I would like to express my appreciation to Mr. Kanjorski and Mr. Baker for the opportunity to present my views for the hearing record, regarding the GAO's report on the consolidation of the Office of Federal Housing Enterprise Oversight (OFHEO) and the Federal Housing Finance Board. Because the members of the Federal Housing Finance Board have not been afforded the opportunity to meet on this issue and come to any conclusions on a position to be taken by the agency, and because you have heard the individual positions of two of the Board members, Bruce Morrison and Nic Retsinas, at the hearings, I am pleased to be able to add my comments to the hearing record. I am the only Board member who has served since the agency's first Board was appointed in 1990. I am also the only current Board member who has previous regulatory experience, having served as Counsel of the New York State Banking Department prior to representing the savings banks of New York State before that Department and the state legislature for 27 years. In presenting my views, I hope that my 40 years' experience in banking regulation and legislation may count for something.

1. Whether A Single Regulator is Appropriate for the Housing GSEs

   Currently, OFHEO's sole regulatory concern is safety and soundness. There are no management issues, and mission-related matters for Fannie Mae and Freddie Mac are handled by another office in HUD. Fannie Mae and Freddie Mac are publicly held entities, which operate exclusively as secondary markets for mortgage loans originated by other lenders.

   The FHLBank System differs significantly from Fannie Mae and Freddie Mac in that it performs a central bank function by making wholesale extensions of short-term and long-term credit to banks and thrifts in order to provide liquidity and to support portfolio mortgage lending. This System function is integrated with a mission oriented toward housing, economic development and community development.

   In terms of safety and soundness regulation, interest-rate risk is the one real risk that these three housing GSEs share. However, other than this risk associated with their mortgage portfolios, Fannie Mae and Freddie Mac have little in common with the FHLBanks, which lend on a collateralized basis to their members.

   The business objectives of Fannie Mae and Freddie Mac and of the FHLBanks are also different. Fannie Mae and Freddie Mac have a profit motive that is manifested in accretions in the value of their publicly sold stock. The FHLBanks have a profit concern in that they need to meet statutory financial obligations for REFCorp and the Affordable Housing Program through profits as well as to pay a fair dividend in order to attract and maintain members in what is a cooperative, rather than corporate structure.

   Consequently, regulating both types of entities from the same agency may not be an ideal solution. It is also questionable whether two different types of institutions that may directly or indirectly compete with each other should be regulated by the same policy-making body.

   It is not clear how combining regulation of the secondary market entities with that of the FHLBanks, which provide balance-sheet funding for portfolio lending, meets the GAO's fifth criterion for an agency's effective oversight: separation of primary and secondary market regulation.

2. Agency Structure

   I concur with the GAO that a single directorship is not the optimum governance structure for an agency that regulates the housing GSEs. A board should head the agency. The purpose of a board, as opposed to a single directorship, is to ensure that a broader range of views and experience is brought to the policy-making process. This enhances the collective and individual responsibility of the board for carrying out the duties of a safety and soundness regulator. Having five members minimizes the risk that the board can be dominated by one person.

   Structure of the Board

   The GAO recommends the following structure: a five-member board comprised of the Secretary of HUD, the Secretary of the Treasury, a full-time chairman with the powers of a chief executive officer (CEO), and two part-time members. In my view, this structure absolutely guarantees that the agency would be controlled by only one person, and not by a board. In this case, there would be little, if any, practical difference between this board and a single directorship.

   The board should be completely independent, with no Cabinet officials; otherwise, whatever Administration is in power controls the System, even with a five-member board. If the Secretaries of HUD and Treasury were on the board, then the absolute minimum size of the board would have to be seven members. However, a five-person board with no Cabinet officials would be much more preferable.

   Representation by HUD and Treasury on the Board

   The GAO correctly points out the disadvantages of having a GSE regulatory agency operate as an independent office within HUD or Treasury: first, the potential for conflicts of interests because the parent agency would have its own particular policy roles and interests and could compromise the agency's objectivity in safety and soundness and mission oversight; and second, the potential for political influence by the then-current Administration, which would compromise the agency's independence. For example, HUD has housing programs which it might want the GSEs to support financially but which could raise safety and soundness issues for those entities. In its turn, Treasury has always viewed the FHLBank System as competition in the financial markets and may seek to control System funding in a way that minimizes such competition but that may inhibit the System's mission fulfillment.

   The GAO states in its report that Treasury's "objectivity and arm's-length status could be questioned." The profound implications of this is evidenced by Treasury's testimony on HR 10 on July 17, 1997, before the House Commerce Subcommittee on Finance and Hazardous Materials, in which Treasury Under Secretary for Domestic Finance John D. Hawke, Jr. stated that

   "The Federal Home Loan Bank System has structural flaws that raise serious policy and safety and soundness concerns. Changes in housing finance, technology, and the System's membership have rendered the System's 65-year old structure obsolete, and raise questions about the allocation and effectiveness of the System's federal subsidy. "

   It is not apparent to me why the GAO thinks these same problems would not exist if HUD and the Treasury had two of five board seats. While the opportunity for either of these Cabinet Secretaries to unilaterally affect the System's policies is theoretically contained by the existence of other board members, in practice, their positions will still always count for at least two-fifths of the board's votes. Arguably, each Cabinet Secretary may have his or her own short-term interests and may not always agree; however, they are ultimately both representing the same "boss," and both could be compelled to take the prevailing Administration position on any issue. The potential for absolute control by the Cabinet Secretaries over the agency also exists if there were vacancies on the board. By definition, the HUD and Treasury positions would never be vacant, and the two would represent either half the board's votes in the event of one vacancy, and a majority of the votes if there were two vacancies on the board. Indeed, an Administration could deliberately avoid filling vacancies on the board in order to ensure that it can control the board through representatives of HUD and the Department of the Treasury.

