[Senate Hearing 107-]
[From the U.S. Government Publishing Office]
S. Hrg. 107- 476
NOMINATIONS OF: MARK W. OLSON
SUSAN SCHMIDT BIES, JAMES E. GILLERAN
ALLAN I. MENDELOWITZ, FRANZ S. LEICHTER
JOHN T. KORSMO, EDUARDO AGUIRRE, JR.
AND RANDALL S. KROSZNER
=======================================================================
HEARINGS
before the
COMMITTEE ON
BANKING,HOUSING,AND URBAN AFFAIRS
UNITED STATES SENATE
ONE HUNDRED SEVENTH CONGRESS
FIRST SESSION
ON
NOMINATIONS OF:
MARK W. OLSON, OF MINNESOTA, TO BE A MEMBER OF THE BOARD
OF GOVERNORS OF THE FEDERAL RESERVE SYSTEM
__________
SUSAN SCHMIDT BIES, OF TENNESSEE, TO BE A MEMBER OF THE BOARD OF
GOVERNORS OF THE FEDERAL RESERVE SYSTEM
__________
JAMES E. GILLERAN, OF CALIFORNIA, TO BE THE DIRECTOR OF THE
OFFICE OF THRIFT SUPERVISION
__________
ALLAN I. MENDELOWITZ, OF CONNECTICUT, FRANZ S. LEICHTER, OF NEW YORK,
AND JOHN T. KORSMO, OF NORTH DAKOTA, TO BE DIRECTORS OF THE
FEDERAL HOUSING FINANCE BOARD
__________
EDUARDO AGUIRRE, JR., OF TEXAS, TO BE FIRST VICE PRESIDENT AND
VICE CHAIRMAN OF THE EXPORT-IMPORT BANK OF THE UNITED STATES
__________
RANDALL S. KROSZNER, OF ILLINOIS, TO BE A MEMBER OF THE
COUNCIL OF ECONOMIC ADVISERS
__________
OCTOBER 17, 23, AND NOVEMBER 15, 2001
__________
Printed for the use of the Committee on Banking, Housing, and Urban
Affairs
79-899 U.S. GOVERNMENT PRINTING OFFICE
WASHINGTON : 2002
____________________________________________________________________________
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COMMITTEE ON BANKING, HOUSING, AND URBAN AFFAIRS
PAUL S. SARBANES, Maryland, Chairman
CHRISTOPHER J. DODD, Connecticut PHIL GRAMM, Texas
TIM JOHNSON, South Dakota RICHARD C. SHELBY, Alabama
JACK REED, Rhode Island ROBERT F. BENNETT, Utah
CHARLES E. SCHUMER, New York WAYNE ALLARD, Colorado
EVAN BAYH, Indiana MICHAEL B. ENZI, Wyoming
ZELL MILLER, Georgia CHUCK HAGEL, Nebraska
THOMAS R. CARPER, Delaware RICK SANTORUM, Pennsylvania
DEBBIE STABENOW, Michigan JIM BUNNING, Kentucky
JON S. CORZINE, New Jersey MIKE CRAPO, Idaho
DANIEL K. AKAKA, Hawaii JOHN ENSIGN, Nevada
Steven B. Harris, Staff Director and Chief Counsel
Wayne A. Abernathy, Republican Staff Director
Martin J. Gruenberg, Senior Counsel
Sarah A. Kline, Counsel
Brian J. Gross, Republican Deputy Staff Director and Counsel
Geoffrey P. Gray, Republican Senior Professional Staff Member
Sherry E. Little, Republican Legislative Assistant
Thomas A. Readmond, Republican Professional Staff Member
Adrienne B. Vanek, Economist
Joseph R. Kolinski, Chief Clerk and Computer Systems Administrator
George E. Whittle, Editor
(ii)
C O N T E N T S
----------
WEDNESDAY, OCTOBER 17, 2001
Page
Opening statement of Chairman Sarbanes........................... 1
Opening statements, comments, or prepared statements of:
Senator Gramm................................................ 3
Senator Carper............................................... 16
NOMINEES
Mark W. Olson, of Minnesota, to be a Member of the Board of
Governors of the Federal Reserve System........................ 4
Prepared statement........................................... 22
Biographical sketch of nominee............................... 24
Susan Schmidt Bies, of Tennessee, to be a Member of the Board of
Governors of the Federal Reserve System........................ 6
Biographical sketch of nominee............................... 35
----------
TUESDAY, OCTOBER 23, 2001
Opening statement of Chairman Sarbanes........................... 45
Opening statements, comments, or prepared statements of:
Senator Gramm................................................ 46
Senator Johnson.............................................. 55
NOMINEE
James E. Gilleran, of California, to be the Director of the
Office of Thrift Supervision................................... 47
Prepared statement........................................... 55
Biographical sketch of nominee............................... 57
----------
TUESDAY, NOVEMBER 15, 2001
Opening statement of Chairman Sarbanes........................... 73
Opening statements, comments, or prepared statements of:
Senator Bunning.............................................. 75
Senator Reed................................................. 75
Senator Corzine.............................................. 83
Senator Gramm................................................ 89
Senator Bennett.............................................. 89
Senator Hutchison............................................ 98
NOMINEES
Allan I. Mendelowitz, of Connecticut, to be a Director of the
Federal Housing Finance Board.................................. 75
Prepared statement........................................... 99
Biographical sketch of nominee............................... 100
Response to written questions of:
Senator Sarbanes......................................... 151
Senators Bennett and Crapo............................... 155
Franz S. Leichter, of New York, to be a Director of the Federal
Housing Finance Board.......................................... 77
Prepared statement........................................... 109
Biographical sketch of nominee............................... 110
Response to written questions of:
Senator Sarbanes......................................... 156
Senators Bennett and Crapo............................... 157
John T. Korsmo, of North Dakota, to be a Director of the Federal
Housing Finance Board.......................................... 79
Biographical sketch of nominee............................... 119
Response to written questions of:
Senator Sarbanes......................................... 158
Senators Bennett and Crapo............................... 160
Eduardo Aguirre, Jr., of Texas, to be First Vice President and
Vice Chairman of the Export-Import Bank of the United States... 90
Biographical sketch of nominee............................... 126
Randall S. Kroszner, of Illinois, to be a Member of the Council
of Economic Advisers........................................... 95
Prepared statement........................................... 133
Biographical sketch of nominee............................... 134
NOMINATIONS OF:
MARK W. OLSON, OF MINNESOTA
TO BE A MEMBER OF THE
BOARD OF GOVERNORS OF THE
FEDERAL RESERVE SYSTEM
AND
SUSAN SCHMIDT BIES, OF TENNESSEE
TO BE A MEMBER OF THE
BOARD OF GOVERNORS OF THE
FEDERAL RESERVE SYSTEM
----------
WEDNESDAY, OCTOBER 17, 2001
U.S. Senate,
Committee on Banking, Housing, and Urban Affairs,
Washington, DC.
The Committee met at 10:30 a.m., in room SD-538 of the
Dirksen Senate Office Building, Senator Paul S. Sarbanes
(Chairman of the Committee) presiding.
OPENING STATEMENT OF CHAIRMAN PAUL S. SARBANES
Chairman Sarbanes. Let me call our hearing to order.
We are pleased to welcome before the Banking Committee this
morning two nominees to be Members of the Board of Governors of
the Federal Reserve System. First is Mark Olson, who has been
nominated to complete the unexpired term of 14 years, from
February 1, 1996, of Alice Rivlin. This means that, if
confirmed, he would have about 8-plus years to serve on the
Board. The second is Susan Bies, who has been nominated to the
Fed to complete the 14 year term from which Susan Phillips
resigned on February 1, 1998. This means if she is confirmed,
she would have 10-plus years to serve on the Fed.
Just for elaboration, I should note that the Fed has seven
Members. They receive 14 year terms and the terms are fixed. So
if the vacancy exists, the person appointed fills the remaining
part of the term. In other words, they do not get the 14 years.
They get whatever is left of the term of their predecessor. Of
course, if the predecessor served the full term, then they get
the full term.
It is set up on a staggered basis. We get a vacancy every 2
years in the normal rotation, although if people step down, as
is the case here, then we have openings and people fill the
unexpired period.
I have had the opportunity to meet with both nominees. In
fact, both have indicated to me their intention to serve the
full period remaining on the terms for which they have been
nominated. And I simply want to say, in my view, that is very
much in the interest of the Federal Reserve as an institution,
to have Members of the Board of Governors serve most, if not
all, of the rather exceptionally long terms provided to Members
of the Board.
Other than Federal judges, who serve for life, I do not
know of anyone that we give this lengthy term to.
It used to be common practice for nominees to serve their
terms. In recent years, that has become less the case. And I
have been disturbed by that growing trend. I commend Mr. Olson
and Ms. Bies for their stated willingness to serve.
Mark Olson, of course, is well known and respected by the
Members of this Committee, since he served with distinction as
Staff Director of the Securities Subcommittee, then chaired by
Senator Grams of Minnesota, from February 2000 to January 2001.
We always like to claim our alumni as best we can around
here.
Mark Olson is from Minnesota, a graduate of St. Olaf
College in 1965. From 1966 to 1970, he worked in retail banking
and commercial lending for First National Bank of St. Paul, now
U.S. Bancorp.
Mark then became involved with Bill Frenzel, serving as his
Campaign Manager, a former very distinguished colleague of ours
who served in the House of Representatives. He worked for
Congressman Frenzel as a Legislative Assistant. He then worked
for Andrews Allen Company, a commercial real estate developer.
Then as President and CEO for 12 years of the Security State
Bank in Fergus Falls, Minnesota.
Actually, during that period of time, he served a term as
President of the American Bankers Association. From 1988 to
1999, he was a Partner and National Director of Regulatory
Consulting for Ernst & Young.
Ms. Bies received her undergraduate degree in Education
from State University College in Buffalo, her M.A. in 1968, and
Ph.D. in 1972 in economics from Northwestern University.
As you know, Senator Gramm, our Ranking Member, is a Ph.D.
in economics. I will just put that on the record as well, as I
frequently do.
Ms. Bies worked at the Federal Reserve Bank in St. Louis
from 1970 to 1972, as an economist responsible for reviewing
bank holding company and bank merger applications. Prior to
that, she worked for a year at the Federal Reserve Bank in
Chicago on a fellowship. She was then Assistant Professor of
Economics at Wayne State University in Detroit, Associate
Professor of Economics at Rhodes College in Memphis. And since
1979, she has been with the First Tennessee National
Corporation in Memphis as an Economist and Chief Financial
Officer. Since 1995, as the Executive Vice President for Risk
Management.
Both of these nominees obviously would bring substantial
expertise and experience to the Federal Reserve Board of
Governors. Mr. Olson served as a banker, the head of a leading
banking association, performed important work in the accounting
field, was the Director of Regulatory Consulting for Ernst &
Young, and had experience here on Capitol Hill. Ms. Bies, of
course, is an economist with the Fed, in academia, and now,
most of her career in senior banking positions.
I am very pleased that we have been able to schedule this
hearing in a timely fashion, and I welcome the witnesses here.
We look forward to hearing from them. But, first, I yield to
the Ranking Member, Senator Gramm.
STATEMENT OF SENATOR PHIL GRAMM
Senator Gramm. Mr. Chairman, thank you very much. I was
over at one of those interminable meetings that we seem to be
having in the last few days. It started at 9 a.m. I apologize
to everybody for being late.
Let me first say that I think we have been blessed in
having excellent people nominated to positions that we oversee
on this Committee. Obviously, in the previous Administration,
there were policies that I did not agree with. But never, ever,
did I feel that any of their nominees that fell under the
jurisdiction of this Committee were unqualified. I thought that
President Clinton, like President Bush, and President Reagan
before him, nominated good people to serve in these very
important positions. And I think President Bush is following
exactly that same pattern.
I want to begin by thanking each of you for your
willingness to serve. Many positions in Government offer only
an opportunity to do hard work at relatively low pay, with
relatively little recognition. And it is the willingness of
people to do this important work that helps make our
Government, while still a Government and embodying all the
inherent problems Government has, the greatest Government in
the history of the world. So, again, I want to thank both of
you for your willingness to serve.
Mr. Chairman, we all know Mark Olson. He worked with us. As
you pointed out, we like to point out our alumni. I like to
remind colleges and universities that the ultimate test of a
great university is not its library or its football team or
even its faculty. It is its graduates.
We are proud of you, Mark. Mark has an extensive
background. In fact, I doubt that there are many people who
have ever served on the Fed Board that have as broad a
background as Mark Olson. He ran a small bank, was the
President of the American Bankers Association, worked for a
Congressman and a Senator. Very broad background and I think it
will be very helpful to him.
Sue Bies has an excellent academic background. In fact, she
and my wife were graduate students together at Northwestern
University, I am very proud to say. She has had a distinguished
career in academics and in business. I think her appointment is
an excellent appointment.
So, I want to congratulate both of you, and I look forward
to your confirmation.
Let me say one more thing, Mr. Chairman. I know we have had
trouble with background checks and trouble with getting people
nominated. At times, it has created an imbalance between
Democrat and Republican Members of various boards and
commissions. I think you have every right to be concerned about
that. In fact, it is part of your job. And I pledge to work
with you to see that we keep this balance moving forward and
when we have a Democrat and Republican opening, we try to bring
the two together.
I just want to thank you for bringing these two nominations
forward. We are in a period where we need more people on the
Board. We have another Board Member, I understand, who is
thinking or is preparing to leave.
I want to thank you for holding this hearing.
Chairman Sarbanes. Well, as I indicated at the outset when
we made, I guess, the transition, might be the way to describe
it, that we would do our best to try to help the Administration
put its people into place.
I also want to just acknowledge that the White House
personnel have in recent days at least been more responsive on
the problem that you outlined. So, I hope that we will be able
to proceed without any difficulties.
We are going to turn to you now for your statements. Before
I do that, though, I would ask you to stand because it is the
practice of the Committee to place the nominees under oath.
Do you swear or affirm that the testimony that you are
about to give is the truth, the whole truth, and nothing but
the truth, so help you God?
Mr. Olson. I do.
Ms. Bies. I do.
Chairman Sarbanes. Do you agree to appear and testify
before any duly-constituted committee of the U.S. Senate?
Ms. Bies. I do.
Mr. Olson. I do.
Chairman Sarbanes. Thank you very much.
Mark, why don't we start with your statement. And I invite
both of you, if you have members of your family here that you
wish to present to the Committee in the course of making your
statement, we certainly invite you to do so.
STATEMENT OF MARK W. OLSON, OF MINNESOTA
TO BE A MEMBER OF THE BOARD OF GOVERNORS
OF THE FEDERAL RESERVE SYSTEM
Mr. Olson. Thank you, Mr. Chairman. I would like to
introduce my wife, Renee Korda, who is with me today.
Both of you referred to Congressman Bill Frenzel, who is my
mentor and former boss, who may be here during the course of
the day also.
First of all, I would like to repeat what Senator Gramm
said. Mr. Chairman, thank you on behalf of both of us for
holding this hearing at a time when both this Committee and the
Congress have a lot of competing issues. We are certainly
appreciative of your attention to that.
You have summarized my background, Mr. Chairman. I do have
a statement that I would like to submit in its totality for the
record and I will skip the first part of it, which you have
summarized, if that is fine.
Chairman Sarbanes. The full statement will be included in
the record. And take whatever time you need to make your
statement.
Mr. Olson. Thank you.
Chairman Sarbanes, Senator Gramm, and Members of the
Committee, I am pleased to appear before you today as one of
President Bush's nominees to serve on the Board of Governors of
the Federal Reserve System. I am honored that President Bush
has nominated me to serve on the Board. And if I am confirmed
by the Senate, I look forward to fulfilling the important
responsibilities of Board membership.
