
who will be 2 in December, and Margaret, who just turned 4 
months old. I am extremely blessed to have such a wonderful 
family, and I will never be able to repay them for the love and 
support they have provided me, for the example of my parents 
and for the support of my wife. No one can undertake a 
challenge like this without a great support system, and I 
certainly have that.
    Thank you again for holding this hearing this morning. I 
know how busy the Committee is, and I appreciate the 
opportunity to meet with you this morning and answer any 
questions you may have. I am humbled to sit here before you 
this morning as the President's nominee to be the Assistant 
Secretary of the Treasury for Terrorist Financing. I would like 
to thank the President for nominating me and for the support of 
Secretary Snow and Under Secretary Levey. I also greatly 
appreciate Senator Hatch for his support and for his 
introduction here this morning.
    It is a great honor to be asked to serve our country. It is 
also a great responsibility and one that I take very seriously. 
Should the Senate confirm me, I will give my absolute best to 
be an effective Assistant Secretary and to help the Treasury 
Department, our colleagues across the Government, as well as 
our international partners, target and disrupt illicit 
financial networks, to build effective systems to prevent the 
abuse of financial institutions, and to isolate and punish 
those who threaten our national security.
    I will bring to this position a variety of professional 
experiences that, I believe, will enable me to be an effective 
addition to the Department of the Treasury. I am fortunate to 
be nominated to join a very strong team. If I am confirmed, I 
am committed to further developing and strengthening the Office 
of Terrorism and Financial Intelligence or TFI. As the 
Committee is aware, the concept behind TFI and one I strongly 
support is to marshal Treasury's unique authorities, financial 
intelligence, analysis, and international relationships to 
attack the financial underpinnings of national security 
threats. If confirmed, I will dedicate myself to developing the 
Treasury's ability to play the strategic role by providing 
policy development and coordination to support TFI initiatives, 
and building partnerships and coalitions to expand the 
implementation of sound financial practices and the impact of 
targeted financial sanctions internationally.
    To develop effective policy requires that we continue to 
grow our expertise across industries and financial disciplines, 
as well as regionally across the world, to expand policies that 
address the wide variety of financial means that can be 
utilized by illicit financial networks.
    Partnerships must be fostered and maintained both 
domestically and internationally. I am committed to building 
the strongest possible cooperating relationships with our 
colleagues across the U.S. Government. These threats cannot be 
addressed by one agency alone. If confirmed, I will build on 
the strong relationships that currently exist between Treasury 
and its partners at Justice, FBI, State, Defense, DHS, CIA, and 
the rest of the intelligence community. Our goal must be to 
think and act as a single government to achieve a shared set of 
goals.
    It is also essential that we internationalize the impact of 
sound financial systems and targeted financial sanctions. This 
requires strong bilateral and multilateral relationships. If 
confirmed, I will continue Treasury's efforts in conjunction 
with the State Department and other Federal agencies, to 
promote accepted international standards for sound financial 
practices and to increase partner capacity and cooperation 
through organizations like the United Nations, the Financial 
Action Task Force, FATF, and the Egmont Group. The activities 
of illicit financial networks do not stop at our borders, and 
thus we must proactively seek to internationalize our efforts.
    Thank you again for holding this hearing, and I would be 
pleased to answer any questions you have.
    Chairman Shelby. Thank you, Mr. O'Brien.
    I will pose the first question to you just for the record. 
Under Secretary Stuart Levey recently said, ``Saudi donors may 
still be a significant source of terrorist financing, including 
for the insurgency in Iraq.'' There are also credible reports 
of open fundraising for the insurgency being conducted in 
Western Europe. More troubling still are the thoughts of the 
U.S. CENTCOM General Abizaid, who has publicly stated that 
money for the insurgency has likely come from our very own 
country.
    One, it is no secret that there are weaknesses in the 
financial defenses of Saudi Arabia. We know that, and you do, 
too, but what are the state of those in Europe and more 
importantly here in the United States? Two, if this money is 
making its way from all of these shores to the inside of Iraq, 
does it follow that plenty of money may be reaching other 
groups in other places as well? And three, as one of the 
officials, Mr. O'Brien, in the chain of command, then, for 
ensuring oversight of the Nation's banks for compliance with 
the Bank Secrecy Act and USA PATRIOT Act, in your view, how 
important are these laws to our overall strategy of combating 
money laundering and terror financing?
