[Senate Hearing 109-464]
[From the U.S. Government Publishing Office]



                                                        S. Hrg. 109-464

 
NOMINATIONS OF SHELIA BAIR, JAMES B. LOCKHART, III, DONALD L. KOHN, AND KATHLEEN L. CASEY

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

                                HEARING

                               before the

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

                       ONE HUNDRED NINTH CONGRESS

                             SECOND SESSION

                                   ON

                            NOMINATIONS OF:

 SHELIA BAIR, OF KANSAS, TO BE MEMBER AND CHAIRPERSON OF THE BOARD OF 
         DIRECTORS OF THE FEDERAL DEPOSIT INSURANCE CORPORATION

                               __________

       JAMES B. LOCKHART, III, OF CONNECTICUT, TO BE DIRECTOR OF 
           THE OFFICE OF FEDERAL HOUSING ENTERPRISE OVERSIGHT

                               __________

        DONALD L. KOHN, OF PENNSYLVANIA, TO BE VICE CHAIRMAN OF 
          THE BOARD OF DIRECTORS OF THE FEDERAL RESERVE SYSTEM

                               __________

           KATHLEEN L. CASEY, OF VIRGINIA, TO BE A MEMBER OF 
              THE U.S. SECURITIES AND EXCHANGE COMMISSION

                               __________

                              JUNE 8, 2006

                               __________

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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

               Peggy R. Kuhn, Senior Financial Economist

           Mark A. Calabria, Senior Professional Staff Member

                         Andrew Olmem, Counsel

               Jonanthan Gould, Professional Staff Member

                 Dean V. Shahinian, Democratic Counsel

             Jonathan Miller, Democratic Professional Staff

                 Lynsey Graham Rea, Democratic Counsel

   Joseph R. Kolinski, Chief Clerk and Computer Systems Administrator

                       George E. Whittle, Editor

                                  (ii)




                            C O N T E N T S

                              ----------                              

                         THURSDAY, JUNE 8, 2006

                                                                   Page

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

Opening statements, comments, or prepared statements of:
    Senator Sarbanes.............................................     4
    Senator Crapo................................................     5
    Senator Johnson..............................................     6
        Prepared statement.......................................    22
    Senator Dole.................................................     6
    Senator Bunning..............................................     7
    Senator Hagel................................................     8
    Senator Reed.................................................     8
    Senator Martinez.............................................     8
    Senator Allard...............................................    23

                                NOMINEES

Shelia Bair, of Kansas, to be Member and Chairperson of the Board 
  of Directors of the Federal Deposit Insurance Corporation......     9
    Prepared statement...........................................    24
    Biographical sketch of nominee...............................    25
    Response to written questions of:
        Senator Shelby...........................................    66
        Senator Bunning..........................................    67
James B. Lockhart, III, of Connecticut, to be Director of the 
  Office of Federal Housing Enterprise Oversight.................    11
    Biographical sketch of nominee...............................    35
    Response to written questions of Senator Bunning.............    67
Donald L. Kohn, of Pennsylvania, to be Vice Chairman of the Board 
  of Directors of the Federal Reserve System.....................    12
    Biographical sketch of nominee...............................    43
    Response to written questions of Senator Bunning.............    69
Kathleen L. Casey, of Virginia, to be a Member of the U.S. 
  Securities and Exchange Commission.............................    13
    Biographical sketch of nominee...............................    57

              Additional Material Supplied for the Record

Statement of Bob Dole, a former U.S. Senator from the State of 
  Kansas.........................................................    73

                                 (iii)


                            NOMINATIONS OF:

                         SHEILA BAIR, OF KANSAS

                    TO BE MEMBER AND CHAIRPERSON OF

                         THE BOARD OF DIRECTORS

                 FEDERAL DEPOSIT INSURANCE CORPORATION

                 JAMES B. LOCKHART III, OF CONNECTICUT

                       TO BE DIRECTOR, OFFICE OF

                  FEDERAL HOUSING ENTERPRISE OVERSIGHT

                    DONALD L. KOHN, OF PENNSYLVANIA

                         TO BE VICE CHAIRMAN OF

                       THE BOARD OF GOVERNORS OF

                     THE FEDERAL RESERVE SYSTEM AND

                     KATHLEEN L. CASEY, OF VIRGINIA

                         TO BE A MEMBER OF THE

                U.S. SECURITIES AND EXCHANGE COMMISSION

                              ----------                              


                         THURSDAY, JUNE 8, 2006

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

    The Committee met at 10:09 a.m., in room SD-538, Dirksen 
Senate Office Building, 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 the nominations of four very 
distinguished individuals. I appreciate the willingness of the 
nominees to appear before the Committee. The panel of nominees, 
if confirmed, will have very important responsibilities for 
ensuring public confidence in the viability of our Nation's 
financial institutions, capital markets, and housing finance 
system.
    Our first nominee is Ms. Sheila C. Bair, nominated by 
President Bush to serve as a Member and Chairman of the Federal 
Deposit Insurance Corporation, FDIC. The FDIC, as we all know, 
is charged with insuring deposits in banks and thrift 
institutions for at least $100,000. In addition, the FDIC is 
the primary Federal regulator of banks that are chartered by 
the States that do not join the Federal Reserve System, roughly 
5,250 banks and savings banks. The FDIC also serves as an 
important role as the backup supervisor for the remaining 
insured banks and thrift institutions.
    The FDIC is currently implementing changes to the Deposit 
Insurance Program mandated by Congress in legislation passed 
earlier this year. I believe that ensuring that this 
implementation process is carried out effectively and in a 
manner that tracks the will of Congress will be a key 
responsibility of the new Chairman. The nominee understands 
that well.
    Ms. Bair brings a wealth of financial services experience 
to the Federal Deposit Insurance Corporation. Currently a 
Professor of Financial Regulatory Policy at the University of 
Massachusetts, Ms. Bair has served as Assistant Secretary for 
Financial Institutions at the Department of the Treasury, as 
Senior Vice President of the New York Stock Exchange and as 
Commissioner and Acting Chairman of the Commodity Futures 
Trading Commission. She is also the author of numerous articles 
on the financial services industry.
    Our second nominee with us is James B. Lockhart, III, 
nominated to be the Director of the Office of Federal Housing 
Enterprise Oversight at the Department of Housing and Urban 
Development that we call OFHEO. Mr. Lockhart, for the past 
several years, this Committee has made regulatory reform for 
the Government Sponsored Enterprises a key priority, as you 
well know. The internal controls, risk management, and 
accounting problems of the GSE's point to the need for our 
efforts to bear fruit in this regard. We will be looking to you 
to assume the stewardship of OFHEO and use the authority you 
may have available to ensure that these entities, which are so 
important to our housing markets, operate in a safe and a sound 
manner.
    Mr. Lockhart was previously nominated and confirmed to 
serve as the Deputy Commissioner for the Social Security 
Administration. In that position, he serves as the Agency's 
Chief Operating Officer, Secretary to the Social Security Board 
of Trustees, and as a member of the Executive Committee of the 
President's Management Council. Prior to this, he served as 
Managing Director at NetRisk, Incorporated. Earlier in his 
career, he served as Executive Director of the Pension Benefit 
Guaranty Corporation and has held senior positions at National 
Reinsurance, Smith Barney, Alexander & Alexander, and Gulf Oil. 
Mr. Lockhart received his bachelor's degree from Yale 
University and his master's degree from Harvard.
    Our third nominee is Donald L. Kohn, nominated to serve as 
the Vice Chairman of the Board of Governors of the Federal 
Reserve System. Dr. Kohn took office on August 5, 2002, as a 
Member of the Board of Governors of the Federal Reserve System 
for a full term ending January 31, 2016.
    The Federal Reserve System is in a period of transition. 
Chairman Bernanke assumed his position earlier this year and 
has the unenviable task of following the much-commended tenure 
of Alan Greenspan. Given his extensive background and training, 
this Committee was pleased to see Chairman Bernanke assume 
those duties. In another type of transition, the future path of 
interest rates appears less predictable than it has been in 
recent years, and the recent volatility in financial and stock 
markets reflects that uncertainty. Additionally, the Federal 
Reserve Board is in the process of developing new capital 
requirements for our banking system. These requirements are an 
extremely important part of our capital regime, and any changes 
must be implemented in a thoughtful and deliberative manner 
that recognizes and preserves the operation of the existing 
minimum capital requirement. For all these reasons, the 
Committee is again pleased that President Bush nominated 
someone with the depth and breadth of experience that you 
possess, Dr. Kohn, to assume the role of Vice Chairman of the 
Board of Governors of the Federal Reserve System.
    You have a very distinguished record with the Federal 
Reserve System already. Before becoming a Member of the Board, 
he served on its staff as Adviser to the Board for Monetary 
Policy from 2001 to 2002; Secretary of the Federal Open Market 
Committee from 1987 to 2002; Director of the Division of 
Monetary Affairs, and Deputy Staff Director for Monetary and 
Financial Policy. He has also held several positions in the 
Board's Division of Research and Statistics: Associate 
Director, Chief of Capital Markets, and Economist. Dr. Kohn 
began his career as a Financial Economist at the Federal 
Reserve Bank of Kansas City.
    Dr. Kohn has written extensively on issues relating to 
monetary policy and its implementation by the Federal Reserve. 
These works were published in volumes issued by various 
organizations, including the Federal Reserve System, the Bank 
of England, the Reserve Bank of Australia, the Bank of Japan, 
the Bank of Korea, the National Bureau of Economic Research, 
and the Brookings Institution. Dr. Kohn received a B.A. in 
economics in 1964 from the College of Wooster and a Ph.D. in 
economics in 1971 from the University of Michigan.
    Our fourth nominee today is no stranger to this Committee. 
It is Kathleen Casey to be a Commissioner of the Securities and 
Exchange Commission. Ms. Casey has served, as we know, as the 
Staff Director and Counsel of the Senate Banking Committee for 
the past 3\1/2\ years. During this period, the Committee has 
considered many significant securities issues, among them 
addressing trading abuses in the mutual fund industry, 
oversight of the Sarbanes-Oxley Act, the structure of the 
capital markets and the hedge fund industry. The Committee has 
also reviewed the impact of the global analyst settlement and 
increased scrutiny of both credit rating agencies and the self-
regulatory organizations that we call SRO's. In examining these 
key issues, the Committee is always mindful of the SEC's role 
and its interrelationship with the SRO's, State regulators, and 
international regulatory bodies. As Staff Director, Ms. Casey 
has acquired substantial expertise in these areas. Beyond this 
institutional experience, Ms. Casey has developed a reputation 
for her keen intellect, diligence, and consummate 
professionalism. Perhaps more importantly, she recognizes the 
fundamental importance of honesty, integrity, and fairness in 
the operation of our capital markets.
    Upon confirmation, Ms. Casey will become a Commissioner at 
the Securities and Exchange Commission during a time of great 
change in the global markets. The Commission is charged with 
protecting investors; maintaining fair, orderly, and efficient 
markets; and facilitating capital formation. Recently, the 
Securities and Exchange Commission has had to confront a host 
of issues, among them, increased retail investment, new 
investment products, new investment vehicles, new markets, and 
the emergence of publicly traded exchanges with more global 
interaction and innovation than ever before. As the flow of 
capital has become increasingly international in scope, 
regulatory considerations will need to adapt to meet these 
changes. On the domestic side, consolidation and exchange 
demutualization further demonstrate that change and evolution 
are a constant in our financial markets. Again, the Securities 
and Exchange Commission must keep pace with these developments.
    Prior to working on the Banking Committee, Ms. Casey served 
as my Chief of Staff and Legislative Director for a number of 
years. She also worked as a Legislative Assistant and Staff 
Director for the Subcommittee on Financial Institutions of this 
Senate Banking Committee. She received her B.A. from 
Pennsylvania State University and her J.D. from George Mason 
University. I commend the President for nominating Ms. Casey 
and look forward to hearing her testimony and the testimony of 
all our nominees this morning.
    Senator Sarbanes.