You have reviewed my background, which I won't repeat. But
in summary, I have been part of the financial services industry
as a practicing banker for 16 years, a regulatory consultant
for 12 years, a Congressional staff member for 5 years, and was
elected to the highest leadership position in the banking
industry.
I particularly enjoyed, I must say, the year that I spent
as part of this Committee. I served as an aide and had a chance
to work with some very dedicated and talented Senators and I
served unofficially as the grandfather to the staff people
around here because I was by a considerable margin the oldest
person while I was here. But I think that experience was of
benefit.
The combination of experiences has allowed me the
opportunity to understand the important issues challenging the
financial services industry, its regulatory authorities, and
the U.S. Congress. I look forward to bringing that experience
to the Board of Governors.
Let me now turn to a couple of specific issues, areas of
responsibility of the Fed.
Monetary policy is a critical Federal Reserve
responsibility. The Federal Open Market Committee and the Board
establish policy, which is implemented through the Federal
Reserve Banks and, ultimately, through the banking system.
As a banker, I gained a hands-on familiarity with the tools
used to implement monetary policy as the banks are,
effectively, the counterparties to Federal Reserve decisions
including: Federal funds rate targets, discount rates for
Federal Reserve Bank borrowing, and establishment of reserve
requirements. My background has provided me an understanding of
how monetary policy is implemented, and the impact these policy
decisions have on individuals and businesses. Importantly, as a
banker, I witnessed firsthand the difficulties caused by both
recession and high inflation in more volatile economic times.
As a result of that experience, I fully support the mandate
Congress has given the Federal Reserve System to pursue
``maximum employment, stable prices, and moderate long-term
interest rates.''
Turning to regulatory issues, with the passage of the
Gramm-Leach-Bliley Act of 1999, the Federal Reserve was
accorded by Congress an expanded role in financial services
supervision. That bill allowed financial institutions from
banking, thrift, securities and insurance industries to
affiliate in a newly-authorized financial holding company.
Though each of the financial services entities will continue to
be regulated by its principal functional regulator, the Fed has
been accorded the important role as umbrella regulator with
overall regulatory coordinating responsibility. As a result,
the Fed has effectively been given the oversight responsibility
for monitoring the blending of financial industries at a time
when these industries are being dramatically impacted by
technological innovation and industry consolidation. That Act
is now 2 years old, and is not yet fully implemented. Given my
background, I look forward to being an active participant in
this continuing effort.
Regarding the payment system, the Board also has
supervisory responsibility for the proper functioning of the
payment system. As we were again reminded following the horror
of September 11, the smooth and efficient functioning of our
payment system is vital to this Nation's economic health. The
dramatic improvements in technology continue to provide
opportunities for greater efficiency, but also raise new
regulatory issues as the system continues to progress from
paper-based to an increasingly electronic system. I look
forward to bringing my banking and consulting experiences to
addressing these important issues.
Another important role of the Board is its responsibility
to consumers. I have been particularly pleased to learn of the
increasing role the Fed now plays in consumer education.
Financial literacy is an important element in our citizens'
ability to fully experience the benefit of a free-market
economy. I look forward to being an active participant in this
important area.
The Congress has also entrusted the Board with important
consumer protection responsibilities. There are a number of
regulatory issues currently awaiting Board action. Among these
are the proposed changes in the Home Ownership and Equity
Protection Act, HOEPA, and the Truth In Lending Act, TILA,
intended to crack down on predatory lending. Also, changes have
been proposed concerning mortgage loan data collection under
the HMDA. The comment period for both has expired and the
comments by interested parties are now under review. While I
have a working familiarity with both proposals from my prior
experience, I look forward to an opportunity to review the
public comments and also the Federal Reserve staff analysis in
order to fully acquaint myself with all the implications of
these proposed rule changes.
Chairman Sarbanes and Senator Gramm, my goal as a
prospective Member of the Board is to utilize my banking
industry background and my public policy experience to continue
the important work of the Federal Reserve. It is my intent to
help the Fed continue to provide a regulatory framework which
will allow the banking industry to meet the evolving financial
needs of its customers, and continue as a critical source of
strength for the economies of the United States and the world.
Thank you again for holding the hearing, and I look forward
to your questions.
Chairman Sarbanes. Thank you very much.
Dr. Bies.
STATEMENT OF SUSAN SCHMIDT BIES, OF TENNESSEE
TO BE A MEMBER OF THE BOARD OF GOVERNORS
OF THE FEDERAL RESERVE SYSTEM
Ms. Bies. Thank you.
Mr. Chairman, Senator Gramm, and Members of the Committee,
I am very pleased to have this opportunity to appear here today
as you consider my nomination to serve as a Member of the Board
of Governors of the Federal Reserve System. I look forward to
serving in this position. If the Committee and the full Senate
approve my nomination, I promise to work with the other Members
of the Board, and with this Committee, to carry out the
objectives that the Congress has established for the Federal
Reserve.
I am honored that President Bush has nominated me to be a
Member of the Board of Governors. This brings me back to where
I began my professional career. When I was at graduate school
at Northwestern University, I received a fellowship from the
Federal Reserve Bank of Chicago that enabled me to conduct
research at the Bank to complete my doctoral dissertation.
Chairman Sarbanes. And that fellowship is going to be like
an endowed chair now and in the future at the Federal Reserve
Bank of Chicago.
[Laughter.]
Ms. Bies. And I hope that there are many more young folks
that can get that.
The decisions of the Federal Reserve affect the economic
well-being of every American consumer and business. The Federal
Reserve has responsibilities for establishing monetary policy
and for assuring the safety and soundness of the banking and
payment systems. I believe my background in these areas
qualifies me to serve on the Federal Reserve Board.
I hold an M.A. and Ph.D. in economics from Northwestern and
have taught economics for 7 years. My first professional
position after graduate school was with the Federal Reserve
Bank of St. Louis. There, and at the Chicago Federal Reserve
Bank, I gained valuable experience in issues regarding bank
mergers and acquisitions, regional economics, and monetary
policy.
I have spent 21 years with First Tennessee National
Corporation, a large, nationwide diversified financial services
institution that is headquartered in Memphis, Tennessee. My
experience has primarily been in the areas of finance, risk
management, and audit, which has given me a real appreciation
of the day-to-day workings of the financial system and the
issues relevant to implementing regulations.
I approach this nomination understanding the
responsibilities that the Federal Reserve has to create the
monetary policy environment that will support full employment
and maximum sustainable economic growth. Based on my experience
over the years, I believe that this can only be accomplished by
restraining inflation. Inflation increases the cost of capital
to businesses and thereby reduces the amount of long-term
investment, which in turn lowers economic growth and job
creation. High inflation expectations increase long-term
interest rates, which reduces the ability of households to buy
homes, finance their children's education, and provide the
means to their families that improve their standard of living.
While the primary focus of monetary policy is to contain
inflation, the Federal Reserve must also be constantly aware of
the rate of economic growth and the level of unemployment. The
American economy benefited from more rapid productivity growth
in the 1990's, which permitted the economy to enjoy faster
growth and lower rates of unemployment without triggering
significant inflation. Economic growth has slowed since late
last year and has been adversely affected by the recent tragic
events. This led to short-term actions to lower interest rates
to strengthen the economy.
When unusual events occur, such as those horrible events on
September 11, the Federal Reserve has the additional
responsibilities of providing liquidity and assuring the smooth
functioning of the payment system. By stepping in promptly to
ensure that banking and payment systems continue to function,
and to provide sufficient liquidity to keep transactions moving
as smoothly as possible, the Federal Reserve helped to keep
short-run disruptions in that awful week to a minimum. In the
aftermath of the September 11 events, bankers throughout the
country were able to support the transaction and credit demands
of their customers due to the effective and prompt response of
the Federal Reserve.
We are in a time of changing technology, competitive
factors, and business practices that affect the financial
system. Recent innovations in financial instruments, such as
derivatives, and securitization of loans, have changed the way
that risks and liquidity move among financial market
participants. With laws like Gramm-Leach-Bliley, the
distinctions among products and services offered by commercial
banks, investment banks, insurance carriers, and nonfinancial
firms are diminishing. The Fed must respond appropriately to
these forces to keep markets competitive and efficient, while
balancing the need to protect the safety and soundness of the
banking system.
Financial institutions now have more tools to manage the
credit, market and operating risks they face. This has
important implications for the way the safety and soundness of
our financial institutions should be measured and monitored.
The Federal Reserve and other bank and financial institution
regulators will have to modify their rules to encourage the
beneficial aspects of these new innovations and encourage risk
mitigation tools without significantly increasing systemic
risks to financial markets. This requires that the staff of the
Fed continue to develop their knowledge base to effectively
monitor the financial institutions for which it has oversight.
Finally, the Federal Reserve must also provide regulations
and oversight of the manner in which financial services are
provided to ensure that the varying needs of consumers,
businesses, and communities are met in a fair and efficient
manner. The Federal Reserve should encourage the appropriate
mix of regulation, customer disclosures, and improved financial
literacy so that consumers and businesses can more fully
benefit from innovations in technology and financial services.
In conclusion, I approach my nomination as a Member of the
Board of Governors of the Federal Reserve with an understanding
of the broad responsibilities the position requires. I would
like to thank the Committee for considering my nomination,
particularly the promptness with which this hearing has been
held, in light of all the other events that are on your
agendas. And if I am confirmed, I look forward to working on
these policy issues with Members of this Committee and other
Committees of Congress. I will be happy to answer any questions
that you may have.
Chairman Sarbanes. Thank you very much.
We appreciate both of your statements. I just have a few
questions and then I will yield to Senator Gramm.
There are some who have advanced the theory that there is
an unemployment rate that you can determine and that if the
economy expands or grows in such a way that it drives the
unemployment rate down below that figure, almost automatically
like a balance, the inflation will go up.
There was a time when one advocate putting that forward
said, well, the rate--just to put some meat on the bones of
this framework--was 6.7 percent unemployment. This was when we
were at 7\1/2\ percent unemployment rate. And if the
unemployment rate went below 6.7 percent, we would have an
inflation problem. Therefore, as the economy expanded and moved
the unemployment rate down toward 6.7, the Fed should start
raising the interest rates in order to dampen down economic
activity in order to avoid an inflation problem.
Now that theory was not followed and, of course, today that
rate has now risen because of all these events. But we were
down to 4 percent unemployment rate and no inflation problem.
Do you have a view about that theory? In particular, I guess, I
am interested in whether you reject that theory?
Mr. Olson.
Mr. Olson. The theory is more of a guideline at this point
because, as you point out, what we discovered in the last half
of the decade of the 1990's is that we could operate at an
employment level that we had not seen previously in history,
and at a level that was not inflation-inducing.
What we discovered is that if there is a natural rate of
unemployment, it is at a different level than it was perceived
to be as recently as 10 years ago.
I think to the credit of the Fed and others, they
recognized that their analysis needed that flexibility, so that
there would not be an automatic response to an employment level
that would require a tightening of monetary policy.
That is the way that the Fed responded and it seems to me
that that is a perfectly acceptable response. I think,
prospectively, we need to recognize that these are very fluid
situations and there will probably be increasing productivity
left in the economy, and that increasing productivity may
change the way we alter the relationship between unemployment
rates and the potential for inflation.
Chairman Sarbanes. I might comment that Chairman Greenspan,
in testimony before this Committee, in effect, rejected what I
think is a simplistic concept and said that the analysis had to
be much more complex and, in a sense, much more pragmatic, in
making the judgments. Obviously, if we had adhered to that, we
would have given away a lot of growth and a lot of employment
to the economy and to the country.
Mr. Olson. I fully agree.
Chairman Sarbanes. Dr. Bies.
Ms. Bies. I also agree that there is no rigid rule or fixed
number.
I think one of the difficulties that you have by looking at
something like the unemployment rate is that it ignores the
other side of the potential that we have for the population to
be employed.
One of the advances that we had was in productivity, which
made given resources more able to handle the same number of
transactions in business. But also in the last decade, we have
continued to bring a lot of women into the marketplace, and
that has enabled the supply of labor to greatly increase.
I think one of the things we need to realize, too, is that
of the people who are looking for work, do they have the right
skills and talents that companies need when they are looking to
fill positions?
And it is important that we continue to make sure that our
work force is able to respond to the changing employment needs.
I think it is more these dynamics that we should be focused
on rather than the unemployment rate by itself.
Chairman Sarbanes. Mr. Olson, we have received a letter,
and I think you have a copy of it, from the National
Association of Realtors. They have expressed concern because of
your past experience as a former President of the American
Bankers Association, as to how you would implement the
financial activities provisions of Gramm-Leach-Bliley. And I
think it encumbent upon me to ask you about this matter. They
are concerned because there is a petition at the Fed and the
Treasury Department to, in effect, allow financial holding
companies and financial subsidiaries of national banks to sell
and manage real estate. Now this raises some very important
questions about the separation of banking and commerce and I
want to explore that with both of you just a little bit. But
how would you respond to their letter?
Mr. Olson. Mr. Chairman, I saw the letter for the first
time last evening. I do have it in front of me. A couple of
thoughts. Let me speak specifically to the letter, and then the
broader question.
First of all, with relation to my American Banking
Association background and connection. I last served as an
officer of the ABA 13 years ago. And for that matter, after we
sold our bank in Minnesota in 1988, I was ineligible to be a
voting member of the ABA. So, I have not been an eligible
voting participant in the ABA for 13 years.
When this Committee asked me about conflict of interest
issues in the questionnaire you put out, I responded by saying
that I would abide by the Government Ethics Office guidelines
with respect to conflicts and I would do the same here.
I would submit the facts of this issue to the Government
Ethics Office and abide by their decision as to whether or not
this is an issue on which I should recuse myself.
More broadly, the question really speaks to the issue of
when background in an industry is relevant to a regulatory
position or whether there is potential conflict. I am quite
familiar with the issue. I studied the issue carefully as a
banker. I had an opportunity to review the issue as a
consultant.
But I think the role as a regulator is entirely different,
and you just said it. The issue is not whether or not it would
be my personal preference. The issue as a regulator is very
specific--does real estate brokerage activity fit under the
definition of financial activities as defined by Gramm-Leach-
Bliley?
There is no way that I could answer that question until I
had had an opportunity to look at the guidance provided by the
Federal Reserve staff and the public comments.
I think the background I have is relevant to understanding
the issue. But the role as a regulator, is it consistent with
the law as intended by Congress?
Chairman Sarbanes. Well, let me put this question to both
of you and let me use an example.
We had before this Committee a nominee, Mr. Harvey Pitt, to
be the Chairman of the Securities and Exchange Commission. Now
Harvey Pitt, the first 10 years he was out of law school,
worked for the SEC. In fact, he became the youngest General
Counsel in its history. He then went into private practice and
became one of the most recognized and successful securities
lawyers in the country and represented a number of clients
before the SEC, very effectively over 25 years. Then he was
nominated to be the Chairman of the SEC.
So the question becomes, how will you be able to shift over
and handle this responsibility? To whom do you owe your
judgment if you are confirmed and become a Member of the Board
of Governors of the Federal Reserve System?
Dr. Bies.
Ms. Bies. I think as a Member of the Board of Governors,
our responsibility is to the safety and soundness of the entire
banking system, first of all. And for that reason, I think the
knowledge we bring, including our personal experience, is an
asset that helps us understand what the root cause issues are
in any potential matter we might be looking at.
It is much more dangerous to be on the other side where you
have no background in an area. By working in a business
operation day-to-day, particularly in many of the areas I have
dealt with in risk management or setting accounting rules on
the Emerging Issue Task Force of FASB, I have the experience of
knowing what the transactions really involve. I think it has
made me, and would make me, a more effective regulator because
I will make sure that I understand all the issues that should
be addressed so that the regulation meets the objective,
without unduly burdening the day-to-day operations.