    Mr. O'Brien. Thank you for that question, Senator.
    I think the Congress gave us some incredible tools when it 
passed the USA PATRIOT Act, and I think the expansion of the 
Bank Secrecy Act, the new authorities it gave us under Section 
311 as well as the information sharing provisions of the USA 
PATRIOT Act provide not only Treasury but also the U.S. 
Government with very significant tools to fight the threats 
that you described.
    Certainly, I think there is continued vibrance in the 
utility of the information that we get under the Bank Secrecy 
Act. We are continually striving to do better analysis and make 
better use of that information. As you mentioned, the threats 
that exist within the network of illicit financial networks are 
international. There are vulnerabilities in really every 
country in the world. We see potential financing can really 
come from anywhere, and the means by which they can affect this 
support are vast.
    I think that underscores the need to internationalize our 
efforts and make sure that, certainly, the requirements through 
the United Nations and others to designate and be able to 
freeze and isolate terrorist funds across the world, our 
partners need to have the capacity to do that, and I think we 
have to work very diligently with our partners in Europe as 
well in Saudi Arabia, the Gulf states, and elsewhere to make 
sure that is a reality.
    Chairman Shelby. I want to go into a different area, Mr. 
Henry.
    This Committee, the Banking Committee, reported out a bill 
to reform the regulatory system for the housing-related GSE's, 
that is, Fannie, Freddie, and the Federal Home Loan Banks. One 
point of contention in that bill is the new regulator's ability 
to review the GSEs' asset portfolios. Do you believe such 
authority for the new regulator is a critical component for a 
reform bill? Have you put any thought in this?
    Mr. Henry. Thank you for that question. First of all, let 
me say that I am very much aware of the continuing dialogue and 
the important continuing dialogue of GSE reform, and I have 
followed this very closely from the private sector.
    Chairman Shelby. Are you concerned about the systemic risk 
that Alan Greenspan keeps talking about?
    Mr. Henry. I think this is an essential element of reform, 
and when I think about the reform bill, I think certainly, the 
size of the retained portfolios of Fannie and Freddie are a 
point of concern and something for us to focus on and other key 
elements such as supporting the resiliency of the housing 
market and making absolutely sure that good and affordable 
credit is available to every consumer. I think those are the 
important elements of reform.
    Chairman Shelby. Given your financial market experience, 
you have spent your life here, do you believe that the capital 
markets could absorb the flow of mortgage-backed securities 
should Fannie and Freddie not be able to hold them in their 
portfolio other than what they need to work with, to the extent 
that they do now?
    Mr. Henry. My instinct is yes, and again, not having 
studied this in great depth at the Treasury----
    Chairman Shelby. Sure.
    Mr. Henry. --and I very much look forward to that, but I 
would point out that the market for credit is somewhere between 
$7 trillion and $8 trillion, and the retained portfolios 
combined of Fannie and Freddie approximate $1.4 trillion. So my 
instinct is that there is plenty of capacity in the private 
market to absorb those kinds of credits.
    Chairman Shelby. Mr. Henry, bank capital requirements are 
one of the important means used to protect the financial 
integrity of the banking sector. Currently, our banking 
regulators are working toward finalizing a new capital accord 
for the largest, most sophisticated banks. The Basel II plan, 
as it is known, will involve a significant departure from the 
current capital rules, Basel I that we are doing.
    What role do you see for the Department of the Treasury to 
see that the plan is thoroughly vetted and properly 
implemented? Because it has been more than a subject of debate 
among our regulators among others.
    Mr. Henry. Yes, I have watched from a distance the very 
important and crucial discussions of Basel II. I think 
historically, the Treasury has acted as an interested observer 
in this process, and the Treasury should be a very interested 
observer in this process.
    The importance of capital standards cannot be overstated. 
The markets, from my position in the private sector, the banks 
in the last 10 to 20 years have increased in size and 
complexity, and so, I think there is increasing need to stay 
focused on proper capital standards in the context of larger 
and more complex balance sheets.