             STATEMENT OF SENATOR PAUL S. SARBANES

    Senator Sarbanes. Thank you very much, Mr. Chairman.
    I am very pleased that this morning, we are considering the 
nominations of four highly qualified individuals, and I want to 
commend the President and his advisers for sending people of 
such quality before us to assume important responsibilities. 
Amongst other things, it makes our job a lot easier, so I 
welcome it for that reason as well.
    At the very outset, I want to pay a special tribute to 
Kathy Casey, who has been nominated to serve as a Commissioner 
of the Securities and Exchange Commission. Ms. Casey, as the 
Chairman observed, has been the Staff Director of this 
Committee since January 2003. During that period, the Committee 
has reported out many bills. Bills of some consequence number 
well into the twenties. Virtually all of them came out of this 
Committee unanimously. On only a couple of instances did we 
have a division, and a lot of the credit, I think, goes to very 
effective staff work.
    Mr. Chairman, I am sure you and my colleagues will agree 
with me that Senators often get credit for the success of the 
Committee, but we know that a large part of the work is done by 
the staff.
    Chairman Shelby. Absolutely.
    Senator Sarbanes. Also, Ms. Casey has led the Committee as 
Majority Staff Director in a highly transparent manner, with an 
open door policy, an open mind to hearing all points of view, 
and with a commitment to try to work toward consensus amongst 
the Members of the Committee. And, at a time that has been 
marked by fractious division and so forth, this is a welcome 
quality and I am sure will be of important service on the 
Commission.
    Ms. Casey has been an excellent Staff Director. I believe 
she will be a very able Commissioner at the SEC, and I am very 
pleased and look forward to supporting her nomination.
    Let me turn to the other nominees. Sheila Bair, of course, 
is also very well known to the Committee. She has been 
confirmed three times before, most recently in 2001, when she 
served President Bush as Assistant Secretary for Financial 
Institutions at the Treasury Department. At Treasury, she 
played a lead role in developing policy relating to Federal 
Deposit Insurance reform, which obviously is highly relevant 
now to the nomination to be the Chair of the FDIC, and on 
terrorism risk insurance, which the Cain-Hamilton Group, 
ranking how their recommendations were being carried out, this 
was the only A that they gave to how it was being implemented.
    Chairman Shelby. That is right.
    Senator Sarbanes. And we all worked together in trying to 
achieve that.
    Most recently, she has been teaching at the University of 
Massachusetts at Amherst. I have come to know Sheila Bair over 
the years, and I want to express my appreciation to her for her 
willingness to serve yet another tour of duty in Government as 
the Chair of the FDIC.
    Don Kohn has served in the Federal Reserve for over 36 
years, the last 4 as a Member of the Board of Governors. He is 
very highly respected as a consummate and dedicated 
professional public servant. As a staff member, he was well 
known for his intellect and for being invaluable to both 
Chairman Volcker and Chairman Greenspan, and I believe it is 
only fitting and appropriate that he is now being considered to 
be the Vice Chairman of the Federal Reserve Board.
    And Mr. Lockhart, not as well known to this Committee, but 
he has had extensive Government experience: Executive Director 
of the Pension Benefit Guaranty Corporation from 1989 to 1993 
and Deputy Commissioner and Chief Operating Officer at the 
Social Security Administration since 2002. He is also currently 
serving as Acting Director of OFHEO, and if confirmed, will be 
leading OFHEO at, I think, one of the most important times in 
its history.
    Finally, Mr. Chairman, I want to take this opportunity to 
express my appreciation to Roger Ferguson, who served so ably 
at the Fed, first as a Member of the Board and then as its Vice 
Chairman from October 1999 to April 2006. Among other things, I 
would note that he provided a very steady hand and a strong 
leadership at the Fed during the crisis surrounding September 
11. We will recall that Chairman Greenspan was out of the 
country when that tragedy occurred, and Roger Ferguson 
responded with, I think, great ability and rendered really a 
tremendous service.
    I also want to express my appreciation to Cynthia Glassman, 
both for her dedicated service at the Securities and Exchange 
Commission and before that as a Senior Professional Economist 
at the Federal Reserve Board. I want to take this opportunity 
to wish each of them well in their future endeavors.
    Thank you very much.
    Chairman Shelby. Senator Crapo, you have an opening 
statement you would like to give?

               STATEMENT OF SENATOR MICHAEL CRAPO

    Senator Crapo. Thank you very much, Mr. Chairman.
    I simply want to join with you and Senator Sarbanes in your 
comments about each of those who are on our panel today. We 
have very strong candidates for the positions to which they 
have been nominated, and I also, because of our close 
relationship with Kathy Casey here, want to give her my 
personal congratulations and commendations for the great work 
that you have done here and the great work that you will do at 
the SEC.
    Chairman Shelby. Thank you.
    Senator Johnson.

                STATEMENT OF SENATOR TIM JOHNSON

    Senator Johnson. Thank you, Mr. Chairman, and Ranking 
Member Sarbanes. I want to thank you for holding this hearing.
    We have a very impressive slate of nominees to consider. I 
look forward to hearing from them. I would especially like to 
offer my congratulations to Ms. Casey, a member of our own 
Banking Committee family. She has been with you, Mr. Chairman, 
for many years, and I appreciate the hard work she has done on 
behalf of this Committee and her service to the financial 
services industry. And while her nomination is a loss for us, 
it is well-deserved, and I have no doubt she will be a great 
asset to the SEC.
    I have a number of comments that I would like to share, but 
in order to expedite the consideration of this hearing, Mr. 
Chairman, what I would like to do is to submit my statement for 
the record.
    Chairman Shelby. Without objection, it will be made part of 
the record in its entirety.

              STATEMENT OF SENATOR ELIZABETH DOLE

    Senator Dole. Thank you, Mr. Chairman.
    While I could talk about all of these outstanding nominees 
before us today in some detail, there is one that Bob Dole and 
I are especially proud of. Bob has asked that I let you know 
that he very much wanted to be here today and is so sorry he 
had to be out of town. He wanted to once again introduce Sheila 
Bair, the President's nominee for Chairman of the Federal 
Deposit Insurance Corporation.
    We have known Sheila for 25 years, Mr. Chairman. Earlier in 
her career, she served as Bob's Counsel on the Senate Judiciary 
Committee, handling issues including civil and constitutional 
rights, intellectual property, and judicial reform. Bob and I 
knew her to be an outstanding member of his staff, one on whom 
we could count for advice and analysis, both of us, a role at 
which she certainly has excelled.
    Bob was here before this Committee on July 12, 2001, when 
he sang Sheila's praises for her confirmation as Assistant 
Secretary of the Treasury. He asked that my colleagues on the 
Committee keep in mind his high praise and confidence in Sheila 
Bair. Within 24 hours of her confirmation for that position, 
Mr. Chairman, Sheila was before this Committee, testifying on 
the need for deposit insurance reform. If confirmed in this new 
role, she will be charged with implementing the reform.
    On numerous issues, Sheila has been a great resource to 
both Bob and me over the years. She has been a catalyst for 
greater action for financial literacy and financial 
institutions policy. Both Bob and I are confident that Sheila 
will be approved speedily and overwhelmingly, and we both give 
her our unqualified support.
    I look forward to working with Sheila in this new capacity 
on critical issues impacting the financial services industry, 
such as the implementation of Basel II. I have some concerns 
that the proposed U.S. regulation differs from the 
internationally adopted accord and how these differences might 
disadvantage U.S. banks of all sizes abroad and on our own 
soil.
    I am confident that Sheila will keep an open mind at the 
FDIC and that she will engage in an open dialogue about the 
concerns of some of the industry with regard to the draft rule.
    Mr. Chairman, I would ask unanimous consent that Bob Dole's 
full statement be made a part of the record.
    Chairman Shelby. Without objection, it will be done
    I also want to recognize Dr. Don Kohn, who has been 
nominated as Vice Chairman of the Board of Governors of the 
Federal Reserve. He has very ably served as a Member of the 
Board since 2002 and has my full support for this new position.
    The Committee will also consider the nomination of Jim 
Lockhart to serve as Director of the Office of Federal Housing 
Enterprise Oversight. I had the great pleasure of working with 
Jim when he was the Executive Director of the Pension Benefit 
Guaranty Corporation during my years as Labor Secretary for the 
first President Bush. In my role, Mr. Chairman, I served as the 
Chairman of the Board of Directors for the PBGC and relied on 
Jim's wise advice and counsel. Jim did a great job of reform at 
PBGC in his time there and has now dedicated himself to the 
daunting task of oversight of Fannie Mae and Freddie Mac. I am 
confident, Mr. Chairman, he will do an excellent job there as 
well, and he has my unqualified support.
    Thank you, Mr. Chairman.
    Chairman Shelby. Senator Bunning.

                STATEMENT OF SENATOR JIM BUNNING

    Senator Bunning. Thank you, Mr. Chairman.
    Today, we have four very important nominations before this 
Committee. Each of the nominees will fill a high ranking 
position at one of the most influential Government agencies 
overseeing the financial sector, and each of the nominees will 
play a critical role in preserving the safety and soundness of 
our national economy.
    Two of the nominees face immediate challenges in their 
jobs. The Government Sponsored Enterprises like Fannie and 
Freddie must be cleaned up, and the risks that they pose to our 
economy must be brought under control. That is a job that we 
must act on in Congress in addition to what is done by the 
Office of Federal Housing Enterprise Oversight. Also, the 
Federal Reserve is at a point where it is going to do some 
serious damage to our economy if its Members are not careful.
    I hear a lot of talk about inflation showing up, but there 
are two things we need to keep in mind when talking about 
inflation: First, our inflation measures are backward-looking. 
Second, there is a lag between Fed action and when we have an 
impact on inflation and the economy. Both of those should lead 
the Fed to be cautious when taking action to fight inflation.
    I am afraid the Fed is going to overshoot this year just as 
they did the last time. Overshooting will have a devastating 
impact on this economy and maybe worse than before, because of 
the artificially inflated housing prices this time around. I am 
not alone in my concern, either. All you need to do is look at 
the stock market since the Fed's last action to see that the 
markets are really worried. Just this week, the Dow is down 317 
points, mostly because of talk from the Fed Chairman that has 
everyone convinced there are going to be more rate hikes 
coming. I am very worried about this not just because of all of 
the money people are losing in the markets but because of the 
lasting damage that could be done to the economy.
    I thank all the nominees for coming before the Committee 
today, and I congratulate them on their nomination by the 
President. I especially want to congratulate Ms. Casey, who has 
served this Committee well over the years. One thing that 
sticks out most in my mind was her help with my TVA provisions 
2 years ago. Mr. Chairman, it is always nice to see our staff 
succeed and go on to bigger and better things, and I 
congratulate both of you.
    Thank you.
    Chairman Shelby. Thank you.
    Senator Hagel.