   Clearly, in my view, having the Secretaries of HUD and Treasury on a five-person board does nothing to ensure that the agency operates independently of the executive branch and, in fact, is more likely to ensure that the agency cannot operate independently.

   I must also raise objections to the idea that having HUD or Treasury representatives would add prestige and prominence to the agency. First, equal, if not greater, prominence can be conferred on an agency through the thoughtful selection of private-sector board members. Second, it is more likely that designees of these Secretaries will serve on the board, and there is no guarantee that these designees enjoy the same prominence with Congress or the executive branch as their superiors might. In fact, it is likely that any dispute between Congress and the Treasury Department or HUD over unrelated issues would hamper the agency's influence on Capitol Hill. Finally, the ability of the agency to align itself with politically powerful allies is not determined by having those potential allies serve on its board, but by the skills and leadership of the board's chairman and board members in forging such alliances. These skills can also bring about cooperative relationships that allow the agency to take advantage of the resources and expertise of other agencies.

   Chairman as Chief Executive Officer (CEO)

   The chairman should not be the CEO of the agency. For administrative purposes, the board can delegate administrative authorities to the Chairman, but any such delegation should expire at the end of each year. This would ensure that the other board members have the opportunity to review the chairman's performance under the delegation and to make any adjustments in renewing such delegation. Otherwise, there is a risk that the chairman may interpret his ability to act unilaterally in an "administrative" capacity as something much broader than was intended by his colleagues. The irony of placing CEO authority in the chairman is that it would give him considerable leeway to act unilaterally, effectively making the agency little different than if it were structured as a single directorship.

   Part-Time Members

   As for part-time status, I served with three other directors as part-time members of the Federal Housing Finance Board for three years, and it worked quite well. There are advantages to a part-time board. Part-time service makes it possible to attract the services of people who are eminently qualified and willing to serve the public without making a full-time career change. However, a part-time structure would only work if all members of the board were part-time. Combining two part-time private sector members and two Cabinet officials, who, by definition, serve only part-time, with a full-time chairman promises that the activities of the agency will be not only dominated by, but controlled by, the chairman.

3. Scope of Agency Authority

   I do agree wholeheartedly with the GAO that management of FHLBanks is an inappropriate obligation of the regulator. Operational and business management should be completely with the regulated entities. Unless this is the case, it is too easy for the regulator to slip into a pattern of micro-management. For example, despite the Federal Housing Finance Board's professed interest in devolving managerial issues to the FHLBanks, the devolution thus far has been largely form over substance in most cases because of the many narrowly drawn and prescriptive regulatory criteria that have been imposed. More often than not, the agency's movement has been to exert equal or greater control over FHLBank management rather than to draw back. The Federal Housing Finance Board, or any subsequent regulator of the System, should not substitute its own judgment for that of the boards of directors of the FHLBanks. This is why we do need to update our statute to recognize a real and substantial transfer of business management issues to the FHLBanks.

   The agency should combine safety and soundness and mission oversight -- oversight, not regulation. In my view, the applicable missions of the various housing GSEs are set by Congress, and it is the regulator's role to ensure that the GSEs have the flexibility to fulfill their statutory missions in ways that are responsive to the needs of communities and lenders and to changes in the financial markets. It is not the regulator's role to prescribe specific ways in which the GSEs must meet their mission obligations.

   I would also like to point out that safety and soundness regulation does not culminate in an annual examination of the regulated entities, but is an integral and ongoing process for an agency. The examination is merely a formal critique of the performance of the FHLBanks, calculated primarily to ensure safety and soundness. The annual examination is a necessary thing and a good thing, but it is not the only thing. Unlike other banking regulators with thousands of regulated entities, the Federal Housing Finance Board has just 12 institutions that require its attention. Consequently, the Federal Housing Finance Board has almost daily contact with the FHLBanks at a variety of levels for a variety of reasons. This contact allows the agency to be constantly aware of activities of the FHLBanks and of how changes in the housing and financial markets may affect their operations. This awareness and communication, as much as any examination, are what allow the Board to be an effective regulator.

4. CONCLUSION

   In conclusion, I would like to point out that, as things stand now, the FHLBanks perform their mission to support financing for housing and community development with great commitment and initiative, and will continue to fulfill their mission even if no legislation is enacted. The Federal Home Loan Bank System is operating efficiently, safely and soundly, and there is no reason to believe that it cannot continue to do so indefinitely.

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