    Chairman Shelby. Solvency, in other words.
    Mr. Henry. Yes, solvency. And right back to safety and 
soundness, which is at the core of the mission of the 
regulators for these industries.
    So, I will watch this closely, I do promise you that, and I 
will watch for unintended consequences, and I will watch to 
make sure our banks can remain competitive and that there is 
proper views given to all ratios that have historically been 
discussed in Basel. I would like to understand how they are 
going to come out on that, the leverage ratio, risk-based 
capital standards, et cetera, but I can assure you I will be 
attuned and focused to that.
    Chairman Shelby. You will be deeply involved in it.
    Mr. Henry. Yes, sir.
    Chairman Shelby. I want to turn now to terrorist risk 
insurance, TRIA.
    In the near future, the Committee here will take up 
legislation that addresses the Terrorism Risk Insurance 
Program, which we call TRIA. I am very concerned that we must 
strike the right balance between public and private 
responsibilities as we move forward; that is to say the 
program, I believe, must address unmet needs without creating 
disincentives for the market in areas where the private sector 
can play a role.
    The Treasury report issued earlier this year, and I 
understand you have not been there, has been a guide for our 
consideration of this law. What are the elements you believe, 
if you have looked at all, should we remain focused on as we 
continue our work in this area?
    Mr. Henry. I am glad you asked that, and as I said in my 
opening statement, I understand that TRIA will be an important 
part of my portfolio, and I am ready to go at that. TRIA was a 
crucial piece of legislation in the wake of September 11. I 
come from New York. We felt that very closely, and at issue 
there, certainly, was the economic dislocation and the ability 
for developers and others to create financing in the absence of 
insurance for terrorism risk.
    So a crucial piece of legislation. I actually, in 
preparation for this hearing, read a summary of the Treasury 
report. I noted some interesting elements of that report. I 
noted one, that there has been increased availability of 
insurance. I noticed that there has been increased take-up of 
insurance. I noticed that there was not a causality, as 
determined, pointed out in that report by----
    Chairman Shelby. Do you think the market is beginning to 
respond to a need there?
    Mr. Henry. Yes, and I would say yes, and I would note that 
responding to a need in the context of increasing deductibles, 
insurance company deductibles through the period that TRIA has 
been in existence, I would also point out that the Treasury 
report did, it did raise some uncertainties: How will rating 
agencies react if there were no TRIA? I do not know the answer 
to that but certainly worth understanding, and other 
uncertainties were raised in that report. So, I will certainly 
stay engaged in this discussion, and I understand it is an 
important one.
    Chairman Shelby. Thank you.
    Mr. O'Brien, I want to get back to you. If confirmed, and 
you will be, both of you, I pray you will be soon, when can 
this Committee anticipate seeing the final regulation on 
correspondent banks pursuant to Section 312 of the USA PATRIOT 
Act? This Committee was promised this regulation many times in 
the past only to see it languish somewhere in the bureaucracy.
    This is an important regulation to finalize, because there 
are a number of financial institutions that are exempt from 
coverage at this time: Casinos, MSB's, investment, and 
insurance companies just to name a few. Have you focused on 
that? I know you will be but----
    Mr. O'Brien. I certainly will be focused on that should I 
be confirmed, and I understand the Committee's frustration in 
that regard. It has certainly been too long for that regulation 
to come out, and I will certainly do everything I can to speed 
that process along.
    Chairman Shelby. Mr. O'Brien, currency transaction 
reporting, I know we are dealing in complicated things, but 
this is your job and will be your portfolio.
    As an official at the Department of Justice and as a former 
Counsel to the Director of the FBI, you are familiar with the 
currency transaction reports and the stories coming from the 
financial industry in the press and elsewhere that these 
filings may be, ``clogging the works.'' Today, CTR's are filed 
at the $10,000 level, and there are also exemptions pertaining 
to when they are not filed.
    As legislators up here, Senator Sarbanes and I and our 
colleagues, we acknowledge that national security is foremost 
in our minds when confronting the money laundering and 
terrorist financing problems of today. But we also try to find 
workable solutions when imposing burdens on private enterprise 
to meet those national security concerns, a balance there.
