Good morning Mr. Chairman, Congressman Kanjorski and other Members of the Subcommittee. My name is Bruce A. Morrison, and I am Chairman of the Federal Housing Finance Board. I welcome the opportunity to appear before you today to testify regarding the recent report of the General Accounting Office on the advantages and disadvantages of creating a single housing GSE regulator. Please note that the views I express will be my own; this statement has not been reviewed by the Board of Directors of the Finance Board. It does not represent a statement of Administration position or views.

At the outset, I wish to thank all of you for your support of the Federal Home Loan Bank Act amendments that are included in the Financial Services Competition Act of 1997, H.R. 10. In particular, I warmly and strongly commend Chairman Baker and Mr. Kanjorski for their leadership and skill in developing and successfully advocating the adoption of these amendments. The Federal Home Loan Bank System is financially strong and has a long and positive track record of service to its members and the communities they serve. However, like other financial services providers, the System needs to adapt to changing conditions. The amendments address the need for a strengthened capital structure, make membership fully voluntary, remove the regulator from inappropriate involvement in the Bank governance process, rationalize the REFCORP burden, and recognize the usefulness and appropriateness of a broader Bank System as a wholesale funding mechanism for community banks. The amendments, if enacted, would empower the FHLBanks to be active and effective in meeting community credit needs in the next century.

Turning to the GAO report, I wish first to note that, in my view, it is always timely for Congress to review Executive Branch structures in an effort to achieve cost savings and operational efficiencies. Such reviews certainly should not be confined to times of crisis. Indeed, the fact that there currently is no significant problem, much less any crisis, affecting the regulation of the housing GSEs should contribute to a more measured approach to evaluating the merits of the consolidation being proposed.

Conceptually, I am in accord with the premise of the GAO report that a single independent agency regulating safety and soundness and mission for Fannie Mae, Freddie Mac and the FHLBanks is preferable to the current structure. And, it is likely that some cost savings ultimately could be realized through such an agency consolidation as redundant positions were eliminated. We have not attempted to quantify such possible savings, but I expect they would be modest, given the small size of the existing agencies. As the report correctly notes, there would be some transitional costs associated with a merger, as well as some operational disruption stemming from the general employee anxiety accompanying such situations, and the need for internal restructuring. I doubt the transitional cost or disruption would be significant.

The central question for this Committee to consider is whether consolidation will yield more effective regulation. I believe that the answer is "yes". Regulatory effectiveness would be enhanced at a number of different levels. The consolidated agency's larger mission would make it a more interesting place for employees, thus helping to attract and retain high-quality professionals. It would bring the agency a broader working knowledge of the mortgage finance marketplace that is the foundation of the operations of the housing GSEs and their members and customers. Most importantly, as GAO points out, the broader mix of competitive entities to be regulated would enhance the independence of the oversight process, particularly in evaluating the competitive effects of regulatory decisions, and assure, to the extent possible, more evenhanded regulatory treatment. The net result should be more effective, consistent regulation.

As a structural matter, I believe GAO outlines precisely the right approach to take in advocating the unification of regulatory responsibilities for ensuring both mission compliance and safety and soundness of the regulated entities. My experience at the Finance Board has convinced me that a unified mission and safety and soundness regime offers the most appropriate way to administer a regulatory framework. A bifurcated approach necessarily will require greater staffing levels and more expense without any assurance that it will yield improved results. In circumstances where there is no conflict between safety and soundness and mission regulation, there is no reason to place responsibility for them in separate places. Where there is a conflict, separation only invites making the balancing of the two policy objectives more awkward and less precise. Instead of one Board or Administrator, who is thoroughly familiar with the competing priorities, making a balanced judgment, the conflict must be negotiated between regulators, offering the regulated entities the opportunity to play one regulator off against the other.

Before leaving this point, let me stress my conviction that it is entirely necessary and appropriate for the regulator of a government sponsored enterprise to oversee that GSE's mission compliance. GSEs are created to accomplish statutory prescribed purposes and are provided with special privileges, such as tax exemptions and a U.S. Treasury line of credit, that create an implied federal government backing for their obligations. In extending these benefits, it has been standard Congressional practice to authorize each GSE's regulator to make sure that the regulated institution is doing what it was created to do. That this is as it should be may seem entirely clear to you, but I note from the GAO report that some in the GSE community believe that mission regulation should be left entirely to Congressional oversight, a wholly inappropriate structure except to those seeking to minimize their public obligations.

Some claim that regulatory bifurcation comes to us as a lesson of the thrift crisis. If so, it is a lesson that has been very unevenly applied, as all the federal banking regulators, including the Office of Thrift Supervision, have important mission responsibilities -- extending beyond chartering to Community Reinvestment Act and consumer disclosure compliance matters -- as well as safety and soundness duties. In fact, I suggest that the real structural lesson of the thrift debacle is that the job of administering federal deposit insurance is sufficiently large and important that it should remain independent from unrelated regulatory duties. I find unsupportable the thesis that the events leading to the thrift crisis point to the need for a bifurcated, OFHEO/HUD-style approach to GSE regulation. It would be unfortunate if one of the ultimate negative consequences of the thrift crisis were mistaken lessons leading to inappropriate regulatory structures.

GAO in my view is correct on the issue of independence. In the case of the housing GSEs, independence would be a considerable virtue. The regulated entities in question are economically and politically powerful organizations that can be expected to make unusually strong, continuing efforts to affect their regulatory treatment. Placing responsibility for their oversight in an independent agency offers the regulator important insulation from political pressures, while offering Administration policymakers some detachment from controversies which otherwise would invite trade-offs with other concerns and priorities.

I agree with GAO on the general point that independent, arms-length regulation requires a structure where business governance is fully delegated to the regulated entities. In the case of the FHLBank System, the Finance Board already is delegating these matters to the extent allowable by statute. I have already mentioned that H.R. 10 would complete this job by fully removing the Finance Board from governance as opposed to regulatory issues.

While I thus agree with GAO on the need to distinguish between regulation and business governance, I disagree with GAO's assertion that the Finance Board's appointment of the public interest directors of the FHLBanks compromises this agency's ability to be an arms-length regulator of the Banks. This is a highly theoretical point. In practice, there simply is no instance of which I am aware of the Finance Board or its predecessor seeking to steer the management direction of the Banks through selection of public interest directors. Frankly, the rulemaking and supervisory processes would offer the regulator a vastly easier and more effective way to influence Bank policy than would the appointment of public interest directors, who enjoy four year terms (often outlasting the terms of the appointing Finance Board members) and can be dismissed only for cause. Public interest directors are an appropriate feature for a GSE, and I believe there is great merit in keeping their appointment at the regulator level, as the regulator has a strong, overriding interest in identifying and selecting individuals with backgrounds and personalities that will add real strength to the boards of the Banks. Presidential appointment exchanges theoretical independence for the intrusion of political considerations wholly unconnected to enhancing the public interest perspective on the boards.

Mr. Chairman, this concludes my remarks. I will be happy to answer any questions you may have.

Thank you.

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