                STATEMENT OF SENATOR CHUCK HAGEL

    Senator Hagel. Mr. Chairman, thank you.
    I would only add that it is a remarkable opportunity when 
we have before us four exceptional individuals that represent 
competency and commitment to causes greater than their own 
self-interest. We are grateful for your service and for your 
willingness to once again take on big assignments with 
significant consequences in these jobs, and, in particular, I 
would add my note of appreciation to our own Ms. Casey's 
nomination. I am strongly supporting each of these four 
nominees and look forward to work with them.
    Thank you very much.
    Chairman Shelby. Senator Reed.

                 STATEMENT OF SENATOR JACK REED

    Senator Reed. Thank you very much, Mr. Chairman, and I do 
want to commend all the nominees.
    I have had a chance to meet with Ms. Bair, Mr. Lockhart, 
and Governor Kohn and am impressed with not only the quality of 
their thought but also their commitment to public service and 
thank you, and a special thanks to our local nominee. Kathy 
Casey has served this Committee with great distinction, great 
fairness, great integrity, and it is a delight and pleasure to 
see you here today for your nomination.
    Thank you, Mr. Chairman.
    Chairman Shelby. Senator Martinez.

               STATEMENT OF SENATOR MEL MARTINEZ

    Senator Martinez. Thank you, Mr. Chairman.
    I very much appreciate the opportunity I have had to work 
with Ms. Casey as Secretary of HUD and then here in this 
Committee, and I am delighted for the opportunity that she has 
here today. It looks like the votes are going pretty well for 
you on the Committee.
    [Laughter.]
    So, I am happy to forecast a confirmation for you.
    [Laughter.]
    But I am also very interested in discussing the issues 
facing OFHEO. It is a very important time at a very important 
entity and just very much appreciate the steps you have taken 
but also very much look forward to discussing with you where 
the future might lead in terms of the work at OFHEO, and I 
likewise commend and congratulate the other nominees for their 
public service and their desire to serve.
    Thank you.
    Chairman Shelby. Will all four of you stand, hold up your 
right hand, and be sworn.
    [Witnesses sworn.]
    Chairman Shelby. Ms. Bair, we will start with you. Do you 
have anybody you want to recognize here this morning?
    Ms. Bair. Yes, I certainly do: my husband, Scott Cooper, my 
husband and best friend is here with me. My son, Preston 
Cooper.
    Chairman Shelby. Okay.
    Ms. Bair. And my daughter, Colleen Cooper.
    Chairman Shelby. Great.
    Ms. Bair. They are here, and I trust the Committee will 
understand if they do not----
    Chairman Shelby. Mr. Lockhart, do you have anybody here 
with you today?
    Mr. Lockhart. My wife, Cricket, and her brother.
    Chairman Shelby. Mr. Kohn.
    Mr. Kohn. My wife, Gail; my son, Jeff; my niece, Sarah 
Friedman; my mother, Pat; and my niece, Marcy Friedman.
    [Laughter.]
    Chairman Shelby. You brought them all.
    Mr. Kohn. It takes a crowd to support me, I think.
    Senator Sarbanes. I wondered where this large crowd came 
from.
    [Laughter.]
    Chairman Shelby. Ms. Casey.
    Ms. Casey. I have my father, Bernie Casey, and my mother, 
Kathy Casey, and several friends.
    Chairman Shelby. Thank you all.
    Ms. Bair, I will start with you, but all of your written 
testimony will be made part of the hearing record of the 
Banking Committee in its entirety. If you will sum up briefly 
your remarks, because we have a lot of Senators here.

              STATEMENT OF SHEILA BAIR, OF KANSAS

                TO BE MEMBER AND CHAIRPERSON OF

                     THE BOARD OF DIRECTORS

             FEDERAL DEPOSIT INSURANCE CORPORATION

    Ms. Bair. Thank you, Senator. I have a short statement. I 
will be brief.
    Thank you very much. It is a pleasure to appear before you 
this morning with such a distinguished panel. At the outset, I 
would like to thank the President for having the confidence in 
me to lead this historic agency. Established in the throes of 
the Great Depression, the FDIC restored depositor confidence in 
our crippled banking system and since that time has served as a 
beacon of safety for the financial assets of the average 
consumer. It is a well-run, well-respected agency, comprised of 
4,500 dedicated staff and a Board of Directors who bring a 
broad depth of experience as well as a rich diversity in 
regulatory viewpoints. It will be my privilege to work with 
these outstanding individuals if confirmed by the Senate.
    I would like to thank my family for their support of my 
decision to accept this nomination and their willingness to 
disrupt their lives to move back to Washington, DC. I have 
introduced my family. I would also like to thank my parents, 
Dr. Albert and Clara Bair, who are quite elderly and could not 
join me this morning. Finally, I would like to recognize my 
former boss, Senator Dole, for his help in this endeavor and 
all the other challenges I have undertaken over the past two 
decades. Washington can be a difficult place to navigate, and 
having someone of high stature and integrity to guide you is 
crucial. I was fortunate enough to have Senator Dole as a 
mentor. His wise counsel and advice have always served me well.
    Another benefit of my association with the Senator was the 
opportunity to get to know the senior Senator from North 
Carolina. Elizabeth, I thank you for those kind words. I first 
had the privilege of meeting Elizabeth Dole in the 1980's, when 
we worked on so-called ``gender gap'' issues in the Reagan 
Administration, to show you how old I am.
    [Laughter.]
    I have seen first-hand her formidable intellect, strong 
work ethic, and utmost dedication to public service, and I am 
very glad she is on this Committee and that perhaps we will 
have the chance to work together again.
    The last time I appeared before this full Committee, I was 
the President's nominee to be the Assistant Secretary for 
Financial Institutions, as was noted. Upon my confirmation for 
that position, my first assignment was to represent the 
Administration on deposit insurance reform. If confirmed by the 
Senate, I will play a role now in the implementation of that 
comprehensive new law. Deposit insurance reform is just one of 
the many major policy issues confronting the FDIC: ILC's, Basel 
II and IA, regulatory burden, antimoney laundering; the list 
goes on. There is no shortage of cutting edge issues at the 
FDIC, and for many, there are no easy answers. But as one who 
loves public policy and believes that Government can be a force 
for positive change, I do welcome these challenges.
    In concluding, I would reiterate my strong commitment to 
the millions of individuals who rely on the FDIC for security 
and peace of mind in protecting their deposits. As the 
ownership society evolves, it is important for everyday working 
men and women to know that they have a safe haven for a 
selected portion of their financial assets. It is equally 
important to the functioning of our banking system that 
consumers have confidence in their banks. The FDIC stands 
proudly at that intersection, and I look forward to the 
opportunity to serve this fine agency.
    Thank you very much, Mr. Chairman.
    Chairman Shelby. Mr. Lockhart.

      STATEMENT OF JAMES B. LOCKHART, III, OF CONNECTICUT,

                         TO BE DIRECTOR

         OFFICE OF FEDERAL HOUSING ENTERPRISE OVERSIGHT

    Mr. Lockhart. Chairman Shelby, Ranking Member Sarbanes, and 
Members of the Committee, it is a real honor to be before you 
today as President Bush's nominee for the Director of the 
Office of Federal Housing Enterprise Oversight, OFHEO.
    This will actually be my fourth opportunity for public 
service. The first was as a Naval officer aboard a nuclear 
submarine, the USS George Washington Carver. The boat's motto 
is one that has always stuck with me, which is ``Strengthen 
through Knowledge,'' and it is going to be important in this 
upcoming job as well.
    As was noted, I have also had the opportunity to run the 
Pension Benefit Guaranty Corporation, to be the Deputy 
Commissioner and Chief Operating Officer of Social Security, 
and for the past month, the Acting Director of OFHEO.
    But despite all of that time in Government, I have spent 
most of my career in the private sector in financial services. 
As such, I have extensive experience with many of the issues 
the Enterprises, Fannie Mae and Freddie Mac, are facing, which 
include internal controls, risk management, systems 
development, investments including asset-backed securities, 
mortgages, guarantees, and capital management.
    A secure retirement and homeownership are key components of 
the American Dream. In many ways, trying to make those dreams 
come true has been the mission and goal of all three agencies 
for which I have worked. The three also share a need for 
strengthening. At PBGC, I was charged with shoring up the 
agency so that it could better fulfill its mission of 
protecting the private sector pensions of Americans. Social 
Security's mission of ``ensuring economic security for the 
Nation's people'' is a very important one, and we did a lot of 
work to improve service and strengthen stewardship. We need to 
do more on ensuring sustainable solvency for future 
generations.
    Obviously, OFHEO is a much smaller agency than Social 
Security. Almost everything is in the Government. And just last 
week, it only had its 13th anniversary. But it does have an 
extremely important and compelling mission, and that mission 
is: ``to promote housing by ensuring the safety and soundness 
of Fannie Mae and Freddie Mac and to strengthen the Nation's 
housing finance system.'' These two companies own or guarantee 
about 41 percent of the residential mortgages in the United 
States and are amongst the largest guarantors and borrowers in 
the world economy.
    There are four key goals that OFHEO needs to accomplish to 
fulfill our mission. First and by far the biggest is to ensure 
the safety and soundness of the Enterprises. My first 
challenge, as you know, at OFHEO was to complete the Special 
Examination Report of Fannie Mae and to negotiate a settlement 
agreement. The work on the report was almost done when I 
arrived, and we were able to issue it and the settlement 
agreement on May 23. I look forward in the future to having an 
opportunity to testify before this Committee on that 
settlement. We must continue to monitor both Fannie Mae is and 
Freddie Mac's compliance and progress with their agreements. As 
the Chief Executive Officers of both companies have told me, it 
will take them several years of hard work to change the 
corporate culture and to strengthen internal controls, risk 
management, and accounting systems to acceptable levels.
    The next two goals that we need to fulfill are 
recommendations from the Fannie Mae Special Examination, and 
the first is that we need to continue to strengthen our 
regulatory infrastructure. The recommendation is we must 
continue to support legislation to provide the powers essential 
to meeting our mission.
    I have been very impressed with the OFHEO team, but we have 
a lot of progress yet to make. There is a lot of hard work to 
do, and we need the tools to do that work. In particular, 
legislative reform of the Agency is critical. The Agency must 
have powers on par with other financial regulators, including 
budget flexibility. OFHEO also needs safety and soundness 
powers equivalent to the banking regulators such as flexible 
capital standards and strong receivership powers.
    The fourth goal is to promote efficient financial markets 
to support homeownership through educational efforts. Over the 
years, great progress has been made in homeownership, which at 
69 percent is near an all-time high. A key role that OFHEO can 
play with your help is to ensure that Fannie Mae and Freddie 
Mac, which have been important elements of this growth, are 
restored to full health and are properly focused on their core 
mission.
    I look forward to working closely with the Members of this 
Committee and the professional and highly dedicated OFHEO team 
to address these challenges so that our Nation's housing 
finance system continues to be vibrant, safe and sound.
    Thank you.
    Chairman Shelby. Governor Kohn.