    In light of your experience at Justice, which is vast, do 
you find these reports relevant and useful to the 
investigations of financial crimes, particularly those 
pertaining to money laundering and the financing of terror?
    Mr. O'Brien. Yes, I do, Senator. And I think there is ample 
public testimony from the FBI and others that demonstrate the 
utility of these reports.
    These types of financial reports are also a very important 
source of intelligence. Financial intelligence is somewhat 
unique in that it is something that can be verified, and I 
think it is an important element in our overall analytic 
picture. I certainly understand the concerns that can be raised 
through the banking community about the burden of regulation.
    I think the U.S. Government needs to do a better job of 
explaining why this is important and how we use these things, 
because I think most financial institutions are good citizens, 
and I think if they understand the utility of these things, I 
think they want to be cooperative. And certainly, there are 
mechanisms like the Bank Secrecy Act Advisory Committee that 
provide a forum for us to have these discussions with the 
community, and I think it is important to always try to strike 
that right balance.
    Chairman Shelby. Do the current exemptions allow sufficient 
latitude on the part of banks and other financial institutions 
interested in decreasing the number of CTR's they are otherwise 
required to file?
    Mr. O'Brien. In my current position, I have not had 
extensive interaction with the private sector community to hear 
their concerns directly. I think that is something that I 
would, if confirmed, want to reach out and hear from them 
directly and understand their concerns before I formulate an 
opinion as to whether the exemptions were appropriate.
    Chairman Shelby. How would you deal with overcompliance? 
You know, banks, they are nervous, I would be, for failure to 
comply, and a lot of them are overcomplying. And it creates a 
big paper nightmare sometimes.
    Mr. O'Brien. Yes, and I understand that there is also a 
concern about, you know, potential criminal liability and so 
forth, and I know the Treasury Department, in conjunction with 
the Justice Department, has kind of worked on that issue, and 
Under Secretary Levey has had some discussions, and I think we 
have some updated guidance for enhanced approvals at the 
Department of Justice for such prosecutions that hopefully 
alleviate some unnecessary concern.
    But defensive filing is a significant issue that we will 
have to continue to work on.
    Chairman Shelby. When your predecessor was here for his 
confirmation hearing, he noted that the main concern with CTR 
filing was that it became rote to file the CTR, an attitude 
that has led to increasing numbers filed. I alluded to that a 
moment ago, without taking full advantage of the exceptions to 
the rule.
    He emphasized that one of his primary duties, in fact, his 
number one assignment, was to get the financial industry to 
understand the existing lawful exceptions to filing CTR's that 
now are not being taken advantage of. Is this mainly a problem 
of information, of education, or is it the fact they are 
nervous about maybe not doing enough? Does more work need to be 
done in this area?
    Mr. O'Brien. Certainly, there is a large education 
component to it, and I think before changes are made to 
regulations and so forth, we should really examine closely 
whether current exemptions are sufficient.
    Chairman Shelby. Mr. Henry, I have one last question for 
you at the moment. Federal deposit insurance is another measure 
that has a proven history for protecting the financial 
stability of the banking system, confidence in the banking 
system. I am currently working, we are with many of our 
colleagues here, on legislation to provide greater flexibility, 
risk sensitivity, and ensure that all beneficiaries are 
required to pay for what they receive. Do you believe this is 
the appropriate focus to achieve positive reforms? You know, we 
are working with the Treasury and the White House.
    Mr. Henry. I know, and I have followed these discussions, 
yes, indeed, and if confirmed, I understand this would be on my 
plate.
    Chairman Shelby. It would.
    Mr. Henry. I understand the value of----
    Chairman Shelby. You will be coming up here a lot.
    Mr. Henry. I would welcome it.
    Chairman Shelby. Okay.
    Mr. Henry. I understand most certainly the importance of 
the safety net provided by the insurance system, and it is 
vital, and it has served this country well for a very long time 
indeed.
    There are many elements to reform. I listened closely to 
your question, and I think you hit on the key elements of 
reform, in my humble opinion. The FDIC is an insurance entity, 
and to allow the FDIC to act like an insurance entity, to have 
flexibility around its reserves for premiums to reflect the 
underlying risk of organizations that are paying into the 
system that organizations pay into the system perhaps that have 
not historically; I would like to understand that a little bit 
better, but most certainly, I think those are within essential 
elements of reform here.