I think it is an asset in that respect. But the overall
directive that we have is to keep the financial system and the
payment system running smoothly.
Chairman Sarbanes. Mr. Olson.
Mr. Olson. When I joined Congressman Bill Frenzel's staff
in 1971, my background at that point had been banking. And as a
28-year-old, I discovered when I joined the Congressional
staff, that when I took off my banker hat and put on my public
policy hat, I look at the same issue from a different
perspective.
I took that responsibility very seriously. I took that new
role very seriously then. I had a chance then to go back into
the banking industry and work on public policy issues as an
advocate for the industry. I also looked at them as a
consultant. Then I had a chance a year ago to come back here
and look at the issues from their public policy point of view.
And that is the point of view that I would bring prospectively
as a Fed Governor.
There are two guidelines for acting on public policy
issues. First, and very important, is the law as set out by
this Congress in terms of guidelines as to what the Fed's role
is. Second is the broader issue with what is appropriate public
policy under the broad guidelines provided and the
implementation of the regulations.
Chairman Sarbanes. I think it is very important because
people need to understand, because the fact that people come
out of a particular background when they move into these public
policy positions, their guiding star actually becomes the
public interest. They have to leave behind them whatever biases
might exist out of their previous experience.
We like to get the knowledge and the expertise from the
previous experience, but it is very important, as you have just
indicated, I think, that people moving into these positions
understand that their frame of reference will alter.
I think it is important to get people on the record in that
regard, because you will often be called upon in a sense to
adjudicate issues between competing economic interests. One
economic interest may be the one out of whose background you
came. Another will be a different economic interest, out of
whose background you did not come.
And so, it is the same thing when people become judges.
They need some sense that they then will rise above the
attitudes of that background and make their judgments on the
public interest.
I appreciate your response.
Senator Gramm.
Senator Gramm. Mr. Chairman, thank you.
I guess in looking at the National Association of Realtors'
letter, it sort of calls me back to an approach that is often
made by people in looking at nominees, that the best background
would be to have just come in off a turnip truck.
[Laughter.]
But I think you are living proof, Mr. Olson, that your
background does not always determine what you believe. Didn't
you go to St. Olaf 's College?
Mr. Olson. I sure did.
Senator Gramm. And as far as I know, having worked with
you, you are very conservative. So it goes to show that we are
not simply chalkboards that experience writes upon. There are
inner circuits that are implanted at birth or somewhere else.
Let me say, Dr. Bies, I think your point is a very good
one, that unemployment is a very poor indicator of the supply
of labor. And I think that, as we look to the future in terms
of our potential to grow, there have been various things
written about the growth of the labor force. Before we had the
current slowdown, and the demand for labor.
But the plain truth is, as you pointed out, that there are
many ways that we can expand the labor force. There are a
substantial number of people who are not in the labor force.
In fact, in the current boom period that we have
experienced, really since 1982, my own opinion is that not only
has the unemployment rate come down to quite low levels as
compared to the post-war experience of America, but also that
we have brought people into the labor force who before were
viewed as unemployable. And I think that is a very important
point.
I do not know if you have family here, but did I miss you
introducing them.
Ms. Bies. No. I apologize to my family. Thank you, Senator.
Senator Gramm. Why don't you introduce them?
Ms. Bies. I have my husband here, John Bies, and my older
son, John Matthew Bies.
Senator Gramm. Well, in my experience with my wife's own
profession, I would like to say that I have gained some insight
into how some spouses feel. I will go to dinner with my wife
and people and they want to talk to her. They talk about stuff
I do not know anything about, or care anything about. So, I
feel for your husband.
Ms. Bies. Thank you.
[Laughter.]
Senator Gramm. You should be nice to him.
[Laughter.]
Let me just pose one question because Senator Sarbanes and
I have to go to a meeting over in the Capitol.
If you are looking at your role, if you are confirmed as
being a Member of the Board of Governors, in setting monetary
policy in the United States, obviously, there are many things
that you want to achieve with monetary policy. There are
various trade-offs.
But I would like to give each one of you an opportunity to
tell us, when you get down to the bottom line, which things do
you think are most important in terms of monetary policy?
What are sort of the crown jewels that you are dealing
with, the things that are not important to the exclusion of
everything else, but that are important in a higher order than
other things in terms of objectives?
Mr. Olson. Even though Susan has the Ph.D. in economics, I
will start with an answer to that.
It seems to me, Senator, that monetary policy has the most
direct influence on price stability. It is typical of monetary
policy to respond to the dynamics in the economy at a certain
time to provide a leveling.
Having said that, though, it is important for the monetary
policy to accommodate the growth opportunities that are in the
marketplace as well.
I think I would take it in that priority, that the price
stability is very important, but absolutely not to the
exclusion of allowing for a dynamic economy to function much as
the way we have seen it in the latter part of the 1990's.
Ms. Bies. I would agree with Mr. Olson that the critical
objective for the Federal Reserve is to make sure we have very
moderate, low rates of inflation. I think it is important
because it will help sustain long-term maximum employment
growth for the economy.
Senator Gramm. So, you do not see a conflict between price
stability and growth. In fact, in the long-term, you see price
stability as a necessary condition for economic growth.
Ms. Bies. I surely do. I think one of the things that we
have to be aware of at the Federal Reserve is that we continue
to make the markets trust us to use monetary policy to make
sure that inflation is under control so that there is not the
uncertainty or the risk of inflation that may be perceived by
markets because that uncertainty, in and of itself, can raise
interest rates and slow growth down. So, our credibility is
very important to help preserve that growth. We only can do it
by consistently focusing on inflation.
Senator Gramm. Well, I think that is Alan Greenspan's view.
In fact, in looking at his career, until very recently, I think
any time things are not going well, or well as compared to the
most recent trend, people are more critical. But I think the
criticism that Greenspan has had historically, which has
primarily come from, ``pro growth advocates'' has been
preoccupation with inflation.
I have always defended the Chairman, believing that, in the
long-term, price stability is a necessary condition for long-
term economic growth. It may not be sufficient, but it is
necessary. In the long-term, if you do not have price
stability, you undercut the ability of an economy to perform
efficiently over long periods of time. And I think that
Chairman Greenspan's priorities, Dr. Bies, are very similar to
yours.
I am finished, Mr. Chairman.
Chairman Sarbanes. I think that when you are, in a sense,
confronted with this kind of question, there is always refuge
in the statute. I just want to read it to you. This is the
statute that governs the Board of Governors of the Federal
Reserve System.
So this is your mandate. It was given to you by Congress.
Congress could change the mandate and, in fact, we have had
some Members on this Committee who wanted to change it and have
it more single-focused, as it were, rather than the more
complex discussion that I think we have just had and your
response, and from Senator Gramm.
I think it is important to just read the statute again.
``The Board of Governors of the Federal Reserve System and
the Federal Open Market Committee shall maintain long-run
growth of the monetary and credit aggregates commensurate with
the economy's long-run potential to increase production, so as
to promote effectively the goals of maximum employment, stable
prices, and moderate, long-term interest rates.''
Now, I am prepared to concede that is a very complex task
and it is one you will have to wrestle with. But I want to
underscore that it sets out, in a sense, a package of goals
that you have to try to address.
I just want to put that on the record and underscore it to
you.
And this is going to lead into another question I have on a
different subject.
Senator Gramm. Mr. Chairman, if you will let me butt in
here.
Chairman Sarbanes. Sure.
Senator Gramm. I think there is no conflict among those
goals. I think in the long-term, the policies that promote each
one of those goals are consistent. In the short-term, there can
be conflicts. But in the long-term, I think the mandate of the
Federal Reserve System is achievable.
Chairman Sarbanes. Their challenge is really how to
harmonize them, I think.
Senator Gramm. Yes.
Chairman Sarbanes. I agree with that. Now this leads me to
another question that I want to ask. And I am prompted to do
this, Dr. Bies, by something that you said in your statement.
``With laws like Gramm-Leach-Bliley, the distinctions among
products and services offered by commercial banks, investment
banks, insurance carriers, and nonfinancial firms, are
diminishing.''
I have a large question mark over non. If it had said
financial firms, I really would not put the question mark. But
one of the issues that was fought out in Gramm-Leach-Bliley was
the separation of banking and commerce. Now some people thought
there should not be a separation. But the decision that was
made by the Congress--and this issue relates a little bit to
this real estate letter that we have received--was to keep them
separate.
So the Fed's charge, in effect, its mandate, is to maintain
separation which has been established by the Congress by law.
If that is to be changed, you will have to come back to the
Congress and get it changed.
Now, we had testimony from Chairman Greenspan. We had
testimony from Secretary Rubin. We had testimony from Henry
Kaufman, from Paul Volcker, from a number of leading thinkers
in this area who thought that maintaining the separation was an
important thing to do. They cited the Japanese experience, the
German experience, where they do not have the separation and
the difficulties that they got into, in part, as a consequence.
It is true that the distinction among banks, investment
banks, insurance carriers, was all going to be allowed to meld
and come together, although they have done less of that than
people anticipated in terms of the mergers and the joining
together. But it wasn't to extend outside of the banking side
over into commerce. And so the use of the word, nonfinancial,
here gives me some concern. Could you respond to that?
Ms. Bies. Yes, sir. First, let me say that I believe very
strongly that we need to continue to have a separation between
banking and commerce because of the issues that you have just
raised that we have seen in other countries where you have
transactions between banks and nonfinancial affiliates in
manufacturing and retailing. The transactions are not done at
arm's length. It affects the safety and soundness of the banks
themselves. And long-term, that has adverse effects in times of
stress to the economy as a whole. I think we need to maintain
that.
Chairman Sarbanes. It may also affect, I might note, the
competitive structure or nature of your economy, too. There is
some concern about that, obviously.
If you have one bank in town and it owns the major retail
outlet or some commercial outlet, then there is a concern about
the competitive position of the enterprises that compete with
that retail or commercial outlet.
So there are some even broader implications beyond that.
But the safety and soundness is obviously important and the
Japanese ran into a lot of trouble on that score.
Ms. Bies. They clearly did. I think what I was trying to
get to is that with particularly some of the new technologies,
we have companies now who provide services that help payments
happen, that help transactions occur in electronic mode that
may, by tradition, not be part of a bank or an insurance
company.
It is the services that people are providing outside of the
bank and outside of insurance carrier charters that I think we
have to address because it is a new technologies area.
Chairman Sarbanes. All right. Well, there are some
difficult questions at the edge, so to speak, connected with
technology, as you have just noted. But I think the use of the
term, nonfinancial firms, potentially is much too broad to just
simply set out in a statement and I am happy to accept that I
think very important limitation on it.
Mr. Olson, do you want to address this at all?
Mr. Olson. I think the Gramm-Leach-Bliley Act provided two
important things.
Number one, there was an imbalance in 1999 with what the
statute allowed and what was happening in the marketplace. I
think the Gramm-Leach-Bliley Act addressed that. Number two,
and very importantly, it provided the framework for
decisionmaking in the future. What it says, and it is quite
clear, and that distinction between banking and commerce has
been preserved.
The activities that, prospectively, the Fed, in
consultation with the Treasury, can look at, are financial
activities or activities complementary to financial activities.
I am very comfortable with that definition and that
guidance.
Chairman Sarbanes. When in doubt, look to the statute, is
what I would say.
Senator Carper.
COMMENTS OF SENATOR THOMAS R. CARPER
Senator Carper. Thank you, Mr. Chairman. And to both of our
nominees, welcome. It is nice to see you both again. Thank you
for visiting with my staff and me last week.
A couple of questions, if I could.
Let me just start off by asking each of you, how will the
Board of Governors be different if you are a Member of it?
Ms. Bies. In my case, it will hopefully benefit by the fact
that I think I bring some unique skills relative to the current
Members of the Board. I have a lot of experience in
derivatives, in accounting, in credit-scoring models, risk
management tools, a lot of the new evolving methods that banks
are using to manage risks and monitor risks. And I think some
of these types of skills I can bring to the table will help me
deal with a lot of the safety and soundness issues that the
Board has to deal with.
Having worked in a bank that has the distinction of twice
in our history acquiring the second largest bank failures that
have ever occurred, I also understand the disruptions that
affect the average person when they have their life savings in
an uninsured institution, which we had in one neighboring case.
And I think that brings me a perspective to realize how
important it is to look to the consumers and understand we have
to protect the safety and soundness of the banks for them.
So, I think that kind of relationship with customers is
something else I bring rather uniquely.
Senator Carper. Good. Thank you.
Mr. Olson.
Mr. Olson. Susan's background and my background overlap in
one narrow respect in that I also spent some years with a
regional banking organization.
What is more unique with respect to the current make-up of
the Board, I also have 12 years in a community bank background,
12 years as a financial institution regulatory consultant, and
5 years working in public policy on Capitol Hill staffs, none
of which now exist on the Board, but are all relevant to what
the Board does.
I think that with all of those experiences I will work to
try to represent and bring that vantage point and that
viewpoint to the Federal Reserve.
Senator Carper. Good. We have been discussing, but not
debating on the floor very much, the elements of a potential
stimulus package that the Congress might work out with the
President.
The four leaders of the Budget Committee, House and Senate
Budget Committees, Democrat and Republican in each body, have
agreed on a number of principles as to what that package might
look like.
I am going to ask if you would just share any thought that
you have on these principles. I am not going to ask you to
necessarily spell out what you think we ought to do with
respect to a stimulus. But I would be interested in your
comments on the principles that they seem to be in unanimous
agreement on.
Number one, they have suggested, at least on the tax side,
that what we do should be of a temporary nature and that we
should sunset it within 1 to 2 years. They have indicated that
the size is such that it should be consistent with moving back
toward a balanced budget within a relatively short period of
time. They believe that the impact should be near-term, almost
immediate from its adoption and not something that kicks in
several years down the road. Do you have any thoughts on those
principles?
Ms. Bies. I think what is unusual about how events are
affecting the economy this time is we have never really been
through this kind of terrorism. And to keep the economy
growing, and to get us to move ahead, it is important that we
provide confidence to consumers and to businesses.
To make that happen, I think the ability short-term to give
more after-tax dollars to consumers to spend is important and
for businesses to invest is important, to sort of jump-start
the economy and get us back on that road of confidence that
leads to more long-term investments.
We have spent a lot of time in this country to get us to
the point where we have a balanced budget that is keeping long-
term interest rates relatively low, which makes it easier to
control inflation.
So in the long-term, when we get back to a faster rate of
growth and back up to full employment, I think we do need to
get back to that discipline of a balanced budget.
However, the unusual events that are occurring right now I
think require an unusual short-term response.
Senator Carper. Thank you.
Mr. Olson.
Mr. Olson. The guidance that has made the most sense to me,
independent of what you have laid out, is the guidance that it
does seem appropriate that there ought to be a fiscal response
to an extraordinary circumstance.
The general guidance that I am hearing is that it ought to
be big enough to make a difference, but not so big as it would
affect the long-term markets.
It seems to me all three of the principles that you have
outlined here fit that. Sunsetting the tax effort is consistent
with that guidance. The size outline that you are suggesting is
consistent. And that it be near-term and immediate are all
three consistent with what strikes me as being a sound
approach.
Senator Carper. How important--to both of you--this is my
last question, but how important is it that we return to paying
down the publicly-held debt of our country?
Mr. Olson. Well, I think this is a time of unusual
uncertainty. I would think that we need to respond to a time by
demonstrating recognition of the current uncertainty and
evaluating some of the long-term impacts as we go along. It is
not a time, I think, for conventional thinking.
I would say, however, that we are already seeing in the
economy more underlying strength than we might have thought
existed there, even as recently as 2 weeks ago.
If consumers have confidence in our economy and the
underlying strength of that economy, it seems to me that
further debt reduction is warranted. And I think some of the
longer-term questions like fiscal responsibility will be dealt
with in that context.