          STATEMENT OF DONALD L. KOHN, OF PENNSYLVANIA

                   TO BE VICE CHAIRMAN OF THE

        BOARD OF GOVERNORS OF THE FEDERAL RESERVE SYSTEM

    Mr. Kohn. Thank you, Chairman Shelby, Senator Sarbanes, 
Members of the Committee, I am honored to have been nominated 
by President Bush to be the Vice Chairman of the Board of 
Governors of the Federal Reserve System, and I am grateful to 
this Committee for scheduling this hearing so expeditiously. I 
have enjoyed a long and productive relationship with the 
Banking Committee and its staff over the years, working 
together to determine how the Federal Reserve can best 
contribute to the economic well being of our citizens. As a 
Governor, and if you confirm me, as Vice Chairman, I look 
forward to continuing to be part of the shared pursuit of that 
objective.
    The Board's Vice Chairman has a very limited role under the 
Federal Reserve Act--to preside over the Board in the absence 
of the Chairman. By tradition and practice, however, the Vice 
Chairman has played a leadership role within the Federal 
Reserve System. He or she has acted as the Chairman's deputy or 
alternate in important international groups; has headed ad hoc 
committees within the Board, System, or Federal Open Market 
Committee to help develop policy alternatives for consideration 
by the larger group, has helped the Chairman to lead the Board, 
and has worked closely with the Chairman in a variety of 
circumstances, including when responding to disturbances in the 
financial sector that had the potential of affecting the 
broader economy.
    The Federal Reserve faces considerable challenges today in 
meeting the responsibilities that you have given us for 
fostering price stability and maximum employment at a time of 
rapid change in the U.S. and global economies; for helping 
maintain a safe and sound banking system and stable and 
efficient payments and financial systems in the face of 
innovations and financial instruments and institutions; and for 
protecting and educating consumers as they take advantage of 
the greater variety and sophistication of financial instruments 
available to them. I believe that my long and wide experience 
within the Federal Reserve, at a Reserve Bank and at the Board, 
on staff and as Governor, along with my close working 
relationship with Chairman Bernanke, will enable me to make an 
even greater contribution to the work of the Federal Reserve as 
the Board's Vice Chairman should you choose to confirm me to 
this position.
    Thank you.
    Chairman Shelby. Ms. Casey.