    Chairman Shelby. Senator Sarbanes, thank you very much for 
your indulgence.

             STATEMENT OF SENATOR PAUL S. SARBANES

    Senator Sarbanes. Surely.
    Mr. Chairman, I am not going to be able to stay long, 
because I have a conflicting engagement. But first of all, I 
want to welcome the two nominees. I want to note that the two 
assistant secretaryships that we are considering this morning 
play a very important role in ensuring our Nation's 
preparedness against acts of terrorism and even natural 
disasters as they may affect our financial infrastructure.
    In fact, most people know that the Assistant Secretary for 
Financial Institutions has the responsibility for developing, 
analyzing, and coordinating the Department's policy on 
legislative and regulatory issues affecting financial 
institutions. That is quite a wide jurisdiction, obviously, and 
is also responsible for policy developments for financial 
privacy and consumer protection and for the safety and 
efficiency of our financial systems and our capital markets.
    So it is quite a big charge, but it is not as well-known 
that the Assistant Secretary for Financial Institutions also 
oversees the Office of Critical Infrastructure Protection and 
Compliance, which coordinates the Treasury Department's 
development and implementation of policies regarding the 
protection of the critical infrastructure of the financial 
services sector, which is something we obviously in recent 
times have had to give increasing attention to.
    We understand from your predecessor in that office that he 
spent about a third of his time working on that dimension of 
his responsibilities, even though it is not as highly visible a 
charge. And I want to ask you about that in a moment.
    Of course, the Assistant Secretary for Terrorist Financing 
is one of three senior officials in the Treasury's Office of 
Terrorism and Financial Intelligence which is responsible for 
administering the Nation's economic sanctions and anti-money 
laundering programs. Now, the Chairman has had a very keen 
interest in this as did I previously, and there have been a 
series of hearings over the last 4 years in this Committee. I 
commend those hearings to you if you have not had a chance to 
look at them on the importance of financial information in 
dealing with the threat of terrorism and proliferation of 
weapons of mass destruction.
    The movement through the financial system of the proceeds 
of white collar corruption and fraud is an equally serious 
problem for the Treasury. The President said last week Katrina 
exposed serious problems in our response capability at all 
levels of government. The focus, of course, is primarily the 
Department of Homeland Security, obviously. But both of you 
have important responsibilities with respect to our response 
capability in the financial services sector, and of course, if 
the financial services sector cannot work, it is very difficult 
to get the economy to work almost by definition.
    So Mr. Chairman, I want to thank you for moving as quickly 
as you have on the hearing for these nominees.
    Chairman Shelby. Thank you.
    Senator Sarbanes. I think it is important that we get those 
positions filled, and I look forward to working with you to 
accomplish that objective.
    Chairman Shelby. Thank you.
    Senator Sarbanes. Mr. Henry, let me ask you: Do you have 
any plans for ensuring there will be no serious problem within 
our Nation's critical financial service infrastructure in times 
of emergency? How large does that challenge loom as you 
consider the responsibilities of this position?
    Mr. Henry. Thank you for that question, and I think the 
events of Hurricane Katrina certainly put a spotlight on the 
importance of preparedness across many institutions, including 
financial institutions.
    I have also learned of the importance of the Office of 
Critical Infrastructure Protection, of the amount of time that 
if I were fortunate enough to be confirmed that I will be 
spending upon those issues. And I will offer the following 
observations. One is that I will be completely committed to 
that. Second, I recognize that in that office, there are a 
number of what appear to me at this point to be very valuable 
tools and resources to assist the assistant secretary in our 
preparedness. These run from public sector committees such as 
the Financial and Banking Infrastructure and Information 
Committee, which I understand was heavily engaged before and 
after Katrina, and this is an important resource for 
understanding vulnerabilities, understanding risks, and 
understanding business continuity plans, disaster recovery, how 
to approach the importance of easing, if required, certain 
regulations in the wake of a disaster and focusing on such 
important issues, especially in Katrina, as understanding when 
a community may go to a cash economy and what is important to 
deliver in circumstances like that.