Ms. Bies. I think, in the long run, it is important to get
back to the discipline. But I think we would all be remiss if
we did not respond to the crisis we have here.
We have to spend money to address the threats that are
facing the economy today--the safety, the security of the
United States, the ability of local and State governments to
respond, companies to respond, industries to respond
appropriately to security questions. That needs to be done
today and we need to support that response in the public and
private sectors.
We have to look at the ability of the Federal Government to
be unique in the sense that it has the financial wherewithal to
support and fund those short-term requirements, which the
private sector alone cannot respond to.
So, I think it is critical that we do have the short-term
response. But hopefully, this will pass and we can get back to
the long-term growth of the economy. But we must respond today.
Senator Carper. Mr. Chairman, can I ask one more?
Chairman Sarbanes. Certainly.
Senator Carper. Thank you.
Chairman Greenspan was before us about 4 weeks ago, along
with Secretary O'Neill and the head of the SEC. Chairman
Greenspan said during his testimony--it is better to be right
than fast--talking about what we do in terms of responding, on
the tax side, on the spending side. He said, ``It is better to
be right than fast.''
Mr. Olson, you alluded just a moment ago to the underlying
strength of our economy. Delaware is a car State. We build all
the Durangos in the country, all the Saturn LS's. So, we have a
real interest in the auto industry.
And I am struck by, even with the trouble that we are going
through, that autos, cars, trucks, vans, we are going to sell
about 60\1/2\ million units this year. Sales seem to be holding
up pretty well, although they are being fueled right now by
low-interest rates, deep discounts, and incentives.
But when you refer to the underlying strength of the
economy, I look at housing. Housing is down a little bit, but
it is holding up actually remarkably well and presumably, long-
term rates are helping to fuel that.
Just give us, anecdotally, both of you, if you will, the
underlying strengths of the economy, can you give us some
particulars that lead you to talk about and to refer to the
underlying strengths of the economy?
Those are two points that I mention and I think suggest
that there are underlying strengths of the economy. But any
others that you would add to that or take away?
Mr. Olson. Well, we have recently seen indication in new
construction starts that are also up from the previous year.
And I think that the entire housing industry is strong, in part
as a result of the fact that rates have come down significantly
over the course of the past year.
We have been talking about a soft economy in a period where
unemployment is still under 6 percent, where we have a 9,400,
roughly, Dow. And I think that if you look in general at what
we consider now a soft economy compared to what was considered
a soft economy at other times, you would have to say that there
is clearly some underlying strength broadly.
Now, I think what we are seeing is, so far in the recovery,
that there are a number of industries that are more directly
impacted by the horror of September 11, the transportation
industry and the tourist industry, among others. But what is
interesting is the numbers of industries across the Board that
have not been impacted in a significant way.
Senator Carper. Thank you.
Dr. Bies.
Ms. Bies. I think what has contributed to this economic
weakness is a little different than traditional economic
cycles, in that this was really led by a slowdown in business
investment.
Typically, we see slowdowns due to consumers reducing their
spending. Through the slowdown we have had in the last 12
months, aside from the recent events, the consumer has been the
mainstay of the economy. And since the consumer is two-thirds
of the economy, and because they were fully employed, they had
the wherewithal to continue to support their standard of
living. The housing, the car sales numbers, show that consumer
confidence kept us moving ahead, despite the fact that business
investment had really dropped during the last year.
I think the recent events are why I am concerned about the
consumer confidence being important. And we are living through
an episode that we have never lived through before. I think all
of us are trying to determine what those indicators are going
to be and how the consumers are going to respond, because none
of us have lived through these kinds of horrible events before.
And that is why I think we need to watch things very
carefully as the indicators come out and to look at the signals
of confidence. But the consumer has been the mainstay in the
last 12 months.
Senator Carper. Mr. Chairman, thank you. You have been very
generous with the time.
One of the points that a number of advisors to us and to
the President seem to agree on, is that we need to incent
capital investment. And one of the ways to do that is to
expedite the write-off or to permit companies to expense those
kinds of investments in a year.
One of the folks that runs one of the major Big 5
Accounting firms in the country that I talked to last week
suggested we have to be careful with respect to accelerating
depreciation and expensing and not touching at all the
alternative minimum tax for companies. He suggested to me that
if we are not careful, we can go ahead and think that we are
encouraging capital investment, but if we do not do anything on
the AMT for businesses, we may not be successful.
Could I just ask the panelists to maybe take 30 seconds and
comment on that? Do you mind?
Ms. Bies. I tried to deal with the Alternative Minimum Tax
issue when I was Chief Financial Officer and I always had to
defer to my tax manager. I think it is a very complicated
issue. But it does hit any time that businesses have low-
taxable income. And with the slowdown that is happening,
companies could be thrown in a low-taxable income position. In
general, it would be something that would need to be looked at,
but I do not pretend to be an expert on the tax code.
Mr. Olson. I would be less than candid if I suggested to
you I could define the correlation between alternative minimum
tax and depreciation schedules. Therefore, I will defer to my
more learned colleague.
[Laughter.]
Senator Carper. Mr. Chairman, every now and then it is nice
to hear an honest answer like that.
[Laughter.]
Thank you, Mr. Chairman. Thank you for letting me ask these
questions of the witnesses.
Thanks. Good luck.
Chairman Sarbanes. As we draw the hearing to a close, I
want to come back and underscore the fact that while Members of
the Board of Governors have a lot of discretion within which to
make judgments, they operate within a statutory framework that
has been provided to them by the Congress. The Federal Reserve,
after all, is a creation of the Congress. And the provisions of
those statutes, in effect, define the framework within which
you operate and make your judgments.
In making that point, I would like to quote first from
Public Law 106-102, November 12, 1999, the Gramm-Leach-Bliley
Act, which of course we wrestled with for quite an extended
period of time. Right at the outset it says: ``An Act to
enhance competition in the financial services industry by
providing a prudential framework for the affiliation of banks,
securities firms, insurance companies, and other financial
service providers, and for other purposes.''
Then it goes on in Title I to say: ``Facilitating
affiliation among banks, securities firms, and insurance
companies.'' And Section 103 discusses financial activities and
says that a financial holding company may engage in activities
financial in nature or incidental to such financial activity.
Later in that Section it says: ``Activities that are
financial in nature, lending, exchanging money or securities,
ensuring, guaranteeing or indemnifying against loss, harm,
financial investment or economic advisory services,
underwriting, dealing in, or making a market in securities,''
et cetera.
So it is all spelled out right here. And of course, I am
sure you have the benefit of the debate and the discussion that
took place over this banking and commerce separation.
The judgment was made here that it is an important
separation and the mandate that the Fed has to operate under
is, of course, sustaining that separation.
We took a big step to allow, as we said here, a framework
for the affiliation of banks, security firms, and insurance
companies, and other financial service providers, which had not
been permitted before.
The previous arrangement had been there had to be a
separation, Glass-Steagall and so forth. Of course that had
been eroded in many ways and we are trying to, to some extent,
adjust to what had taken place in the marketplace. But we did,
after a great deal of focus, debate controversy, sustained--in
fact, we even pulled some firms back who were using the Unitary
Thrift loophole, which was closed up, as you will recall.
So the extent of the Congressional judgment on that was not
the status quo, but we sought to close up a loophole that was
being used, in effect, to cross the line.
The other quote that I will end with, and we will conclude,
is I just want again to say that in the Federal Reserve Act,
Section 2(a), Monetary and Credit Aggregates, general policy.
This is the mantra, and that is why I am going to read it
again. ``The Board of Governors of the Federal Reserve System
and the Federal Open Market Committee shall maintain long-run
growth of the monetary and credit aggregates commensurate with
the economy's long-run potential to increase production, so as
to promote effectively the goals of maximum employment, stable
prices, and moderate long-term interest rates.''
Good luck in that endeavor.
Thank you very much for coming today.
The hearing is adjourned.
Mr. Olson. Thank you, Mr. Chairman.
Ms. Bies. Thank you, sir.
[Whereupon, at 10:58 a.m., the hearing was adjourned.]
[Prepared statements and biographical sketches of the
nominees supplied for the record follow:]
PREPARED STATEMENT OF MARK W. OLSON
Member-Designate of the Board of Governors of the
Federal Reserve System
October 17, 2001
Chairman Sarbanes, Senator Gramm, and Members of the Committee, I
am pleased to appear before you as one of President Bush's nominees to
serve on the Board of Governors of the Federal Reserve System. I am
honored that President Bush has nominated me to serve on the Board. If
I am confirmed by the Senate, I look forward to fulfilling the
important responsibilities of Board membership.
Background
My background has prepared me well for my prospective service on
the Board. The Board has responsibility for both the conduct of
monetary policy in the United States and also for the supervision of
bank holding companies, financial holding companies, State-chartered
banks that are members of the Federal Reserve System, and U.S. offices
of foreign banks. I have spent the past 35 years in the financial
services industry in a variety of roles. After graduating from St. Olaf
College in 1965 with a bachelor's degree in Economics, I began my
career in banking with First Bank System in Minnesota, which is now
part of US Bancorp, a major regional bank holding company. In my 4
years with First Bank System, I spent 2 years in retail banking and 2
years in commercial lending. In 1971, I moved to Washington, DC, and
served with former Congressman Bill Frenzel as his Legislative
Assistant for banking while he was a Member of the House Banking
Committee. In 1976, I returned to the banking industry as President of
the Security State Bank in Fergus Falls, Minnesota. Security State Bank
was, and is, a community bank, which my father was instrumental in
chartering in 1957. I served as President and CEO of that bank for 12
years.
With a combination of banking and Capitol Hill experiences, I
became active in the American Bankers Association, and was elected
President of the ABA in 1986. My ABA responsibilities involved the
development and presentation of the industry perspective on public
policy issues and, among other activities, brought me to testify before
this Committee on two previous occasions.
In 1988, our family sold its interest in Security State Bank and I
returned to Washington, DC, as a Partner with what is now Ernst & Young
LLP. At Ernst & Young, I headed the Financial Services Industry
Regulatory Consulting Group. In that capacity, I worked with a wide
variety of financial services businesses including every type of
charter supervised by the Federal Reserve System with the single
exception of Edge Act Corporations. Our role was to assist financial
institutions in anticipating, understanding, and complying with laws
and regulations. In addition, I consulted on a variety of strategic and
managerial issues. Our clients included some of the largest financial
institutions in the country.
After taking an early retirement from Ernst & Young, I was invited
by then Senator Rod Grams to serve as the Staff Director of the
Securities Subcommittee of the Senate Banking Committee. In that
capacity, I worked with Subcommittee Chairman Grams, and the other
Members of this Committee on a variety of securities and accounting
industry oversight issues.
In summary, I have been part of the financial services industry as
a practicing banker for 16 years, a regulatory consultant for 12 years,
and a Congressional staff member for 5 years, and was elected to the
highest leadership position in the banking industry. This combination
of experiences has allowed me the opportunity to understand the
important issues challenging the financial services industry, its
regulatory authorities, and the U.S. Congress. I look forward to
bringing that experience to the Board of Governors.
Monetary Policy
Monetary policy is a critical Federal Reserve responsibility. The
Federal Open Market Committee and the Board establish policy, which is
implemented through the Federal Reserve Banks and ultimately through
the banking system.
As a banker, I gained a hands-on familiarity with the tools used to
implement monetary policy as the banks are, effectively, the
counterparties to Federal Reserve decisions including: Federal funds
rate targets, discount rates for Federal Reserve Bank borrowing, and
establishment of reserve requirements. My background has provided me an
understanding of how monetary policy is implemented, and the impact
these policy decisions have on individuals and businesses. Importantly,
as a banker, I witnessed firsthand the difficulties caused by both
recession and high inflation in more volatile economic times. As a
result of that experience, I fully support the mandate Congress has
given the Federal Reserve System to pursue ``maximum employment, stable
prices, and moderate long-term interest rates.''
Regulatory Issues
With the passage of the Gramm-Leach-Bliley Act of 1999, the Federal
Reserve was accorded by Congress an expanded role in financial services
supervision. That bill allowed financial institutions from banking,
thrift, securities, and insurance industries to affiliate in a newly
authorized financial holding company. Though each of the financial
services entities will continue to be regulated by its principal
functional regulator, the Fed has been accorded the important role as
umbrella regulator with overall regulatory coordinating responsibility.
As a result, the Fed has effectively been given the oversight
responsibility for monitoring the blending of financial industries at a
time when these industries are being dramatically impacted by
technological innovation and industry consolidation. That Act is now 2
years old, and is not yet fully implemented. Given my background, I
look forward to being an active participant in this continuing effort.
Payment System
The Board also has supervisory responsibility for the proper
functioning of the payment system. As we were again reminded following
the horror of September 11, the smooth and efficient functioning of our
payment system is vital to this Nation's economic health. Dramatic
improvements in technology continue to provide opportunities for
greater efficiency but also raise new regulatory issues as the system
continues to progress from paper based to an increasingly electronic
system. I look forward to bringing my banking and consulting
experiences to addressing these important issues.
Consumer Responsibilities
Another important role of the Board is its responsibility to
consumers. I have been particularly pleased to learn of the increasing
role the Fed now plays in consumer education. Financial literacy is an
important element in our citizens' ability to fully experience the
benefit of a free market economy. I look forward to being an active
participant in this important area.
The Congress also has entrusted the Board with important consumer
protection responsibilities. There are a number of regulatory issues
currently awaiting Board action. Among these are proposed changes in
the Home Ownership and Equity Protection Act (HOEPA) and the Truth In
Lending Act (TILA) intended to crack down on predatory lending. Also,
changes have been proposed concerning mortgage loan data collection
under the Home Mortgage Disclosure Act (HMDA). The comment period for
both has expired and the comments by interested parties are now under
review. While I have a working familiarity with both proposals from my
prior experience, I look forward to an opportunity to review the public
comments and also the Federal Reserve staff analysis in order to fully
acquaint myself with all the implications of these proposed rule
changes.
Conclusion
Mr. Chairman and Members of this Committee, my goal as a
prospective Member of the Board is to utilize my banking industry
background and my public policy experience to contribute to the
important work of the Federal Reserve. It is my intent to help the Fed
continue to provide a regulatory framework which will allow the banking
industry to meet the evolving financial needs of its customers and
continue as a critical source of strength for the economies of the
United States and the world.
Thank you again for holding this hearing, and I look forward to
your questions.
NOMINATION OF:
JAMES E. GILLERAN, OF CALIFORNIA
TO BE THE DIRECTOR OF THE
OFFICE OF THRIFT SUPERVISION
----------
TUESDAY, OCTOBER 23, 2001
U.S. Senate,
Committee on Banking, Housing, and Urban Affairs,
Washington, DC.
The Committee met at 2:30 p.m., in room S-116 of the United
States Capitol, Senator Paul S. Sarbanes (Chairman of the
Committee) presiding.
OPENING STATEMENT OF CHAIRMAN PAUL S. SARBANES
Chairman Sarbanes. Let me call our hearing to order.
I should explain right at the outset that we have a series
of votes on. This is the first in a series, and so we may have
to, as it were, recess, or some of us may slip away and come
back as we proceed through the hearing. But we had to put this
hearing over once and I did not want to do it again.
Mr. Gilleran. I appreciate that.
Chairman Sarbanes. While we have not opened up the office
buildings yet, we have gotten, through the kindness of the
Senate Foreign Relations Committee, the use of their hearing
room here in the Capitol. And so, we will proceed.
I want to welcome James Gilleran before the Banking
Committee this afternoon. The President has nominated Mr.
Gilleran to become the Director of the Office of Thrift
Supervision, the OTS, to complete the remainder of a term
expiring in October 2002.