          STATEMENT OF KATHLEEN L. CASEY, OF VIRGINIA

                     TO BE A MEMBER OF THE

            U.S. SECURITIES AND EXCHANGE COMMISSION

    Ms. Casey. Mr. Chairman, Ranking Member Sarbanes, and 
Members of the Committee, I am honored to appear before you 
today. I am deeply grateful and humbled by the President's 
nomination to serve as a Commissioner on the Securities and 
Exchange Commission, and I thank the President for this great 
honor.
    I would also like to express my sincere gratitude to 
Chairman Shelby, the Members of the Senate Banking, Housing, 
and Urban Affairs Committee, and the staff. It has been both a 
privilege and a joy to work on the Committee. As has so often 
been noted, this Committee has a long history of collegiality 
and bipartisanship. I believe this well-deserved reputation 
stands as a testament to the Committee's effectiveness and 
makes work, even on difficult and divisive issues, not only 
challenging but also rewarding.
    I have also been fortunate to work with extraordinarily 
smart, capable, and professional staff. I have come to know and 
respect all of them, but I would like to particularly thank 
Steve Harris, the Minority Staff Director, for his friendship 
and support over these past several years. It has been 
invaluable to me, and working with you has been a real 
pleasure, so thank you, Steve. The Securities and Exchange 
Commission is the world's preeminent market regulator. Having 
had the opportunity to work with members and staff of the 
Commission over the years, it is easy to see why.
    Over the past 13 years, I have had the opportunity to work 
on a broad range of legislative and oversight issues affecting 
our capital markets and the work of the SEC. This experience 
has given me a deeper understanding of the legal and regulatory 
framework that guides our securities markets and has provided 
me with insight into the public policy considerations that 
underpin it.
    Further, I believe that this experience has given me a 
strong appreciation of the important role the Securities and 
Exchange Commission plays in protecting investors and ensuring 
the integrity and efficiency of our capital markets. I have a 
deep respect for the efficiency and productive power of our 
capital markets.
    I believe we should let market forces work. As it has often 
been said, we have the deepest, most liquid, and efficient 
markets in the world. Millions of Americans invest in them 
every day and rely on the market's vibrancy and depth to build 
and secure their futures. But we should never lose sight of one 
fact: Our capital markets enjoy this preeminent status because 
they are the most transparent. Because of this transparency, 
people in the United States and around the world have 
confidence in their integrity.
    This confidence in our markets is due in large part to the 
disclosure requirements of our securities laws. Full and 
accurate disclosure is the key to transparency. But if 
disclosure is to be meaningful to ordinary investors, it must 
be understandable. I believe that Chairman Cox has identified 
in a most tangible way a promising initiative that could help 
demystify financial disclosure for everyday Americans and 
empower them with meaningful and understandable information to 
guide their decisionmaking.
    As has also been evidenced in the past, while strong and 
dynamic, our markets can be roiled if investors do not have 
confidence that they are fair. It is therefore important that 
investors believe that fraud and misconduct will be pursued and 
penalized. The SEC must play a leading role in policing our 
markets and in enforcing the law. Firm but fair enforcement 
ensures that misconduct of the few does not erode the 
confidence of the many.
    Our markets also continue to rapidly evolve and change in 
an increasingly global marketplace. This promises tremendous 
benefits for U.S. investors but also poses unique challenges. 
The SEC will play a vital role in ensuring that our regulatory 
framework is able to adjust to those changes and continue to be 
responsive to the needs of investors and to market forces. The 
SEC is already undertaking these efforts proactively to look 
ahead and to discuss with international counterparts how the 
SEC can continue to fulfill its mission in this changing 
marketplace.
    The President has nominated me to take the seat being 
vacated by Commissioner Cindy Glassman. I would like to note 
that she has been an extraordinary Commissioner, and should I 
be confirmed, I hope to serve as ably as she has.
    On a final and personal note, I would like to thank 
Chairman Shelby again for giving me the privilege to serve him 
and this Committee. Working in the U.S. Senate has been the 
most rewarding and enjoyable experience of my life, and I will 
cherish the knowledge, wisdom, and friendships that I have 
gained here.
    I think it is often easy to forget in the day-to-day course 
of business what a tremendous honor it is to work here. I 
recall fondly one of my first days on the job for Senator 
Shelby. The Senate was considering a very controversial and 
contentious bill, and I had to accompany him to the Senate 
floor for the debate. I was very nervous, and despite the fact 
he kept calling me by the wrong name----
    [Laughter.]
    --I think he called me Peggy----
    [Laughter.]
    --I was still thrilled.
    [Laughter.]
    It really did not matter that he did not know my name at 
the time. What mattered most was that I was sitting behind a 
U.S. Senator on the floor of the U.S. Senate, and it is with 
this humility and desire to continue to serve the public 
interest that I thank you again for the opportunity to appear 
before you today, and I would be pleased to answer any 
questions.
    Chairman Shelby. Thank you.
    Governor Kohn, I will start with you. This week, Chairman 
Bernanke, as you know, and the Atlanta Fed Bank President, both 
spoke about their concerns regarding inflation. Senator Bunning 
has brought that up already, and he should. What are your views 
regarding the recent inflation data, and what data between now 
and the Federal Open Market Committee meeting at the end of 
June will you be watching most closely or some of it to see 
what is raising its head out there, and what are your concerns 
as far as price stability? That is important.
    Mr. Kohn. I agree with you, Mr. Chairman, that price 
stability is important, and I have found the recent inflation 
data somewhat troubling. As Senator Bunning noted, they are 
backward looking. That is about price increases in the last few 
months, but they were higher than I had anticipated, and that 
raises a warning flag that something might be entrain. In 
addition, some measures of inflation expectations over the 
longer-run have crept up just a little: Surveys of households 
and financial market expectations of inflation. It is not a big 
move, but it is an upward move.
    Chairman Shelby. Does that feed the psychology of 
inflation?
    Mr. Kohn. I think people are reacting to some extent to the 
energy price situation. The economy is facing a somewhat more 
difficult situation now because of the rise in energy prices, 
which has both tended to raise inflation and also tended to 
dampen activity going forward.
    I think a lesson from our economic history, the 1960's and 
particularly the 1970's, is that prosperity, the maximum 
employment that the Congress has instructed the Federal Reserve 
to foster, can only happen under conditions of price stability. 
When inflation begins to rise, that undermines economic 
performance.
    Chairman Shelby. It undermines our whole monetary system.
    Mr. Kohn. It undermines the confidence in our currency; it 
undermines our monetary system; and in the process will not 
permit the economy to produce at its full potential. So, I 
think at this stage, we have to acknowledge the economy is 
slowing down, and that will help to dampen inflation pressures, 
but at the same time, there are some danger signs out there 
that we need to be quite attentive to.
    Chairman Shelby. Thank you.
    Mr. Lockhart, a question for you, if I could. OFHEO just 
signed, and you mentioned this in your statement, a written 
agreement with Fannie Mae to implement remedial measures as a 
result of the special exam that went on. This agreement 
includes, among other things, provisions on capital plans, 
internal controls, and a growth limit.
    The scope of this agreement has led some to question why 
any additional legislation is needed, since OFHEO seems to be 
able to take strong action when necessary. In that context, do 
you believe that legislation is needed to strengthen the 
current regulatory structure for you to do your job, and if so, 
what elements do you believe are critical for a strong reform 
package?
    Mr. Lockhart. Yes, we did negotiate a settlement agreement 
with Fannie Mae and the reason we were able to do that is 
because they were basically in extremis. This is a company that 
cannot be audited, cannot produce accounts, has questionable 
internal control problems and risk management concerns, and we 
felt it was prudent to limit their growth.
    But we most definitely need legislation, and I strongly 
believe that. We need the powers of a bank regulator that the 
people next to me have. We need to be able to set capital 
limits and do that in a flexible manner, and we need to 
consider not only market and credit risks but also operational 
and systemic risks. We certainly need budget flexibility and 
receivership powers. The new Agency should be the one that 
looks at mission compliance and new products and have 
independent litigation authority. The Enterprises should be 
required to register with the SEC. So there are a whole series 
of things in the legislation that would be extremely useful and 
really make us a much better regulator.
    Chairman Shelby. Ms. Bair, deposit insurance reform.
    Ms. Bair. Yes.
    Chairman Shelby. The deposit insurance reform legislation 
passed earlier this year allows, as you well know, the FDIC to 
set the designated reserve ratio within a range rather than 
mandating a specific reserve ratio. This is a big sea change. 
This flexibility allows the FDIC, which you will chair, to 
build up the Deposit Insurance Fund during good economic times 
as insurance against any future bad times, which makes sense. 
That is common sense.
    We are currently in a period of record bank profits and no 
bank failures; keep our fingers crossed. Do you intend to use 
this flexibility in setting the reserve ratio? You probably do 
not want to tell us everything you are going to do or signal 
everything, and I understand that.
    [Laughter.]
    Ms. Bair. Right.
    Chairman Shelby. But this does give you a lot more power, 
in a sense.
    Ms. Bair. Right; it does, and 5 years ago, I was testifying 
in favor of it for precisely those reasons. An important 
component of this was to get rid of the 23 basis point cliff, 
the premium shock, if you will, when reserve ratios fell below 
the DRR. So now, we have a range. We have the ability to smooth 
the premiums according to economic cycles and also better 
reflect risk differentiation in our premium structure.
    These are important tools. I agree with you. We need to 
closely follow legislative intent. I know you, Mr. Chairman, 
continue to have a keen interest in how we implement this new 
law.
    Chairman Shelby. Certainly. We all have a keen interest.
    Ms. Bair. Having worked for the Senate, I know how 
important it is for agencies to try to follow the statutory 
structure and intent, and we will do so going forward. And I am 
just glad that we have the flexibility now that we did not have 
before.
    Chairman Shelby. Thank you. Basel capital standards.
    Ms. Bair. Yes.
    Chairman Shelby. I will direct this question to Ms. Bair 
and also Governor Kohn; Dr. Kohn and Ms. Bair, the Federal 
Reserve, the FDIC, you are both regulators, are presently 
preparing the rules that will implement the Basel II capital 
accord. Basel II aims to modernize U.S. capital requirements to 
make sure banks hold capital commensurate with the risks they 
assume, among others.
    While modernizing capital requirements is a laudable goal, 
the most recent quantitative impact--Senator Sarbanes has 
brought this out many times up here--quantitative impact study 
indicated that Basel II could result in a drastic decline in 
the capital that the U.S. banks hold, which is troubling to a 
lot of us. Such a reduction in capital standards could increase 
bank failures, which we have not had lately in the United 
States. This is especially worrisome to us as the Committee 
charged with protecting the taxpayers, among other people, who 
are on the hook if a bank fails because the Federal Government 
ensures bank deposits, Ms. Bair.
    Accordingly, I will start with you, Governor Kohn, do you 
support maintaining the leverage ratio to make sure that banks 
are sufficiently capitalized?
    Mr. Kohn. I do, Mr. Chairman.
    Chairman Shelby. Okay; Ms. Bair.
    Ms. Bair. Yes, Mr. Chairman, I do. And I would add 
editorially I do not think anybody at this point is arguing we 
should get rid of the leverage ratio. I think we are beyond 
that issue.
    Chairman Shelby. You have given that up.
    Ms. Bair. Yes.
    Chairman Shelby. Senator Sarbanes.
    Senator Sarbanes. Thank you very much, Mr. Chairman. I am 
aware that a vote has begun. I will try to move very quickly 
here.
    Actually, the regulators, and this goes to a follow-up on 
the Chairman, have now put forward a proposal that has certain 
benchmarks for the reduction of capital which would help to 
address this concern over the safety and soundness of the 
banking system, which was greatly increased by this 
quantitative impact study, which showed an over 15 percent 
aggregate decline in capital; half the participating banks 
getting capital reductions of over 25 percent; and one bank 
nearly a 50 percent capital reduction.
    Of course, that raises a lot of red flags and a lot of 
alarms. But I understand now that some of the major banks are 
trying to undercut or undermine this concerted position that 
our regulators have put forward now, which encompasses within 
it measures to try to guard against any substantial decline in 
capital. Do you have a view on that issue?
    Mr. Kohn. Senator Sarbanes, I think any decline in capital 
should be limited and certainly should be limited to any 
commensurate reduction in risk or improvement in risk 
management in the banking system. I voted in favor of the 
proposal that the Federal Reserve put out for comment. That 
proposal contained a gradual phase-in of the Basel capital 
accords. It contained provisions for dialogue back and forth 
between the supervisors and the banks to make sure the banks 
were adequately measuring and ensuring against risk, and it 
contained the trigger points that you mentioned.
    So, I think it is important that the safety and soundness 
of the banking system be protected. The goal of Basel II is to 
build a safer and sounder banking system, and I certainly would 
oppose anything that I thought would undermine the safety and 
soundness of the system.
    Senator Sarbanes. Ms. Bair.
    Ms. Bair. Yes, I agree. I think the QIS-IV results were 
quite problematic, and everyone deemed them to be unacceptable. 
I know there are some concerns now in the large bank community. 
I think the regulators have reached agreement on an NPR. It is 
currently undergoing OMB review. OCC and OTS must have their 
proposed rules cleared by OMB before they can be released, and 
the FDIC plans to wait until OCC and OTS are prepared to go 
forward as well.
    I think the forum for these concerns and arguments is the 
comment period, and they should come forward with arguments, 
and that is the whole point of having a comment period. I, and 
I know everyone else, will read all the comments very 
carefully, and if there are better approaches, they will be 
considered, but all four regulators have agreed on this 
approach, which is going to be reflected in the NPR.
    Senator Sarbanes. Mr. Lockhart, as currently constituted, 
the Office of Federal Housing Enterprise Oversight, OFHEO, is 
part of HUD, although it is directed by the statute to act 
independently of HUD and of the Administration for purposes of 
overseeing the safety and soundness operations of the GSE's, 
which is supposed to act as an independent regulator, which I 
think is a very important feature with respect to all of our 
financial institution regulators.
    Now, and indeed, all of the legislative measures in the 
Congress to strengthen OFHEO provide actually for it to come 
out from under HUD and be independent. There are differing 
proposals, but they are all in agreement on that particular 
point. I want to ask you just a question or two about how you 
view the importance of independence for the Director of OFHEO.
    I am additionally prompted to put this question to you 
because of a story in The New York Times in February of last 
year. ``In the midst of a fractious debate over changes to 
Social Security, a senior official of the agency that 
administers the program has been joining Republican Members of 
Congress at public events around the country devised to promote 
personal retirement accounts.''
    And my concern is also heightened a bit by a story in the 
American Banker about a month ago: what new chief brings to 
OFHEO, and then goes on to say that one of the most important 
things is that you have been a friend of President Bush since 
the two attended prep school and college together.
    So if I have this concern about the independence of the 
regulator in carrying out those responsibilities, I think you 
will understand why these, and there have been some other press 
reports that I could also cite, raise some question about the 
independence of the person who would become the Director of 
OFHEO.
    Mr. Lockhart. Certainly, on the independence issue, I 
strongly believe in it. I have actually worked in two 
independent agencies, the PBGC and the Social Security, so I 
understand the issues of independence, and I applaud the 
legislation for strengthening that independence and also 
combining us with the Federal Housing Finance Board, because I 
think that is another way to give strength.
    One of Social Security's key missions was educating the 
American people about the future of Social Security, and that 
is the role I played. I did town halls with both Democrats and 
Republicans and sometimes both at the same time, so it was a 
very bipartisan effort.
    Yes, I did an educational effort, but I was not strongly 
supporting personal accounts. What I was really looking at was 
the future of the Agency and the need to change the system for 
future generations. And that is really what Social Security 
reform is about. But I understand independence, and I strongly 
believe in it.
    Senator Sarbanes. It is certainly an important dimension to 
any financial regulator, and we will be watching that very 
carefully.
    Mr. Chairman, I do not have any questions of Kathy Casey. I 
mean, we know her well. We have seen her at work.
    Chairman Shelby. You have asked her a lot of questions in 
the past.
    [Laughter.]
    Senator Sarbanes. I thought I would try to make up for it a 
little bit this morning.
    [Laughter.]
    I would note, though, that under your leadership, the 
Committee has held a number of hearings on such subjects as 
separating the business and regulatory functions of the self-
regulatory organizations, giving the SEC more authority with 
respect to the credit rating agencies, and monitoring the hedge 
funds, and I hope Ms. Casey will pursue those interests once 
confirmed. And I also urge her--I do not think I need to do 
this, but just for the public record--to strive to continue to 
ensure that America's capital markets remain the gold standard 
of the world with respect to the protection of investors.
    I perceive some effort to move to lower denominators, and I 
think we have to be very careful about that. It is always 
argued now, particularly the globalization and competition, 
that we have to go to this lower standard, but past experience, 
as I read an article, shows that in the past, when we have 
sought to protect the investor, we got this kind of reaction 
initially for a little bit, and then, everyone started moving 
toward the higher American standard. And my own view is we 
should come at this question with that frame of mind.
    Mr. Chairman, I think we are going to miss the vote if we 
do not----
    Chairman Shelby. Senator Martinez.
    Senator Martinez, Mr. Lockhart, as you know, knows a lot 
about housing.
    Mr. Lockhart. Yes, he does.
    Chairman Shelby. Secretary of Housing and Urban 
Development; he used to be at the table, but we are glad to 
have him up here.
    Senator Martinez. Yes, sir, I am happy to be up here, and I 
will try to be brief. I know we have to go vote, but Mr. 
Lockhart, I did not want to fail to ask a couple of very 
specific things relating to your testimony. One was in answer 
to a question earlier, you indicated, obviously, the 
independence of OFHEO is something that we all acknowledge. I 
always felt uncomfortable having OFHEO under my tutelage at the 
same time I had no real functional oversight over what they 
did, and I do understand as well the need for there to be 
broader legislative authority on budgeting and financial 
soundness and all of the things you mentioned.
    One that concerns me, though, is mission compliance and new 
product approval, particularly new product approval. Some of 
the legislative ideas that we have thrown around merged that 
with some participation, significant participation, or leaves 
it at HUD, particularly as it relates to new product approval, 
and I wonder if you have any fixed views on how that should 
work or whether, in fact, it should be a shared role between 
the HUD Secretary and OFHEO?
    Mr. Lockhart. New product approval is important, and from 
time to time, the companies have gotten into trouble with new 
products. I think it should be a shared responsibility. We have 
a lot of inherent expertise. We have examiners in there every 
day, we are looking at what they are doing. And we are 
discovering not every day, hopefully, but occasionally that 
they have not complied with the approval process. So, I think 
it is very important to not only have a stronger responsibility 
at the new entry but also work with the HUD team.
    Senator Martinez. Also, prior approval, not just after the 
fact, you know, when in fact there has been a practice 
established.
    Mr. Lockhart. That is true.
    Senator Martinez. And then, one other thing: I want to 
commend you for your report and for the settlement. I think it 
is important. I think it is well done. I am concerned about the 
liability of this company now of $400 million, Fannie Mae, and 
I wonder, I know in your report you indicated or instructed 
that there be some review as to compensation paid to officials 
of the company in the past which might have been tainted by 
what appears to have been a manipulation of books in order to 
trigger extraordinary and extravagant bonuses.
    What would be your attitude toward pursuing of that issue 
and those issues, and what response have you had, if any, from 
Fannie Mae so far?
    Mr. Lockhart. There was the $400 million fine that was paid 
to the Government, the SEC, and OFHEO, and as the SEC Chairman 
said, they committed fraud. We believe, and we have in our 
settlement agreement, that the first line of defense should be 
that the Board of Fannie Mae should go after these individuals 
and try to get restitution, that is disgorgement of some of the 
bonuses paid. We have that in the agreement for both previous 
management and present management.
    Senator Martinez. But do you not think they owe that to the 
shareholders, in fact?
    Mr. Lockhart. I believe they owe it to the shareholders 
and, if the company fails, we have already referred it to our 
General Counsel. They will be looking into it as well.
    Senator Martinez. Have you had any response from Fannie 
Mae?
    Mr. Lockhart. We have talked to Fannie Mae. I talked to the 
Chairman of the Board last week and I have another meeting 
scheduled, I think, next week on the topic. We will continue to 
work with them on that. We expect to have a report. They have 
appointed four independent directors to look at this, and we 
expect to receive a report 30 days after we signed the 
agreement.
    Senator Martinez. Very good.
    Chairman Shelby. Senator Martinez, for the record, we are 
going to have Mr. Lockhart and Chairman Cox up to the Committee 
as an oversight hearing to detail what went on at Fannie Mae, 
what their findings are, and go from there.
    Senator Martinez. I look forward to that and thank you for 
making that hearing available.
    Chairman Shelby. Very good.
    Senator Martinez. I believe it is an important hearing.
    And thank you, sir, and thank all of you and congratulate 
you on your appointments. Thank you.
    Chairman Shelby. As you can tell by the absence of 
Senators, we have a huge vote on the floor of the Senate. Our 
time is gone. We are going to recess, because I have some 
questions that I might want to ask at least for the record and 
give the others an opportunity. We will stand in recess until 
we get back here, maybe 10, 15 minutes.
    [Recess.]
    Chairman Shelby. The hearing will come back to order.
    As you well know, we have had a big vote on the floor. I do 
not know if any other Senators have any other questions. I have 
some questions for the record that we would submit to you, but 
what we would like to do is move all four of your nominations 
as expeditiously as possible. Senator Sarbanes, I think, joins 
me in that, and we would do our best to move you quickly, 
because you have important nominations and important jobs to 
do.
    We thank you for waiting. We thank you for your patience, 
but more than that, we thank you for offering to serve the 
American people. The hearing is adjourned.
    [Whereupon, at 11:33 a.m., the hearing was adjourned.]
    [Prepared statements, biographical sketches of nominees, 
response to written questions, and additional material supplied 
for the record follow:]
               PREPARED STATEMENT OF SENATOR TIM JOHNSON
    Mr. Chairman, Ranking Member Sarbanes, I want to thank you for 
holding this important hearing today. We have before us an impressive 
slate of nominees to consider, and I look forward to hearing from them.
     I would especially like to offer my congratulations to Ms. Casey, 
a member of our own Banking Committee family. She has been with you, 
Mr. Chairman for many years, and I appreciate the hard work she has 
done on behalf of this Committee and her service to the financial 
services industry. And while her nomination means a loss for us, it is 
well-deserved, and I have no doubt that she will be a tremendous asset 
to the SEC.
     Mr. Chairman, there are a few issues that I would like to raise 
this morning.
     First, our Nation is blessed with the strongest and most resilient 
economic and financial system the world has ever known. And what makes 
our system strong and resilient is the diversity of the system, and the 
fairness of it.
     Our system is based on the impartial allocation of credit, and 
consumers and small businesses have a wide choice of credit providers, 
which means that the terms and cost of that credit are determined by 
the market, and not central planners.
     That system is being threatened today, in my opinion, by some of 
the world's largest corporations that are trying to get into the 
banking business by taking advantage of an obscure loophole in the 
law--the ILC loophole.
     I am concerned that this growing trend of commercial firms 
chartering or acquiring ILC's is putting us on a path toward a 
dangerous concentration of economic power that would rival all but a 
handful of nations, and it would create a system where conflicts of 
interest would run rampant.
     I know that both Wal-Mart and Home Depot are operating within the 
letter of the law in their pursuit of a banking affiliate. And I 
recognize, Ms. Bair that you will not be able to comment on those 
specific applications pending before the FDIC, but you should know that 
Congress never intended for this loophole to be exploited in this 
manner, and I believe that we must carefully consider the precedent 
that is being set, and the adequacy of the supervisory and regulatory 
structure of ILC's before heading down what is arguably dangerous and 
irreversible course. Kieretzu did not work in Japan; there is no reason 
to believe it would work here.
     Now I should say to my colleague from Utah that I mean no harm to 
the ILC's chartered in his State that are serving small niche markets. 
That is precisely why the loophole was allowed to exist when other 
loopholes were closed in the CEBA Act of 1987.
     But we need to draw the line somewhere, and I would suggest that 
the best way to protect the existing ILC's is to begin to consider ways 
to stem the tide and restrict further expansion of this loophole. I 
would like to work toward that goal and I invite the Senator from Utah 
to join me in protecting the integrity of our financial system.
     Our long history of keeping banking and commerce separate has 
served this Nation well. Now is not the time to abandon it. I am also 
interested in Ms. Bair's views on Basel II and how she views her role 
going forward. I am troubled by several aspects of the latest draft 
rule, which is currently being reviewed by the Office of Management and 
Budget and could yet be changed prior to its publication in the Federal 
Register.
     Basel II was intended to create a risk-based capital regime. 
However, because of what I presume are political compromises, the 
latest draft would impose a heavy regulatory burden on large banks, 
while ironically reducing their competitiveness in the global 
marketplace. In fact, the draft ANPR would impede the ability of 
larger, U.S.-based banks from competing on a level playing field with 
their international competitors. While safety and soundness of our 
insured depositories is of course paramount, the last thing we should 
be doing is making it harder for American banks to compete, both at 
home and abroad.
     In addition, I am deeply troubled that the draft rule contains a 
loophole to exempt ILC's from operational risk capital standards. In my 
view, any insured depository institution which has a significant volume 
and value of transactions that could directly or indirectly affect the 
payments system, should be required to capitalize that risk. 
Operational risk is not a function of the nature of the parent company; 
it is a function of the scale and complexity of the activity taking 
place inside of the insured depository institutions.
     I recognize that the agencies appear to have reached a consensus 
with this latest draft. However, Ms. Bair, I would hope that you will 
keep an open mind at the FDIC, and be willing to hear through the very 
serious concerns that some parties have raised about the draft rule, 
even if it means revising the rule prior to its publication in the 
Federal Register.
     Finally, there is still a very real issue of consumer access to 
affordable, short-term credit. Ms. Bair, I share the view you expressed 
in your study entitled, ``Low Cost Payday Loans: Opportunities and 
Obstacles'' that cautioned,