    So, I understand the resources that are available. I 
welcome the challenge, and I recognize its crucial importance 
in our financial institutions and financial services 
businesses.
    Senator Sarbanes. I want to follow-up on the Chairman's 
question with respect to Basel II, which you said you had 
followed closely, but I think there is a considerable concern 
in the Congress that it is moving very much in the direction of 
lowering capital standards. In fact, there are some studies 
that indicate that the new Basel Accords could result in 
lowering capital by almost 50 percent for some large banks.
    It is not just watching it, but I think there is some 
concern that it may be moving in a direction that you will not 
have as much capital backup, and therefore, you will have an 
impact on safety and soundness. Do you have a view on that 
particular question?
    Mr. Henry. Most certainly. I, just to restate, the 
importance of having accurate, risk-based capital standards are 
absolutely crucial to our financial institutions, especially as 
they increase in complexity and especially as they become 
counterparties in droves to such things as derivatives and the 
like. So having accurate risk-based capital standards are 
crucial.
    I would, certainly to the extent that there were 
quantitative impact studies that suggested that capital 
standards would be lowered, that they would be widely 
dispersed, that our U.S. banks would be at a disadvantage 
competing, and I would like to understand as I suggested to 
Chairman Shelby how the historical leverage ratio, which has 
served a useful purpose historically, how that would be 
factored in.
    But most certainly, I would want to understand carefully if 
these standards resulted in decreased capital.
    Senator Sarbanes. There is some concern that a limited 
number of banks, primarily the large ones, will participate in 
this, that it will create a competitive disadvantage for the 
next tier of U.S. banks in their competition with the tier that 
utilizes the Basel II Accords. What is your view of that 
problem?
    Mr. Henry. I certainly believe it is an issue to stay 
abreast of and to understand, and I understand that the 
Treasury in the whole ongoing discussions around Basel have 
been a keenly interested observer.
    I think as it regards all of our banks, whether they are 
community banks, local financial institutions, money services 
businesses, credit unions serving such a vital purpose at the 
community level on up to larger banks, they certainly should 
have the ability to compete.
    I think that is at the core of our regulatory structure is 
providing for safety and soundness but at the same time 
providing enough flexibility to compete and innovate and do 
great things for our consumers. So, I would certainly stay 
attuned to this if I were confirmed.
    Senator Sarbanes. The community development financial 
institutions are under your jurisdiction. They have been quite 
important in helping to develop economic opportunity in their 
areas; in fact, it is estimated that they leverage about $20 in 
private investment for every dollar of Federal expenditure. And 
they vehicle been particularly important in helping to meet the 
needs of low-income people.
    Regrettably, the Administration did not ask for CDFI fund 
money in the budget. The Congress has provided it or appears to 
be about to provide it as we move through the appropriations 
process. It seems pretty clear to me that we need responsible 
community-based financial service providers in low-income 
areas. Hurricane Katrina only underscores this need.
    Do you have a view on sustaining or even expanding the CDFI 
fund as we move ahead?
    Mr. Henry. Thank you for that question. Not being in the 
Treasury or in our Government while the Strengthening America's 
Communities Initiative was formulated and CDFI's roll in that, 
this is difficult for me to discuss the merits of CDFI in 
isolation.
    I think certainly, the goals of Strengthening America's 
Communities, streamlining things so there are inefficiencies 
that are taken out of the system, these strike me as good 
things. As an investor, it is not lost on me the leverage that 
that particular fund can impart upon a dollar. So, I would say 
suffice to say for me it is difficult for me to discuss CDFI 
and the merits of that in isolation apart from the broader SACI 
initiatives.
    Senator Sarbanes. Well, I commend that to you, because it 
seems to me there is a clear role that needs to be played, and 
I think the experience in the Gulf States only underscores 
that.
    Warren Buffett has warned that derivatives can lead to 
corporate meltdown and create a daisy chain risk. What do you 
think about that?
    Mr. Henry. There are a number of people and institutions 
that are focused on the potential risks and understanding what 
risks derivatives might impose upon our system.
    Senator Sarbanes. Are you one of them?