Mr. Gilleran earned a B.A. degree from Pace University. He
received his law degree from Northwestern California
University. He spent his professional career in the financial
services industry.
For approximately 30 years, he worked with Peat Marwick and
eventually was a Managing Partner of their northern California
operation. He left the accounting firm to become President of
The Commonwealth Group, an investment banking company.
Subsequently, he was appointed and served from 1989 to 1994, as
Superintendent of Banks for the State of California. From 1994
to 2000, he was at the Bank of San Francisco, a State-chartered
bank with over $200 million in assets. He was the Chairman and
Chief Executive Officer until the bank was sold in December
2000, about a year ago.
Mr. Gilleran has been active in banking and professional
organizations. He served as Chairman of the Conference of State
Bank Supervisors and served on the Federal Financial
Institutions Examination Council, as Chairman of its State
Liaison Committee, and on the Board of Directors of the
California Society of Certified Public Accountants, the
National Association of Corporate Directors, and other groups.
He has contributed to his community by serving as Chairman
of the Board of the American Red Cross for the Bay Area,
Chairman of the National Conference of Christians and Jews,
trustee of the Golden Gate University, and various leadership
positions of other organizations, and has been honored by the
YMCA, UNICEF, and many other organizations.
The Director of the OTS plays a critical role in
maintaining the strength of the U.S. Federal thrift system. He
makes important decisions to provide for the examination, safe
and sound operation, and regulation of the Nation's savings
associations in a manner faithful to the letter and spirit of
the Federal statutes.
The Director also sits on the Board of the Federal Deposit
Insurance Corporation, the FDIC, making decisions affecting the
Federal deposit insurance system, as well as the safety and
soundness of insured depository institution operations.
I will turn to Senator Gramm for any opening statement he
has before I give Mr. Gilleran the oath and we proceed to his
statement and testimony.
STATEMENT OF SENATOR PHIL GRAMM
Senator Gramm. Mr. Chairman, first of all, I want to join
you in welcoming James E. Gilleran before the Committee. For
all the reasons you have cited, Mr. Chairman, Mr. Gilleran is
eminently qualified to be head of OTS.
I have made a similar remark at our hearings before, but I
continue to be encouraged by the quality of people who are
nominated to serve in the financial part of our Government. And
I want to congratulate the President for his choice.
Let me also say, Mr. Chairman, that we have never had a
Chairman of this Committee who has been more diligent or fairer
in holding hearings and moving nominees than you. I want to
personally thank you for it.
Welcome, Mr. Gilleran. This is an agency that you are going
to that is very important. I know you are eminently qualified
both in your education and your experience to do this job, and
we are grateful you are willing to do it.
The only way you are going to get your picture on the front
page of the paper is to do something terribly stupid.
[Laughter.]
And the amazing thing about public service is that, for
most people who are willing to come and serve their country,
that if they do a good job, they are never heard of. If they do
something wrong, they can become infamous.
It is encouraging to me on behalf of the country that we
have people who are willing to serve, that are willing to give
up happy lives, and higher incomes, because they love this
country and they think that they have something to contribute.
I want to thank you for being willing to serve the greatest
country in the history of the world.
Mr. Gilleran. Thank you, Senator.
Chairman Sarbanes. If you would stand, sir, and take the
oath, I would appreciate that very much.
Do you swear or affirm that the testimony you are about to
give is the truth, the whole truth, and nothing but the truth,
so help you God?
Mr. Gilleran. I do.
Chairman Sarbanes. Do you agree to appear and testify
before any duly-constituted committee of the Senate?
Mr. Gilleran. I do.
Chairman Sarbanes. Thank you very much. We would be happy
to hear your statement. And if there are members of your family
here that you would like to introduce, we would be happy to
receive them as well.
STATEMENT OF JAMES E. GILLERAN, OF CALIFORNIA
TO BE DIRECTOR OF THE OFFICE OF THRIFT SUPERVISION
Mr. Gilleran. Thank you, Senators.
First of all, I would like to introduce my wife, who has
been not only my life-long companion, but also my greatest
supporter and encourager and without whom I would not be
sitting here today.
Thank you so much, honey.
Sitting next to my wife is my daughter Amy. Amy lives in
the region north of San Francisco called the Wine Country.
Sitting next to Amy is my daughter Laura from San
Francisco. Laura was here for the confirmation hearing on
Thursday. She had to fly back to San Francisco for the weekend.
She had a responsibility at church. And then she flew back last
night to be with her daddy here today.
Thank you, honey.
Sitting next to Laura is my nephew, Ryan McReynolds. Ryan
was also here for the meeting on Thursday with his mother and
his father. His parents are from Kalamazoo, Michigan. Ryan
lives here in Washington, DC, and he is a Clean Water
Specialist for the Environmental Protection Agency here in
Washington.
Sitting next to Ryan is Jean Andrews, who is my sister-in-
law. Jean and her husband own a commercial air conditioning
business in southern California.
Sitting next to Jean is my sister-in-law, Joy Jones. Joy is
a missionary and has recently come back from India, where she
has been working with earthquake victims. Her next tour is
either in Kosovo or in Thailand.
We are waiting to see which one you choose.
Senator Gramm. Take your time.
[Laughter.]
Chairman Sarbanes. We are pleased to have everyone here
with us. We would be happy to hear from you.
Mr. Gilleran. Mr. Chairman, I do have a prepared statement
which I will submit for the record, if that is all right with
you. But under the circumstances, I will just summarize it by
saying that, first, I am delighted to have received the
President's nomination. And I am also delighted that you have
tried so hard to schedule this hearing. I know it has been a
very difficult period and I am very grateful.
In summary of my opening statement, I would like to say
that I think my background has uniquely qualified me for this
position, in that I not only have experience in bank
regulation, but in bank operation, as well as bank auditing and
consulting.
So, I offer myself to the Committee for your consideration
and believe that if you do confirm me, I will do my level best
to protect the safety and soundness of the thrift industry. And
I look forward to answering whatever questions you have, and
also to working with the outstanding staff of the Office of
Thrift Supervision.
I would appreciate the inclusion of my formal opening
statement, as well as Senator Johnson's statement in the
record.
Chairman Sarbanes. Thank you very much, sir. The full
statement will be included in the record.
I must say that you have had a lot of experience that I
think is very relevant to being the Director of the OTS.
Mr. Gilleran. Thank you.
Chairman Sarbanes. Both in the private sector in the
accounting firm and, of course, with the Bank of San Francisco,
which as you say in your statement, leading the Bank of San
Francisco through this challenge granted me the invaluable
opportunity to experience firsthand those factors that
contribute to a financial institution's deterioration, as well
as those which lead to its reclamation.
And then, of course, your work for the State of California
as the Banking Superintendent. Of course, that is the seventh
largest economy in the world, so it is no small task.
I have a few questions that I want to put to you and then I
will turn to Senator Gramm.
We held a hearing last week on the failure of the Superior
Bank in Chicago. Several witnesses testified about red flags
that were apparent 2 or 3 years ago and which indicated
potential problems.
Professor Kaufman testified, and I quote him:
A number of red flags were flying high that should have
triggered either rapid regulatory response or continuing
careful regulatory scrutiny. These include very rapid asset
growth, large amounts of risky residual assets, and other
problems.
Do you have any ideas on how we can prevent future costly
thrift failures like the Superior one?
Mr. Gilleran. Well, I think the attention of the Committee
upon the prevention of future thrift failures is very good. I
would hope to have the opportunity at some time in the future,
if confirmed, to come back and answer whatever questions you
may have in detail after having an opportunity to review the
factual circumstances myself.
I think that the focus of the testimony on red flags is
very appropriate because one of the most crucial things that a
regulator or an outside auditor can do in connection with an
examination, is to look for the risk areas. And the risk areas
are usually signalled by a red flag of some kind.
It is important that the regulator or auditor make an
assessment early on as to what the potential red flags are so
that the examination and regulatory procedures may be focused
upon those warning signals.
The red flags you have referred to are very important ones.
My understanding of the Superior Bank matter, based upon
the newspaper accounts and other reading of testimony, is that
a primary problem revolved around the residuals and the change
in the accounting for the residuals toward the end of
Superior's life cycle. That led to a very precipitous write-
down in capital.
The most important thing that a regulator can do is to
focus on the issue of what is the real capital of the
institution? And to the extent that the real capital is tied up
in an asset like residual values, it must receive great
attention from the regulators and the auditors early on.
In this area, it is extremely important that you have
people in the regulatory field and the auditing field that are
capable of evaluating it. And it is a very complicated area.
I can say to you that I will give this a tremendous amount
of my time and my effort and I look forward to having an
opportunity to come back, if confirmed, to testify about it
further.
Chairman Sarbanes. We look forward to that opportunity. Let
me follow that up with this question. In the Superior Bank
situation, the Federal regulators and Superior's external
auditor, Ernst & Young, strongly disagreed as to the valuation
of the highly risky residual assets. But the OTS waited until
Ernst & Young agreed to reverse its position before they
formally determined that Superior had overstated the value of
these assets and had a serious capital problem.
Last week, we had a witness, Mr. Bert Ely, who testified,
and let me just quote what he said:
I think there has to be more frequent and conservative
valuation of risky assets by the regulators. To this extent,
the bank regulatory agencies need to develop their own
capabilities to detect fraud and to value all types of bank
assets.
I think that it is inexcusable for the regulators to
constantly try to lean on and, frankly, pass the blame to the
outside accountants. The outside accountants do not work for
the Government. They do not work for these agencies. The
agencies need to be able to act independently on their own.
What is your reaction to that, about at what point do
regulators, in a sense, overrule the accountants?
Mr. Gilleran. Again, I would have to review it to find out
exactly at what point that took place and the reasons for it.
But my reaction to it is that the outside audit of any
institution constitutes a piece, but only a piece, of the
information that the regulators must use in terms of their
total regulation.
Additional pieces are the internal control procedures of
the institution itself, the quality of management, the extent
of capital, and the liquidity, as well as the quality of the
lending portfolio, and the quality of the residuals.
So the outside audit is an important piece, but certainly,
it is only part of the picture.
Chairman Sarbanes. I have some other questions, but I will
come back to them.
Senator Gramm.
Senator Gramm. I am tempted to go back to Paul's question.
It seems to me that, obviously, a regulator should be
prepared, if they disagree with the outside auditor, to make a
judgment based on their own evaluation. The outside auditor's
reputation is at stake in terms of service they are providing
to their client. But at OTS, you are basically a steward of the
insurance fund, which, as we know from painful experience, is
backed up by the Federal taxpayer, full faith and credit.
We have had the unfortunate opportunity during our period
of public service, both the Chairman and myself, of seeing the
Federal taxpayer pay out tens of billions of dollars.
So, I would hope that you would have no reservation
whatsoever, if you were convinced that the audit was wrong, in
overriding it.
Mr. Gilleran. I have no reservation whatsoever. In fact, I
agree with you completely that the regulator must have his own
capability to make these evaluations and that, again, what the
outside auditor thinks is confirmatory or perhaps is another
piece of information as far as the total regulation.
The regulator has to be prepared to take his own
independent action when it is called for, when it is required
for the safety and soundness of the institution, and for the
system.
Senator Gramm. I want to just ask you a question. And there
is not any right answer to the question, but I am just trying
to get an insight into your views. You, obviously, are familiar
with the S&L crisis and generally familiar with the history.
One of the things that I saw a lot of in my State was what we
call brokered deposits, where in $100,000 increments, hundreds
of millions of dollars of funds were moved into thrifts that
were clearly insolvent, that were paying very, very high
interest on 90-day CD's. These funds basically moved without
any concern for safety and soundness because of the $100,000
insurance. There have been proposals from various quarters to
raise the level of insured deposits from $100,000 to $200,000.
I would be interested to know what your view is of the proposal
and any thoughts you have as to the impact of the
implementation of the proposal on the whole safety and
soundness question.
Mr. Gilleran. I think it is a very important question and
it is one that deserves a tremendous degree of consideration
before action is taken.
From an independent banker's point of view, a rise in
insurance level might enable the bank to raise more deposits
and therefore, grow faster.
The ideas now being put forth include raising the coverage
level for retirement funds. This idea deserves serious thought
because I think it relates to the soundness of retirement funds
and that is a good thing to think about.
I have not concluded as to whether or not it should be
done.
As far as raising the amount for all deposits, I must say
that, if confirmed, I would have to see much more study done on
it because I really have not seen a comprehensive study which
shows: Number one, that it would enable independent banks to
gather more deposits, because once you raise it for one bank,
you raise it for everybody; number two, a comprehensive study
would need to show what the impact is on the assessment from
the FDIC because once we find out by what amount the assessment
would be increased, maybe people wouldn't want it.
So the issue of insured deposit levels is one that I look
forward to exploring fully and I hope to be helpful to you in
your thinking about it. I think the issue needs yet more study.
Chairman Sarbanes. Well, as you know, the FDIC has come in
with a study and a series of recommendations. And at some
point, those will have to be looked at, I think. But you are
just coming on board and, of course, there is a new Chairman at
the FDIC, too. He has preceded you by a few months. So all of
that will have to be carefully examined. But it does have far-
reaching implications and we need to look at it with some care.
We had better excuse ourselves for this vote. I will return
at least because I have a few more questions.
Mr. Gilleran. Very good.
Chairman Sarbanes. So if you all will bear with us, we will
take a short recess.
[Recess.]
Chairman Sarbanes. The Committee will resume.
We have a few minutes now. I hope we can finish up here in
short order.
I do not know how closely you followed the Superior issue.
But, obviously, once you get over there, you will have to
follow it very closely.
Apparently, the FDIC asked to participate in an OTS
examination of Superior Bank and that request was turned down.
Now, subsequently, the Director of OTS about a year later,
stated that we have one policy. The door is always open. We
have told our regional directors that whenever the FDIC asks to
go into a thrift, that request must be honored. What is your
view about the FDIC coming in on an examination?
Mr. Gilleran. Having been a State regulator for 5-plus
years, I can tell you that we, of course, cooperated on a daily
basis with the FDIC because we were doing joint examinations
with them.
So, I myself personally have always been extremely open to
the FDIC and have found them to be an outstanding regulatory
entity.
I believe that the FDIC should be involved in every problem
institution in order to protect the public and the taxpayer.
The FDIC should be involved so that they can participate in the
decision as to whether and when to go out for a bid package.
A bid package is usually put together when it is determined
that an institution is highly likely to have to be closed and
the FDIC will invite other banks to make a bid on the
institution.
It is very important that the bid package be put together
in a timely fashion because if you can get a bid on an
institution at the right time, it is possible that the buyer
will take over the institution and take not only the insured
deposits, but also the uninsured deposits. This is a great
protection to the consumer.
So, in my view, cooperation and communication with the FDIC
is extremely important to safety and soundness.
Chairman Sarbanes. Well, I think it is important to turn
your attention to that as you move into the directorship
because there was a problem in this particular case, and we do
not want that to occur again.
In September 2000, the Federal banking regulators
promulgated a proposed rule to impose stricter capital rules
and to limit the concentration of residuals. The comment period
for the proposed rule closed on December 26 of last year.
Yet, 10 months later, there is still no final rule. Now,
they have a lot of comments, which they have to digest. In
fact, they have one from the operating officer of Superior,
saying that they did not need this rule and that everything was
fine in his experience at his institution, and so forth and so
on, which tells you something.
Apparently, there is a lot of difficulty in moving this
through the multiagency rulemaking. And I just wondered what
might be done to expedite getting this rule into place.
Mr. Gilleran. Again, I do not know all of the factors
behind the scenes as to the nature of the hang-up between the
agencies in getting that done. I must say, however, that the
status of this inter-agency ruling should never be a reason for
an individual regulator to avoid a safety and soundness
decision as it relates to any particular institution.