        Though they are not identified and marketed as payday loan 
        alternatives, fee-based bounce protection programs are 
        functionally equivalent to payday loans when used by customers 
        as a form of credit.

     I agree with your conclusion that ``When used on a recurring basis 
for small amounts, the annualized percentage rate for fee-based bounce 
protection far exceeds the APR's associated with payday loans.'' And I 
support your recommendation that the same APR disclosure requirements 
that apply to payday loans should also apply to fee-based bounce 
protection programs.
     I hope that you share my view that competition for ``small 
dollar'' credit services must be maximized. There is something to be 
said for striking the right balance between regulation, consumer 
protection, and effectively meeting consumers' credit needs. I have a 
real concern if financial services are pushed outside of a regulated 
environment due to increased regulatory requirements, because it can 
open the door for abuse and inevitably results in less consumer 
protection. It is critical that the regulatory environment is one that 
supports short-term credit products and one in which such products can 
thrive while providing the greatest benefit to the consumer.
     Thank you all for being here this morning. I look forward to your 
testimony and I hope that the Committee will move quickly with your 
nominations.
                               ----------
               PREPARED STATEMENT OF SENATOR WAYNE ALLARD
    I would like to thank Chairman Shelby for holding this hearing. 
Today, we are considering a number of nominees for key positions at the 
agencies under the Committee's jurisdiction.
    First, we will consider the nomination of Sheila Bair to be 
Chairman of the FDIC Board of Directors. In this position she will be 
instrumental in ensuring the safety and soundness of our banks. Ms. 
Bair will also be responsible for implementing the recently enacted 
deposit insurance changes, as well as responsibility for a decision on 
Wal-Mart's pending application for deposit insurance.
    Next, we have the nomination of Donald Kohn to be the Vice Chairman 
of the Board of Governors of the Federal Reserve System. Given the 
recent change in leadership from Chairman Greenspan to Chairman 
Bernanke, I look forward to learning more about Governor Kohn's 
leadership plans.
    Third, we will hear from James Lockhart, who is nominated to be the 
Director of OFHEO. Mr. Lockhart certainly has experience leading 
troubled agencies, given his experience at PBGC and the Social Security 
Administration. While I appreciate your willingness to take on this 
challenge, Mr. Lockhart, I hope that we are able to put you out of 
business very soon by enacting fundamental reform of GSE regulation. As 
I am sure you would agree, OFHEO in its current form is unable to 
provide the necessary regulatory oversight.
    Finally, I would like to make special mention of the nomination of 
Kathy Casey to be a Member of the Securities Exchange Commission. As 
everyone is well aware, Kathy has spent a number of years working for 
Senator Shelby, and I would like to join my colleagues in thanking her 
for her service. Not only has she served the Chairman with distinction, 
but she has also served each one of us as well. Kathy has fostered an 
open and inclusive atmosphere that has allowed Members to have their 
concerns addressed in a fair, bipartisan manner. Thanks to her skills 
and expertise, this Committee has achieved a number of legislative 
victories. We will all miss her as the Committee Staff Director, and 
while it is tempting to put a hold on her nomination to keep her here, 
I offer my thanks and best wishes as she moves forward. Kathy, you will 
undoubtedly be a great asset to the SEC, and they are lucky to have 
you.
    In closing, I would encourage all the nominees to become familiar 
with the Government Performance and Results Act (GPRA), which has been 
named ``PART assessment'' by the Administration. The Results Act is a 
key tool in giving them the focus and vision to carry out effective, 
efficient programs. I would exhort the nominees to become familiar with 
the appropriate strategic plans, annual performance plans, annual 
accountability reports, and financial statements. If properly utilized, 
they can help you achieve success in meeting your mission.
    Thank you, Mr. Chairman.
                   PREPARED STATEMENT OF SHEILA BAIR
               Member of the Board and Chairman-Designate
                 Federal Deposit Insurance Corporation
                              June 8, 2006
    Chairman Shelby, Ranking Member Sarbanes, and Members of the 
Committee. I am pleased to appear before you this morning as the 
President's nominee to be the next Chairman of the Federal Deposit 
Insurance Corporation. At the outset, I would like to thank the 
President for having the confidence in me to lead this historic agency. 
Established in the throes of the Great Depression, the FDIC restored 
depositor confidence in our crippled banking system and since that 
time, has served as a beacon of safety for the financial assets of the 
average consumer. It is a well-run, well-respected agency comprised of 
4,500 dedicated staff and a Board of Directors who bring a broad depth 
of expertise, as well as a rich diversity in regulatory view points. It 
will be my privilege and honor to work with these outstanding 
individuals if confirmed by the Senate.
    I would also like to thank my family for their support of my 
decision to accept this nomination and their willingness to disrupt 
their lives to move back to Washington. Joining me this morning are my 
husband and dearest friend, Scott Cooper, and the two best kids in the 
world, Preston and Colleen. I would also like to thank my parents, Dr. 
AE and Clara Bair for all of their support. Finally, I would like to 
recognize my former boss, Senator Robert Dole, for his help in this 
endeavor and all the other challenges I have undertaken over the past 
two decades. Washington can be a difficult place to navigate. Having 
someone of high stature and integrity to guide you is crucial. Early in 
my career, I was fortunate to have Senator Dole as a mentor. His wise 
counsel and advice have always served me well.
    Another benefit of my association with Senator Robert Dole was the 
opportunity to get to know the senior Senator from North Carolina. I 
had the privilege of first meeting Elizabeth Dole in the 1980's, when 
we worked on so-called ``gender gap'' issues during the Reagan 
Administration. I have seen first hand her formidable intellect, strong 
work ethic, and utmost dedication to public service. I am very glad 
that she serves on this Committee and that we may have the opportunity 
to work together again.
    The last time I appeared before the full Committee, I was the 
President's nominee to be the Assistant Secretary for Financial 
Institutions of the Treasury Department. Upon my confirmation for that 
position, my first assignment was to represent the Administration on 
deposit insurance reform. If confirmed by the Senate, I will play a 
central role in the implementation of that comprehensive new law. 
Deposit insurance reform is just one of many major policy issues 
confronting the FDIC. Industrial loan companies, Basel II and IA, 
regulatory burden, antimoney laundering and USA PATRIOT Act 
enforcement, identity theft, Federal preemption, the list goes on. 
There is no shortage of cutting edge issues at the FDIC, and for many, 
there are no easy answers. But as one who loves public policy and 
believes that the Government can be a force for positive change, I 
welcome these challenges.
    There are two additional issues which I care about deeply and where 
the FDIC has been notably active: Financial education and banking 
services for underserved populations. As part of the FDIC's financial 
education efforts, I hope to place a particular emphasis on school-
based education and the integration of math and financial curriculums, 
which I believe can improve both financial literacy as well as math 
scores. Regarding underserved communities, I hope to work with industry 
leaders and other regulators to encourage more products to facilitate 
asset accumulation among lower-income families. To paraphrase financial 
columnist Jane Bryant Quinn, saving money may not make you rich, but it 
can help keep you from poverty. So much of the emphasis in the past has 
been on the extension of credit to underserved populations. We need to 
do at least as much to promote savings and asset preservation.
    In concluding, I would reiterate my strong commitment to the 
millions of individuals who rely on the FDIC for security and peace of 
mind in protecting their deposits. As the ownership society evolves, it 
is important for every day working men and women to know that they have 
a safe haven for a selected portion of their financial assets. It is 
equally important to the effective functioning of our banking system 
that consumers have confidence in their banks. The FDIC stands proudly 
at this intersection. I look forward to the opportunity to serve this 
fine agency.
















































