    Mr. Henry. I am one who would like to understand better the 
potential risks of derivatives. Just some quick observations, 
if I might: These instruments have grown dramatically into the 
multitrillions. There are issues in derivatives of how they are 
traded and whether or not they are getting held up and clogged 
up in trading, which is certainly not healthy. There are issues 
of the implied leverage that derivatives impose upon the 
system. One does not necessarily borrow when they are an owner 
of a derivatives contract, but they certainly can have a lot of 
outstanding exposure that is the equivalent of leverage.
    I think it is important that there be disclosure of our 
financial institutions of their exposures in this regard. I 
think in my opening statement, I said how much I value 
disclosure. This in particular is something that warrants some 
attention, to make sure that these things are properly 
disclosed, so investors have all the accurate information 
possible at their fingertips.
    I note that the IMF and the Federal Reserve are looking at 
this. I believe that private groups such as the Corrigan Group 
this past summer are suggesting measures. So there are a number 
of intelligent people who believe that this is something to 
certainly keep their eyes on. And if I could just say last, I 
view part of Treasury's mission as one that looks holistically 
at systemic risk and hopefully would be able to stay ahead of 
real changes in important aspects in the financial community, 
and I would hope to be a part of that as it regards derivatives 
that continue to stay abreast of these important changes.
    Senator Sarbanes. Well, of course, The New York Times has 
this major story about Corrigan and his group's study, and I 
think it should be right at the top of your priority list.
    Let me ask you: The Treasury's Office of Financial 
Education is under the jurisdiction of the Assistant Secretary 
for Financial Institutions, and they are charged with providing 
assistance to the President's Financial Literacy and Education 
Commission. Secretary Snow is the Chairman of this Commission.
    The Commission was tasked with producing a national 
strategy to promote basic literacy and education. That strategy 
was due on July 29 but has not yet been submitted. I understand 
there are some differences amongst Commission members. When do 
you think we might get that report and move this strategy 
forward on literacy and financial education?
    Mr. Henry. I am aware of this issue. I am aware of the 
importance within the Office of Financial Institutions. I am 
aware of what Title V of the FACT Act mandated. And so, I do 
not know specifically when that will happen, although my 
understanding is that they are working hard on it, that it will 
come shortly, and that they are striving to achieve a 
consensus.
    And it is vital, a national strategy on financial 
education, and financial education is a crucial component of 
better informed citizens ultimately making better decisions and 
ultimately helping society in general. So, I am attuned to 
that, and if confirmed, I will certainly do my best to push 
that along.
    Senator Sarbanes. The agencies that make up your 
Commission, I understand, have some good proposals, and the 
Treasury has held them up, and I think you need to address that 
situation.
    Speaking of not meeting deadlines, Mr. O'Brien, let me ask 
you a couple of questions. The USA PATRIOT Act was signed 4 
years ago next month. Section 312, which deals with 
correspondent accounts, was a major part of Title III of that 
Act. Treasury was required to issue rules under Section 312. A 
proposed rule was published in May 2002. Under Secretary Levey 
in testimony here concurred in the importance of dealing with 
this issue.
    Despite repeated statements to this Committee that Treasury 
recognizes the importance of this rule, it has not been 
finalized. Here we are just shy of 4 years from passage of the 
legislation. The failure is more surprising because the Federal 
Reserve Board has issued at least two cease-and-desist orders 
identifying correspondent banking failures of major 
international banks, and Treasury itself, actually, has used 
its authority to propose barring correspondent banking in the 
United States for certain institutions.
    Let me ask you: At what point do you think failure to issue 
these rules would be regarded as a deliberate disregard of a 
statutory requirement?
    Mr. O'Brien. Well, certainly, I think the Treasury 
Department appreciates the responsibility it has to issue these 
regulations. They are too late. They are overdue. I understand 
your frustration about that.
    Not being at the Treasury at the moment, I do not know 
precisely what the holdup has been as far as the issuance of 
the final rule. I can tell you that I definitely hear you loud 
and clear about the need to get this final regulation out. I 
think the USA PATRIOT Act has given us many important tools, 
and we owe it to the community to get the regulation out.
    Senator Sarbanes. Do you think we can count on you to tell 
your colleagues at Treasury if you get down there that the 
Congress is really quite upset about this, and that they need 
to hear you loud and clear as you transmit that message to 
them?