I think that the question of diversification is an
extremely important one. When you have an asset like residual
values constituting a large percentage of the capital of any
institution, the question of how to value the residual must not
languish for a long period of time. The regulators have to take
a stand on what the value is as quickly as possible.
In my experience, in banking and in bank regulation, any
action delayed usually just exacerbates a bad problem. So
dragging things out is not helpful.
Chairman Sarbanes. In the testimony last week, in this
hearing we had on Superior Bank, Mr. Bert Ely, who was an
expert witness, pointed out, and I am quoting him now:
I think that it is important that there be public
notification that amended thrift financial reports and bank
call reports have been filed with the regulators to alert
depositors and outside analysts to a possible decline in a
bank's financial condition because of the amended return.
In the securities market, a registrant that amends a public
filing, such as a form 10(k) or form 8(k), designates the
amendment as a form 10(k)(a) or 8(k)(a), to alert investors. Do
you feel that an amended thrift financial report should be
publicly identified as having been amended to alert analysts,
depositors and other interested parties? But, apparently, under
the current procedure, they can be amended without there being
any assured public notification of it.
Mr. Gilleran. I am certainly completely sympathetic to the
idea that it is a protection to depositors to get that
information out.
I do not know why in this case the information might not
have been disclosed, but I certainly think that disclosure of
that sort of information should be made.
Chairman Sarbanes. Senator Gramm pointed out, you have one
of those jobs where--it is not like a major league batting
average. It is not that you hit .333 or something.
It is just how often and how large a particular failure is
because that comes right back to your doorstep.
In the Financial Services Modernization bill last year,
this Committee and the Congress addressed the issue of banking
and commerce and, really, in a sense, decided it in the
statutes. But I am curious to know your views on permitting the
combination of thrift and commercial activities.
Mr. Gilleran. I think it is an idea whose time has not
come. It was thought about extensively before the most recent
legislation was enacted, and it was not allowed then. It does
not seem to be something that is required at this time. So it
is not an idea that I would be interested in advocating at this
time.
Chairman Sarbanes. We had very strong testimony from both
Chairman Greenspan and Secretary Rubin on this issue. It was
controversial because there are Members of the Congress who
feel that we should allow a mixing of commerce and banking. But
the decision that was made, and that is embraced within the
statute, was not to permit that. In fact, the Congressional
decision required that some--because some had bridged that
line--pull back from that. And it seems clear to me that the
regulators now are in the posture of carrying out, in effect, a
Congressional judgment as reflected in the statute.
If it is to be changed, it seems to me people need to come
back to the Congress----
Mr. Gilleran. Absolutely.
Chairman Sarbanes. --and have the statute changed. It
should not be changed downtown through a series of regulatory
decisions.
I presume you would agree with that.
Mr. Gilleran. I completely agree with you.
Chairman Sarbanes. I hope when you get down there, you will
take a look at the morale of the agency and what might be done
to sustain it or to improve it. Perhaps we need to look at how
it is funded. Some have said that the funding of the OTS and
the OCC through fees from their institutions puts the agency in
a difficult position because the people you are regulating are
also the people who pay for your bread and butter, and that is
not an altogether comfortable situation to be in. And maybe
some thought needs to be given to obtaining operating revenues
in a different way that would avoid that potential conflict.
Have you had any exposure to that question?
Mr. Gilleran. I have, sir. Having spent a long time in the
public accounting industry, I know that it is an industry which
is built upon independence, but at the same time, you must
collect a fee from the client.
I think that the model can actually be effective because it
provides a discipline in how you are spending your time and
whether or not it is effective and efficient. And therefore, I
would like to have an opportunity to pursue how the agency is
funded and how it is spending its money before I would conclude
that we ought to change that model.
I think changing the model brings into consideration all
kinds of potential other problems. But I would like to have an
opportunity, if confirmed, to really work on that aspect of it.
Chairman Sarbanes. Well, I think it needs to be looked into
because the current system does have the danger with it of
reducing everybody to the lowest common regulatory denominator
on the concern that if you are too tough, your clientele will
change their charter and their primary regulator and leave your
system. And of course, if enough of them do that, then the
ability to support your system is undercut.
On the other hand, obviously, you need to do what you have
to do as regulators to assure that things are under control.
Mr. Gilleran. Absolutely.
Chairman Sarbanes. These are difficult times and we are
facing a lot of challenges. But one of the challenges we face,
I think, as the President has said, is to go on about doing our
business.
I share Senator Gramm's thanks for your willingness to take
on this important responsibility. After all, in a sense, part
of this attack is on our financial system. Witness the assault
on the World Trade Center.
Mr. Gilleran. Absolutely.
Chairman Sarbanes. And we have to make sure that the system
works and works effectively. Those of you who are front-line
regulators carry a very great responsibility.
I do not have any further questions. Anything you want to
add?
Mr. Gilleran. Senator, just to thank you once again for the
hearing, and to say that I wanted very much to be of service,
even before September 11. But I want to be of service even more
now, and would look forward, if confirmed, to doing it.
Chairman Sarbanes. Very good.
Thank you very much, sir.
Mr. Gilleran. Thank you, Mr. Chairman.
Chairman Sarbanes. The hearing is adjourned.
[Whereupon, at 3:20 p.m., the hearing was adjourned.]
[Prepared statements and biographical sketch of nominee
supplied for the record follow:]
PREPARED STATEMENT OF SENATOR TIM JOHNSON
Mr. Chairman, thank you for holding today's hearing. We had hoped
to complete action on Mr. Gilleran's nomination to head up the Office
of Thrift Supervision last Thursday, and while events conspired against
us, I do appreciate the rapid rescheduling for today.
I am very pleased to welcome you, Mr. Gilleran, to Washington, and
I look forward to working with you on a variety of issues. You bring a
wealth of experience with you to this position, and I am particularly
intrigued by your initiative in going to law school after an extremely
distinguished business career.
I would be remiss if I did not thank you for your willingness to
leave your private sector career behind and join us here in Washington,
DC, especially during these troubled times. I understand that you and
your wife arrived in the District on September 10, and closed on your
house on September 12. I am sure that did not feel like the most
auspicious timing, and I just hope that you will begin to feel at home
as we continue to conduct the Nation's business.
Mr. Gilleran, I do not want to spend too much time talking about
issues that you will no doubt become familiar with in the near future,
but I did want to touch on one matter briefly.
As many of my colleagues remember, during the financial
modernization discussions, I introduced an amendment that ultimately
closed the so-called unitary thrift loophole--a loophole that
permitted, in my view, an unacceptable mixing of banking and commerce.
Mr. Gilleran, as you know, the U.S. affiliate of Toronto-Dominion
Bank has a proposal at the OTS to set up a joint venture offering its
banking services in Wal-Mart stores. The representatives of these
companies have made statements, including remarks to my staff, about
the possible use of Wal-Mart employees and checkout terminals to
perform bank functions.
While this ``business modification plan'' is not publicly
available, I believe the plan must be scrutinized carefully to ensure
that it does not circumvent Section 401 of the Gramm-Leach-Bliley Act
or the banking and commerce separation. I would be very pleased to work
with you to ensure that both the letter and spirit of Gramm-Leach-
Bliley is implemented properly.
Once again, thank you for your willingness to serve, Mr. Gilleran,
and thank you, Mr. Chairman, for working hard to ensure that we act as
quickly as possible on banking nominations.
----------
PREPARED STATEMENT OF JAMES E. GILLERAN
Director-Designate, Office of Thrift Supervision
October 23, 2001
Chairman Sarbanes, Senator Gramm, and Members of the Committee, I
am very honored that President Bush has nominated me to serve as
Director of the Office of Thrift Supervision and I am grateful to have
the privilege of your consideration. I would like to introduce those
members of my family who are present today.
The thrift industry is composed of approximately 1,000
organizations, which operate in all States with approximately $1
trillion in assets. Many of the organizations are small, some are owned
by mutual thrift depositors, and several are very large with leadership
roles in the financial services industry.
If confirmed, I would bring to the role of Director a unique range
of experiences. I was the banking regulator for our most populous and
diverse State during one of the most challenging periods in our
economy's history. For 25 years, I served the banking industry as
auditor and consultant. Most recently, I led the successful turnaround
of a historic San Francisco bank. The diversity of my professional
background has enabled me to understand and value the perspectives of
both great and small financial institutions, the challenges implied in
providing for their safe and sound operation, and the importance of
protecting the consumer and taxpayer.
As California's banking superintendent during an economically
volatile period, I led the California liquidation of the Bank of Credit
and Commerce International and was able, after liquidating all debts,
to contribute in excess of $100 million to aid others in the worldwide
liquidation.
In connection with the closure of another institution where
investors in trust certificates were facing a total loss of investment,
we were pleased to be able to resolve all matters and return in excess
of 100 percent of investment to all parties, many of whom were retired
and would have lost their entire life savings.
As a regional managing partner with the worldwide accounting firm
of KPMG, I directed all bank practice in the Western Region, including
recruitment and training of financial institutions specialists.
In 1994, I became Chairman and CEO of the Bank of San Francisco, an
institution facing closure by the FDIC. When we sold it in December
2000, it was one of the most profitable in its size in the country.
Leading the Bank of San Francisco through this challenge granted me the
invaluable opportunity to experience firsthand those factors that
contribute to a financial institution's deterioration, as well as those
which lead to its reclamation.
I am enthusiastic about the opportunity to serve our county during
this demanding time. If confirmed, I will dedicate myself to the
preservation of stability in our Nation's diverse thrift organizations.
I thank each of you for your time and your consideration.
NOMINATIONS OF:
ALLAN I. MENDELOWITZ, OF CONNECTICUT
FRANZ S. LEICHTER, OF NEW YORK
JOHN T. KORSMO, OF NORTH DAKOTA
TO BE DIRECTORS OF THE
FEDERAL HOUSING FINANCE BOARD
EDUARDO AGUIRRE, JR., OF TEXAS
TO BE FIRST VICE PRESIDENT AND
VICE CHAIRMAN OF THE
EXPORT-IMPORT BANK OF THE
UNITED STATES
AND
RANDALL S. KROSZNER, OF ILLINOIS
TO BE A MEMBER OF THE
COUNCIL OF ECONOMIC ADVISERS
----------
THURSDAY, NOVEMBER 15, 2001
U.S. Senate,
Committee on Banking, Housing, and Urban Affairs,
Washington, DC.
The Committee met at 10:12 a.m., in room SD-538 of the
Dirksen Senate Office Building, Senator Paul S. Sarbanes
(Chairman of the Committee) presiding.
OPENING STATEMENT OF CHAIRMAN PAUL S. SARBANES
Chairman Sarbanes. The hearing will come to order.
This morning, the Committee on Banking, Housing, and Urban
Affairs will consider the nominations of Allan Mendelowitz,
Franz Leichter, and John Korsmo, to be Directors of the Federal
Housing Finance Board.
We will also consider the nominations of Eduardo Aguirre,
to be First Vice President and Vice Chairman of the Export-
Import Bank, and Randall Scott Kroszner, to be a Member of the
President's Council of Economic Advisers.
We will do a lead-off panel with the three nominees to be
the Directors of the Federal Housing Finance Board. If they can
come forward and take their places at the table, we would
appreciate that. And then we will follow with Mr. Aguirre and
Mr. Kroszner.
We want to welcome the nominees to the Committee today. We
are glad they are able to be with us. In addition, when we
obtain a quorum, or if not, we may do it after a vote, I would
like to be able to vote to report out the nominations of Mark
Olson and Susan Schmidt Bies, to be Members of the Board of
Governors of the Federal Reserve System, and the nomination of
James Gilleran, to be Director of the Office of Thrift
Supervision.
Our first panel consists of the nominees to the Federal
Housing Finance Board, which regulates the Federal Home Loan
Bank System, a System of 12 regional banks created by Congress
in 1932, to assure the availability of funds for home mortgage
lenders. These banks are cooperatively owned by their members,
which currently include almost 7,800 commercial banks, thrifts
and credit unions, and also insurance companies.
As of June 30 of this year, the Federal Home Loan Bank
System's assets totaled almost $667 billion. In other words,
two-thirds of a trillion, making it one of the largest
Government sponsored enterprises.
The System provides low-cost loans, called advances, to its
members to support housing finance. At the end of June,
outstanding advanced totaled $450 billion--that is an increase
of 170 percent since the end of 1996.
The System also supports an affordable housing program
mandated by statute through which the banks make grants
available to support construction purchased in rehabilitation
of housing for very-low-, low-, and moderate-income families.
Since that program was created in 1989, the banks have
granted nearly a billion dollars to help create over 200,000
housing units.
The Finance Board is charged with overseeing this extensive
system to ensure that it continues to fulfill its mission of
supporting affordable housing. I believe that the
responsibility of the Finance Board is of particular
importance.
I am pleased to welcome to the Committee the three nominees
who are before us.
Allan Mendelowitz is currently serving as a Director of the
Finance Board and served as its Chairman from his appointment
last December until June of this year. Mr. Mendelowitz has had
a very distinguished career in Government service. Amongst
other things, he has been the Executive Director of the U.S.
Trade Deficit Review Commission, Executive Vice President of
the Export-Import Bank of the United States, and was the
Managing Director for International Trade, Finance and
Competitiveness in the General Accounting Office, where he
directed a number of studies of the Nation's finance and
economic development policies. Prior to that, he was a
Professor in Urban and Regional Economics, including also
housing economics, local public finance, and urban economic
development.
Franz Leichter is also currently serving as a Director of
the Finance Board. He brought to the Board extensive experience
in housing and financial services, a distinguished Member of
the New York State Senate from 1975 to 1998, where he was a
Member of the New York State Senate Banking Committee.
Mr. Leichter has published a guide to banking services in
New York, engaged in providing funding for a number of
community organizations aimed at conserving affordable housing,
and sponsoring community improvement, and was really one of the
leading public policymakers in the State of New York in his
tenure in the State Senate with respect to housing and
financial services issues.
John Korsmo has had extensive experience in real estate
business. His commitment to public service is reflected in his
membership of the Small Business Administration Advisory
Council, the North Dakota State Banking Board, and the North
Dakota Board of Higher Education. And he also served as Policy
Director in the Office of Governor Ed Schafer of the State of
North Dakota.
We regard oversight of the Federal Home Loan Bank System as
of high importance and we are looking forward to hearing your
statements.
Now before I swear the witnesses in, I will turn to my
colleagues and see if they have any statements.
Senator Bunning.
COMMENT OF SENATOR JIM BUNNING
Senator Bunning. No statement, Mr. Chairman.
Chairman Sarbanes. Senator Reed.
COMMENT OF SENATOR JACK REED
Senator Reed. No statement, Mr. Chairman.
Chairman Sarbanes. Would you all please stand?
Do you swear or affirm that the testimony that you are
about to give is the truth, the whole truth, and nothing but
the truth, so help you God?
Mr. Mendelowitz. I do.
Mr. Leichter. I do.
Mr. Korsmo. I do.
Chairman Sarbanes. Do you agree to appear and testify
before any duly-constituted committee of the U.S. Senate?
Mr. Mendelowitz. I do.
Mr. Leichter. I do.
Mr. Korsmo. I do.
Chairman Sarbanes. Thank you very much. We are prepared to
hear your statements. If you have members of your family you
want to introduce, we would be quite happy to recognize them.
Mr. Mendelowitz, we will begin with you and go to Mr.
Leichter and then over here to Mr. Korsmo.
STATEMENT OF ALLAN I. MENDELOWITZ
OF CONNECTICUT, TO BE A DIRECTOR OF THE
FEDERAL HOUSING FINANCE BOARD
Mr. Mendelowitz. Chairman Sarbanes, Senator Reed, Senator
Bunning, it is really a great honor to appear before you today
to testify on my nomination to be a Member of the Board of
Directors of the Federal Housing Finance Board. I would like to
thank President Bush for nominating me and I would like to
thank you, Senator Sarbanes, and Senator Daschle for your
encouragement and support.