        RESPONSE TO WRITTEN QUESTIONS OF SENATOR SHELBY 
                        FROM SHEILA BAIR

Q.1. As an academic you have written about the future of 
financial regulation, including the possibility of a 
fundamental restructuring of the banking, securities, and 
insurance regulators such as the consolidation of agencies. How 
will your views on the future of financial regulation impact 
your leadership of the FDIC?

A.1. As an academic, I advocated long-term reforms toward 
greater consolidation and coordination among the various 
financial regulators. Your GSE bill, Mr. Chairman, is one good 
example of this concept. By combining OFHEO and the FHFB, the 
legislation would give the combined regulator more stature and 
a broader jurisdictional base to avoid regulatory capture. As 
Chairman of the FDIC, one of my highest priorities will be to 
maintain effective working relationships with other financial 
regulators to ensure a safe and sound banking system. I am 
fortunate to already have strong working relationships with 
many of the top regulators. To that end, I will embrace 
consensus approaches to improving financial supervision, but I 
do not expect to be advocating significant structural changes 
at this time.

Q.2. The size of the loss to the insurance fund resulting from 
the failure of Superior Bank in 2001 led to criticisms that the 
OTS and the FDIC had failed to recognize warning signs and to 
act in a timely manner. Because the FDIC is frequently in the 
role of back-up regulator, it is to some extent dependent upon 
the information it receives from other regulators. What steps 
do you intend to take to ensure adequate communication and 
coordination between the FDIC and other regulators?

A.2 I believe that the FDIC's authority as back-up supervisor 
is key to its ability to prudently administer the Federal 
deposit insurance program. The FDIC and the other banking 
regulators reached an agreement in January 2002 on protocols to 
ensure that necessary information is shared between the FDIC 
and the primary Federal regulator and any disputes are resolved 
expeditiously. The agreement also provided the FDIC with 
greater access to information regarding some of the largest 
banks. My sense is that this agreement has been working well. I 
intend to work closely with my colleagues at the other 
regulatory agencies to ensure that this cooperative 
relationship continues. While I believe that the current 
structure is working, I will not hesitate to exercise the 
FDIC's back-up authority in appropriate circumstances if it 
becomes necessary.

Q.3. Although our dual banking system has a great number of 
benefits, it can pose certain jurisdictional challenges, 
particularly when issues span jurisdictional lines among 
agencies. In 2003, you suggested creating a rulemaking council 
composed of the heads of all the major financial regulatory 
agencies to coordinate the formulation of rules having cross-
jurisdictional impact. Do you believe your proposal is still 
relevant in the current regulatory environment?

A.3. I think the bank regulators, for the most part, work well 
together. When I suggested the rulemaking council, it was to 
include the functional regulators (SEC and CFTC), as well as 
insurance regulators. The extended ongoing discussions between 
the SEC and the bank regulators regarding Regulation B is one 
example where such a council might assist in the resolution of 
a cross-jurisdictional issue.

       RESPONSE TO WRITTEN QUESTIONS OF SENATOR BUNNING 
                        FROM SHEILA BAIR

Q.1. We have experienced a period of relative stability in the 
banking sector. What do you see as the biggest threats to the 
banking system today?

A.1. By virtually any measure, the banking industry is doing 
very well. The industry is well-capitalized and has experienced 
5 consecutive years of record earnings--and recently reported 
another record quarter. Areas of concern are high and volatile 
energy prices and an emerging slowdown in some housing markets. 
These are areas of risk most likely to have an impact on the 
general economy and ultimately to have an impact on banking 
performance. I am also concerned about growing levels of 
consumer debt and the fact that the personal savings rate in 
the first quarter for 2006 and for all of 2005 was actually 
negative. This has not occurred since the Great Depression. 
Personal savings act as a cushion against unexpected adverse 
economic conditions. A lack of savings reduces the financial 
flexibility of households, which poses risks for them and the 
financial institutions which serve them. The FDIC will need to 
monitor all of these risks closely in the coming months;. 
Currently, however, the banking industry remains healthy. 
Indeed, there has not been a bank failure in almost 2 years--an 
historic record.

Q.2. Do you think that retailers such as Wal-Mart and Home 
Depot could be honest brokers if they are let into the banking 
sector?

A.2. If I am confirmed, I may have to act on regulatory matters 
involving the two companies cited in your question. For that 
reason, I cannot comment at this time on their circumstances. I 
can say as Chairman of the FDIC, I will work to ensure that all 
participants in the banking sector treat consumers and 
customers fairly.

       RESPONSES TO WRITTEN QUESTIONS OF SENATOR BUNNING 
                   FROM JAMES B. LOCKHART III

Q.1. The Office of Federal Housing Enterprise Oversight has the 
authority to impose cease and desist orders and civil money 
penalties on GSE's, but lacks explicit authority to take 
actions against employees and consultants, or to remove 
officers and directors. In other words, you cannot take any 
action against the very people who promoted the culture of 
corruption at Fannie Mae. With such limited enforcement power, 
wouldn't you agree that leads to a pretty ineffective 
regulator?

A.1. The lack of such enforcement powers, that are similar to 
other financial institution regulators, does adversely affect 
our effectiveness.
    OFHEO has authority to direct an Enterprise to install 
qualified individuals, but cannot directly remove a senior 
executive or a director. Should the Enterprise object, the 
process contained in OFHEO's statute could take years to 
conclude.
    OFHEO does not have explicit authority to remove officers 
and directors from an institution as do depository institution 
regulators.
    OFHEO does not have authority to act against consultants, 
such as the power of depository institution regulators to act 
against ``institution-affiliated parties.''
    Among the problems surrounding OFHEO's enforcement 
authorities are the standards set in the statute are very high, 
and the procedural steps that are required are time consuming. 
One example is that the statute sets a 2-year statute of 
limitations regarding discharged employees versus 6 years for 
other safety and soundness regulators who have more time to 
build their cases and press for potential settlement. In sum, 
OFHEO has enforcement authorities but these authorities are 
undermined by procedural hurdles and missing explicit powers.

Q.2. There are serious concerns about the capability of the 
Office of Federal Housing Enterprise Oversight to effectively 
regulate GSE's. As late as June 2002, the regulator reported 
that Fannie Mae's implementation of the derivatives accounting 
rule had a sound basis even though regulators were already 
aware that the Enterprise was operating under improper 
accounting methods. Do you think that oversight of Fannie Mae 
and Freddie Mac has kept pace with their growing portfolios? Is 
the regulator equipped to regulate these enterprises?

A.2. In retrospect, there is no doubt that the prior culture at 
both the Enterprise and OFHEO contributed to what was known and 
when on the accounting issues. It can also be said that in 2002 
OFHEO did not have all the tools and staff it needed to ensure 
safety and soundness of the Enterprises. Since then, management 
has been strengthened and the budget and staff have doubled. 
However, OFHEO still needs the full safety and soundness powers 
of a bank regulator, budget flexibility and other powers in the 
proposed legislation.
    In June 2002, OFHEO was not aware that the Enterprises were 
operating under improper accounting methods. However, OFHEO 
through it risk-based safety and soundness examination program 
had begun to recognize a need for additional staff with 
selected expertise including but not limited to accounting. In 
a January 2001 memorandum, a proposal for strengthening the 
examination program was outlined. The memorandum included a 
proposal to create a specialized Examination Activities group 
that would include a team of accountants that would evaluate 
accounting policies and treatments for specific transactions 
and hedges. As the financial resources became available to 
OFHEO, the accounting team began with the hiring of an 
Examination Manager in the Fall of 2002, which increased to a 
team of four during 2003.
    As OFHEO assessed the risk at the Enterprises, the Agency 
continued to recognize the need for additional specialized 
staff. In 2003, the Director established two new supervisory 
offices: The Office of the Chief Accountant which has a current 
staff of 12 employees, 9 of which are CPA's, and the Office of 
Compliance which has a current staff of 14 employees, including 
11 compliance examiners. The Office of Examination has also 
been expanded since 2002 adding 60 plus examiners in 
specialized areas like model, credit, market, and operational 
risk over the past 4 years.
    In summary, OFHEO has increased its staffing level each 
year. Today, OFHEO has 226 employees and plans to staff up to 
250 by the end of the fiscal year. As mentioned above the 
majority of the increase in staffing has been in the direct 
supervision areas.
    OFHEO continues to assess the optimal skill sets needed to 
keep pace with Fannie Mae and Freddie Mac growth and their 
changing business risk and adjust OFHEO staffing accordingly. 
Despite this growth in staffing, OFHEO does need independence 
from the appropriations process and improved authorities.