    Mr. O'Brien. I will certainly deliver that message.
    Senator Sarbanes. Let me move on and ask you about 
terrorist financing.
    The GAO, in a report in November 2003, said, ``According to 
the FBI's Terrorist Financing Operations Section, most if not 
all terrorist cases involve a financial aspect known as funding 
nexus, which is normally considered to be a component to the 
overall negotiation.'' Then, the GAO went on to say the FBI 
does not currently isolate terrorist financing cases from 
substantive international terrorism cases, and its data 
analysis programs do not designate the source of funding for 
terrorist financing. In other words, the FBI is focused, as it 
were, on a broader challenge.
    This is part of that, but it gets encompassed within it. It 
does not get pinpointed. Does Treasury have a database that 
isolates sources of terrorist financing? Do you know?
    Mr. O'Brien. I do not know about a single database. 
Obviously, there is all the reporting that we get, the 
suspicious activity reporting, the CTR's, et cetera. I know 
FinCEN is working very hard on a new system, BSA Direct, to 
help provide investigators and other users of the data much 
better analytic tools to make use of the data that we do have.
    Senator Sarbanes. If we do not have this focus currently in 
how we are proceeding, do you think that we need to have such a 
focus, to look at terrorist financing as its own phenomenon 
against which specific efforts can then be directed?
    Mr. O'Brien. And I am not familiar with the GAO report that 
you mentioned. I do know that the JTTF's at the FBI each have a 
terrorist financing person incorporated into the JTTF. The work 
of TFOS, the Terrorist Financing Operations Section, I think 
does try to incorporate the financial aspects of terrorist 
networks or groups that are being investigated.
    I think it is hard to separate sometimes the funding of an 
operation from the investigation of the operation itself. I 
think it is important as you suggest to make sure that we have 
the appropriate focus, attention, and resources on the 
financial dimensions of terrorist investigations, but I think 
there is some benefit to incorporating that into the overall 
investigation into a terrorist group or suspect or what have 
you.
    Senator Sarbanes. Yes, I do not have any problem with 
incorporating it into the overall investigation, but I do have 
a problem if the specifics of the terrorist financing are not 
being reported out to Treasury and if Treasury does not have a 
database. After all, you have a lot of the instruments to deal 
with the terrorist financing problem. I do not know. Is the FBI 
communicating all of that terrorist financing information to 
appropriate elements of the Treasury Department?
    Mr. O'Brien. It is my belief that it is. I think IRS and 
other agencies are incorporated into the Joint Terrorism Task 
Forces, and I might add that I think this is one thing that the 
TFI structure at Treasury, I think, can really bring to the 
table here.
    There is, as you now know, a separate office, the Office of 
Intelligence, that Assistant Secretary Janice Gardner is 
leading very capably, and I think that enhanced analytic 
capability hopefully will address to some degree the concerns 
that you raise.
    Senator Sarbanes. The Chairman and I have had some 
discussions with Treasury about that very point, and it seems 
to me you have a statute, and you have some authorities that 
could be very helpful, but we are not sure how fully they are 
being executed and implemented, and I hope you would place that 
at the top of your priority list, because we think this is one 
way of getting at the terrorism problem is to dry up its 
financing, one very important way, and Treasury has a very big 
role to play in that regard.
    Mr. O'Brien. I certainly agree with that.
    Senator Sarbanes. Thank you, Mr. Chairman.
    Chairman Shelby. Mr. O'Brien, the 2004 intelligence reform 
bill required a comprehensive study on the Nation's efforts to 
combat terror financing. That report was due last week. Can we 
here at the Committee anticipate seeing this report soon once 
you get, especially once you get down there and get ensconced 
where you----
    Mr. O'Brien. I do not know the precise status of that 
report, but I understand its importance and will do my best to 
get it moving.
    Chairman Shelby. Well, I thank both of you for your 
appearance today. You are both eminently qualified, in my 
judgment, for the positions the President has nominated you 
for, and we will try to move these nominations expeditiously.
    Thank you so much. The hearing is adjourned.
    [Whereupon, at 11:07 a.m., the hearing was adjourned.]
    [Biographical sketches of nominees supplied for the record 
follow:]



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