I would also like to introduce my wife, Shereen, who is
right here. I also want to thank her. We have been married
almost 35 years now and without her support and encouragement,
I do not think I could have gotten to this point. She has been
a bottomless reservoir of patience for all the evenings I came
home late from the office, the weekends I was in the office,
and the long absences when I was on travel.
I really appreciate it, and obviously, I love her because
she has put up with me for 35 years.
Last, on a personal note, I have had the opportunity to
work with this Committee over the past two decades in several
different capacities and on a number of diverse issues. It has
been a privilege to work with the staff of this Committee
because they stand out for their integrity, their commitment,
and their talents.
I would like to take this opportunity to recognize the
staff who I have worked with over these many years--Steve
Harris, Marty Gruenberg, and Pat Malloy--who used to be on the
staff of the Majority--and Wayne Abernathy of the Minority
staff.
This is a time of great challenge and change for the
Federal Home Loan Bank System. Some of the changes are mandated
by statute and some of the changes are a direct result of the
changes that are taking place in financial markets and in the
membership of the Home Loan Bank System.
The Gramm-Leach-Bliley legislation mandated a new, modern,
risk-based capital rule for the Home Loan Bank System. I have
to say that before I arrived at the Finance Board, they took on
this challenge and within the very tight timeframe mandated in
the statute, they completed the rule, published on time, and
subsequently, as provided in the statute, all of the Home Loan
Banks have submitted their plans for review and approval by the
Finance Board.
I have to say, with respect to the new legislative mandates
that the Finance Board has received, that the Home Loan Bank
System and the Finance Board itself I think are performing
quite well to this point.
The second big challenge, of course, is how to grapple with
the changes that are taking place in the underlying membership
of the Federal Home Loan Banks and their implications for the
System.
We are, in a sense, forced to address these issues because
the Finance Board has received three petitions for an
unprecedented action, which would be to permit a member
institution to belong to more than one Federal Home Loan Bank.
It is clear that these petitions are symptomatic of the
broad changes and challenges to the System that are being
caused by changes in financial markets and the membership base.
In order to respond to these petitions, rather than trying to
review them on a case-by-case basis, we issued a broad-ranging
request for comments in September in an effort to more fully
understand the full depth and dimensions of the changes and of
their implications for the System.
I am looking forward to receiving good, creative,
thoughtful comments and information and I look forward to
working with this Committee and others in the Congress on this
important issue.
The resolution of these complex issues will require good
information and analysis and very careful and thoughtful
deliberation.
In closing, I have to say again how honored I am to be
here. If confirmed, I pledge to work closely with this
Committee and to continue the long-standing spirit of
cooperation that has existed between the Federal Housing
Finance Board and the Congress.
I will pledge to work hard to ensure the safety and
soundness of the System and ensure that the Federal Home Loan
Banks fulfill their public mission.
I have submitted my full statement for the record and with
this, I conclude my oral comments. Obviously, if any of the
Senators on the Committee have questions, I will be more than
happy to try to answer them.
Thank you.
Chairman Sarbanes. Thank you very much.
Mr. Leichter.
STATEMENT OF FRANZ S. LEICHTER
OF NEW YORK, TO BE A DIRECTOR OF THE
FEDERAL HOUSING FINANCE BOARD
Mr. Leichter. Good morning, Mr. Chairman, Senator Reed.
Chairman Sarbanes. I think you need to pull that microphone
a little closer to you.
Mr. Leichter. Okay. I'm sorry. Good morning, Mr. Chairman,
Senator Reed, and Senator Bunning. Thank you very much for the
opportunity to appear before the Committee. I am honored and
privileged to be before you as President Bush's nominee to one
of the positions on the Board of Directors of the Federal
Housing Finance Board.
I want to first express my appreciation to you, Mr.
Chairman, and to Senator Daschle, and to the Senator from my
home State, Senator Charles Schumer. Also, I am pleased that my
wife, Melody Anderson, is here with me today and it gives me a
chance to thank her publicly for her support and encouragement.
Chairman Sarbanes. I am glad we hold these hearings. The
wives get recognition that they do not otherwise perhaps get.
[Laughter.]
Mr. Leichter. We appreciate the fact that the Committee
gives us this opportunity.
[Laughter.]
I have had the distinct pleasure of serving on the Federal
Housing Finance Board since August 2000. It has been a very
productive and rewarding experience. My primary concern at the
Finance Board has been to ensure the safety and soundness of
the Federal Home Loan Bank System. And if confirmed, this will
continue to be my top priority.
I have taken a special interest in the System's mission of
supporting housing in this country. I think we can all take
pride in the affordable housing program which Congress had the
foresight to enact as part of FIRREA in 1989.
As you pointed out, Mr. Chairman, this year, the affordable
housing program topped the $1 billion mark, more than 200,000
units of affordable housing that have been produced under this
program. Other Federal Home Loan Bank System community cash
advance programs have invested $2 billion in our communities.
The Federal Home Loan Bank System is uniquely positioned as
a key source of liquidity for small community financial
institutions in meeting the credit needs of the Nation's
communities, big and small, urban and rural. Although the
Federal Home Loan Bank System is economically sound, it must
continue to evolve to meet the needs of the financial services
sector.
In the upcoming year, the System will face two primary
challenges. First is dealing with the ramifications of the
ever-consolidating financial services industry, in particular,
its effects on Federal Home Loan Bank System membership. Second
is overseeing the implementation of a new risk-based capital
system.
The System also faces the crucial question of how it will
adapt to the dramatic changes that have occurred as a result of
a rapidly consolidating financial sector in which national
financial institutions are organized in a variety of ways under
a single or multiple charter.
Several institutions have now petitioned the Finance Board
to address directly the issue of membership changes as a result
of mergers and acquisitions across the boundaries of different
Federal Home Loan Bank districts. The Board has chosen to deal
with this issue on a system-wide basis by issuing a
solicitation for comments in September 2001, that focused on
the range of issues raised by these petitions.
Any solution must take into account that the financial
markets have changed significantly since the System was created
in 1932 to serve small savings institutions.
The Finance Board looks forward to working with all of our
core constituencies, including this Committee and the Congress,
to guide us in taking the appropriate action within the present
statutory framework.
Although I believe that the resolution of these complex
issues will require a great deal of careful reflection and
analysis, I am confident that they can be resolved in a way
that continues the continued viability of the Federal Home Loan
Bank System and maintains its cooperative character.
The Finance Board is presently in the process of
implementing a new risk-based capital structure to implement
the provisions of the Gramm-Leach-Bliley Financial
Modernization Act. And I am pleased to say that the Finance
Board met the timeframe set forth by the Congress and approved
the final capital rule in December 2000, after a process in
which we received input from those interested in the Federal
Home Loan Bank System, including, of course, the Congress.
As required by statute, each Federal Home Loan Bank has now
submitted a proposed capital plan by the end of the October
2001. These are now being reviewed by the Finance Board and I
think they will be approved and in place shortly.
The staff of the Finance Board deserves a great deal of
credit for the professional and expeditious manner in which it
has handled this capital process.
In closing, I would like to reiterate again what an honor
it is to appear before this Committee. I look forward to
continuing the spirit of cooperation between the Federal
Housing Finance Board and the Congress.
I have submitted a formal statement for the record.
This concludes my oral presentation. I would be very
pleased to answer any questions you or the Committee may have.
Thank you.
Chairman Sarbanes. Thank you very much. The full statement
will be included in the record as submitted.
Mr. Korsmo.
STATEMENT OF JOHN T. KORSMO
OF NORTH DAKOTA, TO BE A DIRECTOR OF THE
FEDERAL HOUSING FINANCE BOARD
Mr. Korsmo. Thank you, Mr. Chairman, and distinguished
Members of the Committee. Thank you very much for the
opportunity to appear before you today as a nominee for
Director of the Federal Housing Finance Board. I am deeply
honored to have been chosen by President Bush to serve the
people of the United States in this capacity, and I would
sincerely appreciate your support in confirming his decision.
If I may, Mr. Chairman, let me introduce a couple members
of my family. The love of my life, Michelle Larson, and one of
my three sons, Charlie. There are four people who are my life
and I am certainly happy that two of them could be here to
support me today.
Chairman Sarbanes. Very good.
Mr. Korsmo. I literally grew up in the housing industry. In
junior high and high school, I did filing and deliveries and
learned the basics of real estate title abstracting working in
a title plant in my hometown of Fargo, North Dakota. Thirty
years later, I owned the company.
Along the way, I became a lawyer and a licensed real estate
title abstracter and title insurance agent in both North Dakota
and Minnesota. I founded the first independent closing and
escrow company in North Dakota and northwestern Minnesota; and
I came to appreciate the important role that mortgage loan
officers, homebuilders, and realtors play in helping people
achieve the American Dream of homeownership.
Those mortgage loan officers, homebuilders, and realtors,
and the homebuyers they served, were my customers for over 20
years. My guess is that, if I have the privilege of being
confirmed, I will be the first Federal Housing Finance Board
Director who has actually closed a home mortgage package.
[Laughter.]
And I have closed hundreds of them. As a result, I think I
understand the real-world implications of fluctuations in the
availability of adequate mortgage loan funds and mortgage
interest rates, and the importance of simplifying accessibility
to affordable housing and community investment programs.
I know we were all pleased recently to read that
homeownership in this country has hit a modern-day high. As of
last quarter, 68.1 percent of American homes were owner-
occupied. This is an enviable record. But, unfortunately, among
some families--minority families, families of low- and
moderate-income, women-headed families, and new American
families--and in some communities, including my home community,
homeownership rates remain below 50 percent. Don't get me
wrong, I believe the Federal Home Loan Banks are doing an
excellent job in this regard now. But I assume we can always do
better. And if I become a Finance Board Member, a continuing
emphasis on affordable housing will be one of my highest
priorities.
I also want to mention that I do have previous experience
as a bank regulator, having served 4 years as the public
interest member of the North Dakota State Banking Board. The
Banking Board is responsible for supervising and ensuring the
safety and soundness of State-chartered financial institutions
in North Dakota, a role directly comparable to that of the
Federal Housing Finance Board. While I certainly recognize that
the scale of responsibility is different, the fundamental
safety and soundness principles are the same.
Chairman Sarbanes, let me say again how honored I am to
appear before you today. If confirmed, I, like Dr. Mendelowitz
and Mr. Leichter, pledge to work closely with the Members of
this Committee and the Congress to ensure the safety and
soundness of the Federal Home Loan Bank System and the
fulfillment of the System's critical public policy mission.
Thank you, again, Mr. Chairman. I look forward to
addressing any questions you or the Members of the Committee
may have.
Chairman Sarbanes. Thank you. We appreciate the statements
from all three of the nominees who constitute this panel.
I think we will do 5 minute rounds and we can do another
round if Members wish to do so.
As I understand the mission regulations issued in July
2000, the Finance Board discouraged banks from funding or
requiring loans with predatory characteristics, but did not
actually issue a regulation on the subject.
Individual banks have apparently developed their own
policies for avoiding involvement with predatory loans. For
example, the Atlanta bank requires that members certify that
none of the collateral they are using to get advances has
predatory characteristics.
Why wouldn't the Board take steps certainly to encourage,
and perhaps even require, other banks to follow the example set
by the Atlanta bank?
I would like to hear from each of you on that question.
Mr. Mendelowitz. Senator, I think you have identified one
of the serious problems in financial markets and in the lending
sector. We take concerns over this issue quite seriously.
At the current time, there is an interagency task force
that is deliberating on the issue of predatory lending. The
Finance Board has representation on that interagency task
force. I would characterize our current position as collecting
information and trying to understand what is being done
Government-wide, so that when the Finance Board moves forward
on this issue, we do it in the best way possible.
Mr. Leichter. Mr. Chairman, I think this is an important
issue and one that the Finance Board has to take a look at and
the System has to respond to.
And as Mr. Mendelowitz says, we are working together with
other regulators as part of the predatory lending task force
and would want to work together with these other regulators to
try to come up with a uniform policy. So, I think it is
something that the Board very definitely will look at and would
be willing to address.
Chairman Sarbanes. Mr. Korsmo.
Mr. Korsmo. Mr. Chairman, it may be presumptuous on my part
to talk about what has gone on in the past. I guess I can say
that I certainly share the concern you express about this
issue, particularly at a time when we may be looking at
increasing rates of delinquency and particularly for first-time
homebuyers. They tend to be the kind of people who would be
involved in this kind of a loan.
Again, I certainly share your concern. I am looking forward
to working with the other Members of the Board on addressing
those kinds of issues.
Chairman Sarbanes. Well, some of the other regulators are
moving. The Federal Reserve has a proposal out that they are
about to act on for comment. Of course, some of the Members of
your System have moved on it. This is an issue that we will
continue to follow closely.
The Finance Board has authority under the statute to set
the compensation of its staff, provided, ``In directing and
fixing such compensation, the Board shall consult with and
maintain comparability with the compensation at the Federal
Bank Regulatory Agencies.''
I am a strong supporter of public service, but there is a
problem because the Finance Board has set salaries
significantly higher than the other Federal Bank Regulatory
Agencies. How do we justify this disparity?
Mr. Mendelowitz. I would say that you have identified an
issue which the Finance Board going forward will need to look
at very carefully.
If you look at the span of responsibilities that the
Finance Board has, compared to the span of responsibilities at
the FDIC or the span of responsibilities at the OCC, I think
that their span of responsibilities are broader and quite
significant.
I think that we as an agency would have a very hard time
justifying compensation going forward that significantly
exceeded those of other FIRREA agencies.
Mr. Leichter. Mr. Chairman, just recently we did look at
this issue and we asked that we be provided with figures to
show whether the compensation of the staff of the Federal
Housing Finance Board was comparable to that of other
regulators. We will look at that. But as you properly pointed
out, the statute does say that these salaries should be
comparable and I think that we are required to implement that
provision of the law.
Mr. Korsmo. Mr. Chairman, I had the privilege of talking
with you earlier about this issue. I was surprised when I got
there to find out I am about the lowest-paid guy in the System
over there.
[Laughter.]
Which is fine. I have a history of serving on boards where
I received no compensation. I believe public service means
exactly that. But I am sensitive to your comments on this issue
and, believe me, I am looking forward to looking into exactly
that issue.
Chairman Sarbanes. Well, my time is expired. Let me just
add one further dimension to this.
The Financial Services Modernization bill repealed the
requirement that the Finance Board approve compensation for the
Federal Home Loan Bank Presidents. In 2000, the Bank
Presidents' salaries across the country increased by an average
of 43 percent over the previous year's level. These Bank
Presidents' salaries now are significantly higher. In fact, the
disparity compared, for instance, with the Regional Presidents
of the Federal Reserve Banks, is far greater than the staff
disparity we just talked about, it exists, this disparity is
just enormous.
Senator Bennett. What is the disparity with the Members of
the U.S. Senate?
Chairman Sarbanes. Even greater.
[Laughter.]
Even greater. And I think this is an issue that we will
have to revisit at some point. I just put it out there.
Now, Senator Bunning was here at the very outset. In fact,
even before I arrived here.
Senator Bunning. Thank you, Mr. Chairman.
I would like to follow up on the Chairman's inquiry about
staff compensation, not only your present compensation, but
also future consideration. I want to ask all of you--the
Federal Home Loan Bank Chairmen's salaries, and what they were
and what they are now, since the cap came off. What is the
current compensation for a Member of your Board?
Mr. Mendelowitz. The compensation for a Board Member
currently is $125,700, which is the compensation of Executive
Level 4. The Chairman's compensation is $133,000, which is
Executive Level 3.
Senator Bunning. Compared to the Federal Reserve Board,
what would that be?