Q.3. Do you think that the split oversight of GSE's between HUD 
and the regulator weakens the ability to regulate this sector?

A.3. Government Sponsored Enterprise regulation would be 
enhanced by having both new products and affordable housing 
programs located within the same agency that oversees safety 
and soundness. This is the model of bank regulators and has 
worked very well. OFHEO has worked cooperatively with HUD and 
has been given the opportunity to provide its input on the 
safety and soundness of product offerings subject to HUD 
review.
    As the proposed legislation has the HUD Secretary as a 
board member, the revamped GSE regulator would continue to 
cooperate with and seek advice from HUD.

Q.4. HUD approved and increased funding for ADC construction 
loans, eventually granting permanent approval of the program. 
Given what the regulator knew about Fannie Mae, do you think 
Fannie Mae should have been allowed to expand into construction 
loans? Could this be an example of the weakness of divided 
regulation of this sector?

A.4. OFHEO is reviewing the operation of the ADC program at 
Fannie Mae for safety and soundness and does consider 
construction-related lending a higher risk area requiring 
strong oversight. At this point, OFHEO is not satisfied that 
the existing controls are adequate to the expanded program. 
Furthermore, OFHEO has concerns about Fannie Mae actions in 
expanding business lines at a time of fundamental problems with 
its overall control and management structures.
    Begun as a pilot program in 1990, HUD lifted the cap on the 
program's size in 2003. OFHEO was asked to provide its views on 
the operation of the program at that time. OFHEO indicated that 
the controls were adequate, but ongoing review was required 
should the program grow. OFHEO communicates regularly with HUD 
on its examination of the program's operation.
    As noted above, consolidation of new program authority with 
routine examination for safety and soundness should be 
beneficial.

       RESPONSE TO WRITTEN QUESTIONS OF SENATOR BUNNING 
                      FROM DONALD L. KOHN

Q.1. To date you have not dissented from any of the Fed's 
interest rate actions, including the most recent increase. Will 
you commit to being an independent voice on the Fed and to 
speaking up when you have a different viewpoint than the 
Chairman or other members?

A.1. My responsibility as a member of the Board of Governors 
is, and if I am confirmed by the Senate as Vice Chairman of the 
Board will be, to provide my own best judgment on all policy 
issues facing the Board and the Federal Open Market Committee. 
I pledge to uphold that responsibility by expressing my views 
in Federal Reserve deliberations and by voting for the actions 
that I believe will best foster the attainment of the Federal 
Reserve's legislated objectives.

Q.2. As we have seen for the last few weeks, and particularly 
the last 3 days, the financial media and stock markets are 
following the words of you and your Fed colleagues extremely 
close. Just a slight change in words from previous statements 
can drive the markets up or down. Have you learned anything 
from those episodes, and are you going to be careful about what 
you say and where you say it?

A.2. Clear communication about the macroeconomic situation and 
monetary policy is an important aspect of the transparency and 
accountability of monetary policymaking by an independent 
central bank. My colleagues and I at the Federal Reserve 
recognize both that financial market participants closely 
scrutinize our statements for the implications for the future 
course of the economy and monetary policy and that markets can 
sometimes react sharply to what is perceived as new 
information. Consequently, we try to exercise great care in 
such communications, a practice that I myself have followed to 
date and will in the future.

Q.3. How long does it take for the Fed's actions to affect the 
economy? In other words, how long of a lag is there between Fed 
rate increases or cuts and the action's impact on the economy? 
And what kind of impact have we seen from the current stretch 
of Fed tightening?

A.3. Changes in the stance of monetary policy have substantial 
economic effects, but the timing of those effects is uncertain 
and varies over time. Empirical estimates of the lag between a 
change in the funds rate and its full effect on aggregate 
output range from as short as one quarter to as long as a year 
and a half; the estimated lag in the response of inflation is 
also variable but tends to be somewhat more drawn out. Some of 
this variability reflects differences across time in the extent 
to which financial markets anticipate future policy actions. In 
the current episode, Federal Reserve communications have 
enabled investors to anticipate much of the rise in the funds 
rate that has occurred over the past 2 years and incorporate 
those expectations into prices in financial markets, speeding 
up the response of real activity and inflation relative to a 
situation in which policy actions are less well-anticipated. 
Actual and expected increases in short-term interest rates have 
likely already contributed to damping some forms of interest-
sensitive spending, most notably in the housing sector.

Q.4. In a speech last fall, you noted the importance of taking 
global trends into account when measuring inflation. Would you 
expand on what global trends the Fed should be looking at, what 
impact they have, and if you think the Fed is properly taking 
them into account?

A.4. Globalization, which encompasses the various trends toward 
greater integration of product and financial markets across 
countries, has been going on for some time, but it has 
accelerated in the past 15 years or so as the economies of 
eastern Europe moved toward market-based systems and China, 
India and other east Asian economies emerged as important 
players in the global trading system.
    Among the trends we must monitor are the effects of these 
emerging market economies on inflation and output in the United 
States. To date, demands from these economies appear to have 
contributed to the rise in energy and other commodity prices, 
which is boosting overall inflation here, while their supply of 
low-cost exports seems to have been placing some limited 
downward pressure on our underlying inflation rate. But that 
latter result may not persist; it stems in part from the 
imbalance of production over spending in some of those 
economies and the constraints some have placed on the 
appreciation of their currencies, neither of which is likely to 
be sustained indefinitely.
    More generally, the increasing integration of national 
economies means that what happens in other countries can have a 
greater effect on prices and incomes here in the United States. 
Information on foreign economies, financial markets, commodity 
markets, and exchange rates, along with staff projections for 
our trading partners, all feed into our consideration of the 
U.S. economic outlook.
    Policymakers need to factor into their decisions the 
implications of globalization for the determination of 
inflation and output, and we do. In the end, however, we cannot 
lose sight of the fundamental truth that in a world of separate 
currencies that can fluctuate against each other, the ultimate 
responsibility for ensuring stable prices and maximum 
sustainable employment in the United States rests with the 
Federal Reserve.

Q.5. What inflation measures do you think are the most 
important? And what forward-looking measures do you think are 
useful?

A.5. I believe that it is important to monitor a range of 
inflation measures in conducting monetary policy. No single 
measure can, by itself, provide enough information with which 
to form a well-founded judgment about the prospects for 
inflation and economic growth. Among the many inflation 
measures I consider are indexes of consumer prices (including 
the Personal Consumption Expenditure price index and the 
Consumer Price Index)--both the headline indexes and the 
indexes that exclude the erratic prices of food and energy; the 
price index for gross domestic purchases (the broadest price 
measure of domestically purchased goods and services); and the 
price index for Gross Domestic Product (the broadest price 
measure of domestically produced goods and services). The 
Federal Open Market Committee provides a forecast of core PCE 
price inflation in the semi-annual Monetary Policy Report to 
Congress because the Members of the Committee believe this 
index provides a reasonably clear indication of underlying 
inflation pressures. But looking also at a variety of other 
price measures helps me to gain a deeper understanding of 
underlying inflation pressures and, more generally, of the 
array of factors influencing the economy.
    Similarly, I find it useful to look at a variety of 
forward-looking measures of inflation when considering the 
economic outlook. These include both survey-based measures of 
inflation expectations, such as those from the University of 
Michigan Survey Research Center and Professional Forecasters 
surveys of the Federal Reserve Bank of Philadelphia, and 
market-based measures, such as those derived from inflation-
indexed Treasury Bonds and futures markets. Each measure is 
useful because it provides information about inflation 
expectations from a different perspective and thus helps to 
form a more complete picture of how individuals view the 
outlook for inflation. These expectations in turn influence the 
path that inflation actually will follow, and it is the 
forecast of that path into the future that helps to shape the 
policy decision in the present.
                         STATEMENT OF BOB DOLE
             A Former U.S. Senator from the State of Kansas
                              June 8, 2006
    Mr. Chairman and Members of the Committee, I am sorry I cannot be 
here to re-introduce the Committee to Ms. Sheila Bair, the President's 
nominee for Chairman of the Federal Deposit Insurance Corporation. 
Unfortunately, I am out of the city on business.
    Sheila is already known to you through her previous confirmation as 
Assistant Secretary for Financial Institutions at the Department of the 
Treasury and through her frequent dealings with this Committee, over 
many years, from within and outside of Government.
    I am proud to offer my unqualified support for Sheila again, for 
this nomination--as I did for her previous nomination--which I am 
confident will be approved speedily and overwhelmingly.
    I have known Sheila for 25 years. Earlier in her career, she served 
as my Counsel on the Senate Judiciary Committee, handling issues 
including civil and constitutional rights, intellectual property, and 
judicial reform. As I am sure many of you can recall, she was an 
outstanding member of my staff whom I counted on for advice and 
analysis, and she never failed me.
    She has gone on to do many other good jobs and has held several 
important posts. As a current Dean's Professor of Financial Regulatory 
Policy at the Isenberg School of Management at the University of 
Massachusetts-Amherst, she has continued her strong record of research, 
analysis, and writing on financial institutions policy. She has become 
an advocate for financial literacy and recently authored a children's 
book. Sheila has continued her strong record of service and 
contribution to this area of public policy.
    Prior to her position at the University of Massachusetts-Amherst, 
Sheila was responsible for the development and implementation of 
Administration's policies with regard to financial institutions policy 
at the Treasury Department. Immediately after being confirmed for that 
position--in fact, within 24 hours if I am not mistaken--she was before 
this Committee again testifying on behalf of deposit insurance reform. 
If confirmed to head the FDIC, of course, she will be charged with 
implementing that new law.
    At Treasury, Sheila handled bank regulatory policy, insurance, 
Government Sponsored Enterprises, critical infrastructure protection, 
securities regulation, consumer protection, and financial education, 
among other issues. In that position, she dealt directly with the 
Office of Thrift Supervision, the Comptroller of the Currency, the 
Federal Reserve Board, and the FDIC.
    I will not delve too deeply into more of her history and extensive 
experience which qualify her for this position, much of which was part 
of my statement before this Committee on July 12, 2001, when I 
supported her confirmation for Assistant Secretary of Treasury. But I 
would like to reiterate my support. I would like to reiterate how proud 
I am to have had her as a former member of my Senate staff.
    Mr. Chairman and Members of the Committee, thank you for your 
previous support for Sheila, and thank you for your continued support 
for her. I know she will serve us well in this new position.
    Thank you.