Mr. Mendelowitz. I do not remember exactly, but I think
that the Chairman of the Board of Governors of the Fed is an
Executive Level 2. So, I would say the Chairman of the Board of
Governors is maybe paid slightly more. The Board of Governors I
would assume would be paid slightly more.
Senator Bunning. Okay. Then I would like the comparison,
since you have both been on the Board, of the Bank Presidents
in your System, approximately where they were and where they
are now, since the cap came off.
Mr. Leichter. The Bank Presidents, sir, I would say, on
average, their salary is between $500,000 and $600,000 a year.
Some are somewhat higher and some are somewhat lower.
Senator Bunning. That is now, not what it was.
Mr. Leichter. I would say that is their current salary,
2001.
Senator Bunning. Currently.
Mr. Leichter. As the Chairman pointed out, there has been a
significant increase in their salaries. But the Board no longer
has any authority to set the compensation of the Bank
Presidents.
Senator Bunning. Just the Board of the Bank itself.
Mr. Leichter. Yes, that is right.
Senator Bunning. Would you please give me your definition
of predatory lending? Any and all.
Mr. Mendelowitz. I cannot say I am an expert on it, but
from the perspective of an economist, any time that lending
activity takes place and the market works efficiently, one
would expect to find a rate of interest on a loan equal to some
sort of pure rate of interest plus a spread to represent the
risk, which should be the expected loss on the transaction. In
other words, the spread represents the creditworthiness of the
borrower.
A borrower who has absolutely zero-risk, such as the U.S.
Government, gets in effect a pure rate of interest. Any other
borrower who represents higher risk pays more.
And the extent to which, because of a lack of information
or a lack of efficiency within the market, a lender winds up
lending to a borrower at a spread over the pure rate of
interest that is substantially higher than the risk associated
with that borrower, and is able to do that because of lack of
asymmetries in information, or lack of understanding on the
part of the borrower, I guess you could call that predatory.
Senator Bunning. So, then, the knowledge of the borrower
would be part of the consideration. In other words, whether he
knows or she knows that they are getting a fair and equitable
deal and does it also depend on the ability of the borrower to
borrow money? In other words, the credit risk?
Mr. Mendelowitz. Yes, that was the point I was trying to
make.
Senator Bunning. I understand that. But there are people
who have really bad credit ratings and sometimes they wind up
with the borrower of last resort, so to speak. And you could
see where there would be a higher rate of interest.
I am trying to get at the handle of what is predatory
lending and what is not. The law of supply and demand takes
over here. If you are hurting and you have had a bad credit
rating, you usually pay 1, 2, 3 percentage points higher for
the money. Obviously, I would be more at risk if I were the
lender in making a loan to you if you had a bad credit risk. Is
that considered predatory lending?
Mr. Mendelowitz. I think that what you have described is
the sort of fine distinction I was trying to make between
interest rates that represent compensation to the lender for
the risk of the borrower versus interest rates that go well
over and above compensation for that risk.
Senator Bunning. Over and above. Okay. You said something
about a task force on predatory lending. Are you a member of
that task force?
Mr. Mendelowitz. No, it is a staff member.
Senator Bunning. Staff member. Have they come out with
their report and do they have a definition of what predatory
lending is? Would that be included in the task force?
Mr. Mendelowitz. I actually do not know the answer to your
question. But if I were organizing the task force, coming up
with a definition would be one of the first things that I would
try to do because you have to know what it is that you are
dealing with when you are trying to prepare a response.
Senator Bunning. Thank you very much. My time has expired.
Chairman Sarbanes. Thank you, Senator Bunning.
Senator Corzine.
COMMENTS OF SENATOR JON S. CORZINE
Senator Corzine. Yes. Thank you, Mr. Chairman. And I
welcome the nominees.
I have a particularly parochial issue that I would like to
hear your comments on. I think it actually is more than
parochial given the events of September 11. And this is the
multidistricting issue, dual membership that gets at the
application of----
Senator Gramm. Jon, pull your mike a little closer.
Senator Corzine. --what some people might argue is the
crown jewel of the System. And that is the affordable housing
program and the matching programs that exist and the likelihood
that if, through the mergers, a number of the institutions are
not able to be recognized at least for this purpose. In the
multiple districts, you are going to see a diminution of
application of matching funds from the Federal Home Loan Bank
profits scenario.
I consider this one of the more important roles of
fulfilling the mission of the Federal Home Loan Bank and I
would love to hear your views on the multidistricting issue. Or
are there other solutions outside of dealing with allowing for
the multiple application that you are considering or you think
should be considered, so that we do not lose the economic
participation of the Home Loan Banks because of the
consolidation of the industry?
Any of you would be fine.
Mr. Leichter. Senator, you certainly identified what is
probably the most difficult issue that the Board is going to
face in the coming year, and that is the issue that we call the
multidistrict membership, whether a member may belong to more
than one bank.
The Federal Home Loan Bank System was set up 1932, at a
time when there were small thrifts. Most of them were located
in one community and at the most, they may have had one or two
branches throughout the county.
Now, we have national banks and what has occurred
particularly recently in the consolidation is that you have
national banks under one unitary charter carry on business
throughout the whole country and through more than one Home
Loan Bank district. In fact, we currently have over a hundred
financial institutions that through holding companies have
banks that belong to or that are members of various Home Loan
banks.
We now have the situation in New York that you pointed out,
you and Senator Schumer----
Senator Corzine. And New Jersey.
Mr. Leichter. And New Jersey. The New York Bank, which
covers New Jersey and New York, where there has been an
application to allow Washington Mutual to become a member of
that Bank and to waive the regulations in regard to single
membership.
I want to assure you that we are paying very careful
attention to that application and trying to deal with it in a
prompt manner. But there are some extremely complex issues--
legal, policy issues. We hope to be able to come up with some
resolution.
Senator Corzine. There may be other solutions than just
multiple memberships and it may be going back and rewriting
either statutory or regulatory structures that recognize a
changed world from the world that you described in 1932.
Clearly, the depository base of the institutions is still
reflective of the communities and where they are doing their
business. And Dime may not have the same logo in front of the
branches, but it is still working in the community. And so,
some of the benefits associated with the fees to the Home Loan
Bank and therefore, their profits certainly I think need to
reside in either dealing with it by different multidistrict
memberships or some other solution, which I would be more than
happy to work with folks on to try to accomplish--I think
address a need that is real.
Mr. Leichter. Well, we would very much like to work with
you and other Members of this Committee in dealing, first of
all, with a system-wide solution and second, addressing the
particular problem now of the New York Bank.
I would just add that the New York Bank lost its
headquarters. They were in the World Financial Center in
Building 7, which collapsed. So there is every intention on
behalf of the Board, to the extent we can, to be helpful to
that Bank.
Senator Corzine. Right. My time has expired.
Chairman Sarbanes. I want to comment at this point. I think
the issue of multidistrict membership raises some very
important questions for the Board. As I understand it, the
Board has issued a solicitation for comment and is proceeding
in the regular order to address this issue and reach some
decisions.
Now, I am concerned about the affordable housing program
and the questions which have been raised. But as I understand
it, the advances by the Home Loan Bank in New York were $52
billion at the end of 2000--$52 billion. Is that correct, or do
you have reason to differ with that?
Mr. Mendelowitz. That sounds like about the right ballpark.
Chairman Sarbanes. The affordable housing program of the
Federal Home Loan Bank of New York in 2000 was $22 million--$52
billion advances, $22 million on the affordable housing
program. Is that correct?
Mr. Leichter. That sounds correct.
Chairman Sarbanes. Now, we are told that the Dime merger
might reduce funding by 20 percent. Of course, I think the
affordable housing aspect of that could be dealt with in some
other way. It is not quite clear to me why it should be used to
make a fundamental change in the System. But even if it were
not, 20 percent of $22 million is $4\1/2\ million. Correct?
Mr. Leichter. Right.
Mr. Mendelowitz. I think, Senator, what you have identified
is that this Board must be very careful to make decisions based
on good data. Asserting a problem to get an issue on the table
is okay. But as a Board Member, in order to make a decision, I
would have to see the data that establishes there is a problem
that requires some extraordinary action, and the case has not
been made yet.
Chairman Sarbanes. You have 7,800 members. I understand 2
percent of the members account for 40 percent of the advances.
Is that correct?
Mr. Mendelowitz. Yes.
Chairman Sarbanes. Senator Gramm.
Senator Gramm. Mr. Chairman, let me say, I rejoice. I think
that there are five members on this Board. We have, if we
confirm them, three of them here.
[Laughter.]
So, we have the right people here to talk to.
Let me say, without overstating the case, that with the
great success and I think the very positive service of Freddie
and Fannie and their growth in the last 25 years, I am not sure
what the Federal Housing Finance Board does.
I think this is a renegade agency under Chairman Morrison.
They took actions in my opinion that are absolutely
indefensible.
First of all, I believe each of you are qualified for the
position and I intend to support each of your nominations. But
I think we have to take a long, sober look at exactly what this
Government agency is doing, what its mission is, whose interest
it is serving.
And look, I am a strong believer in paying people who work
for the Federal Government. I do not love Government, but I
believe you should have the best people in Government that you
can get, and I think paying competitive salaries is critically
important.
I have grieved over how little we pay the people on the
Federal Reserve Bank Board. I have had trouble getting people
who are Regional Presidents to let themselves be considered to
be members of the Board because of the big pay cuts involved.
I am not someone who is concerned that somebody was making
a lot more money than I was making. I would think you would
have a hard time hiring a good person for the salary of a U.S.
Senator to run one of the regional banks.
But I do not think the kind of salaries we are talking
about now, unless you all are doing something of such great
importance that it has missed my attention, I do not think
those salaries can be justified. And I think it creates a very
real problem when you have people working who are Regional
Presidents of the Federal Reserve banks and they are making a
third what your people are making in what would be a parallel
job.
So, Mr. Chairman, I want to thank each of you for your
willingness to serve. I look forward to working with you. I do
believe it is time for this Committee to take a long, hard look
at exactly what the Federal Housing Finance Board is doing.
We need to look at its lending function with commercial
banks. I would have to say that I was never in love with that
policy, even though it was one of the compromises that helped
put together a major piece of legislation that we dealt with
several years ago.
I think we are in for a comprehensive review. I would just
like to ask each of you, when you are confirmed, and I believe,
based on your qualifications, you will be, to really sit down
and go back and look at the mission of this agency, look at
what has happened over its lifetime in terms of other ways of
doing the same thing, and that is Freddie and Fannie, for
example.
We really need to decide what it is that we set the agency
up to do and then compare it with what it is doing. I think if
there is a difference, that we should take a long, hard look at
what was Congress' intent? Is that intent still valid?
Now part of this is our job. But I think part of it, as
Members of the Board, is your job. I just commend each of you
to that task. And again, I want to thank each of you for being
willing to serve.
The only way you are ever going to get your name in the
paper as a Member of the Federal Housing Finance Board is to
screw something up.
[Laughter.]
Nobody is ever going to write an article saying that, after
a distinguished career at GAO, that you did something brilliant
on this Board, or after a career as a member of the banking
committee in New York. Nobody is going to write an article in
The New York Times talking about what a great job you are doing
on this Board. But if you screw something up, you can get your
picture on the front page of The New York Times.
[Laughter.]
And so, I understand the sacrifice that is involved in
public service. I just want to thank each of you for being
willing to serve. I think part of the greatness of our system
is that we do have people that are willing to serve in
positions that do not carry any great glory, but often carry
great responsibility and provide tremendous public service.
I look forward to working with each of you, and thank you
very much.
Mr. Leichter. Thank you, Senator.
Chairman Sarbanes. Senator Bunning, do you have any further
questions?
Senator Bunning. No, thank you, Mr. Chairman.
Chairman Sarbanes. I just have a couple and then we will
move on to the next panel.
One of the responsibilities of the Finance Board is to
appoint the public interest directors to the individual Home
Loan Bank Boards. I think there are some 75 or 80 of them
around the country in the various individual Home Loan Banks.
Of course, Mr. Korsmo was a public interest member of the Bank
Board in North Dakota, as I understand it.
Mr. Korsmo. Yes, sir.
Chairman Sarbanes. He presumably has some sensitivity to
the role of the public interest directors.
One of the things we have been concerned about is the
feeling on the part of minorities, and women, although they are
a different minority because they are really a majority. But in
any event, that they have been left out of the financial
system, that they really are not in it, they do not play any
role in it, and so forth.
Now one relatively minor step, that can be done to sort of
address that, and some efforts have been made, is in the
appointment and selection of public interest directors to pay
some attention to this issue.
Obviously, there are some very qualified people in those
segments of the population who are not part of the ``good old
boys network.'' For that reason, they do not get looked at,
they do not get drawn.
I would be interested in your view of this issue.
Mr. Leichter. If I may just say, Mr. Chairman, I think you
are absolutely correct, that we can get greater and better
diversity on our Board of Directors of the 12 Home Loan Banks,
and the best way of doing that is through the public interest
directors.
I hope that we will be able to choose competent people. I
just want to say that I have served, in the 1 year I have been
there, under two Democratic and one Republican chairmen, and I
found that the Board acted in a very nonpartisan, nonpolitical
fashion, and I hope that will continue.
I have every expectation it will be if we are confirmed and
that we will keep in mind your admonition that we do need to
have greater diversity on our boards.
Chairman Sarbanes. Mr. Korsmo.
Mr. Korsmo. As I said, Mr. Chairman, I think you are
absolutely right. I think the two keys to being public interest
members of any board, and certainly this one is no different,
first is that the people have a strong history of community
involvement; and, second, a real, genuine interest in the
mission of this board.
I can say that at least in the market with which I am most
familiar, the most successful, the most effective, the most
talented mortgage loan originators now are all women. The same
is true of the realtors in the community I am most familiar
with. And so, it seems to me that there certainly is the
opportunity to improve the diversity of the boards as they
exist.
With that caveat, the people that we appoint must all have
a strong history of community involvement and a real interest
in the mission of this organization.
Chairman Sarbanes. Mr. Mendelowitz.
Mr. Mendelowitz. Over the course of the past year, I have
had the chance to meet with every Board of Directors in the
System. And it was clear to me that past efforts to promote
greater participation in the Board of Directors by women and by
minorities has, in fact, made progress. And I think going
forward, the goal is to make sure that we do not backslide.
Chairman Sarbanes. Thank you all very much. We appreciate
your appearance before the Committee and we hope that we will
be able to act on your nominations in the very near future.
Mr. Mendelowitz. Thank you.
Mr. Korsmo. Thank you.
Mr. Leichter. Thank you, Mr. Chairman.
We will now move on to the next panel. Mr. Aguirre, if you
would come forward.
[Pause.]
Chairman Sarbanes. Eduardo Aguirre has been nominated by
the President to be First Vice President and Vice Chairman of
the Export-Import Bank. Mr. Aguirre was born in Havana, came to
this country as a youth. His personal story is notable in terms
of starting out in very difficult circumstances and then moving
up, utilizing the opportunities that the American system
offers. He has had a very distinguished banking career and
rendered a very significant public service to his community.
It is not an uncommon story in America, but it is always
worth noting, and I want to recognize it here today and I think
it is one of the great strengths of America.
Mr. Aguirre is a graduate of the Holy Cross High School in
New Orleans, received a B.S. from Louisiana State University.
Started his financial career as a banking officer in Mexico
City for Texas Commerce Bank. Worked for First Union National
Bank as Vice President and Manager of the Latin America area.
And since 1977, he has worked for the Bank of America,
eventually becoming President of its International Private
Bank. He also headed its export finance business.
He has held a number of important community positions--
Board of Regents of the University of Houston System, by
appointment of then-Governor Bush, and served as the Chairman
of that Board in 1996 to 1998.
Appointed by the President as a Member of the National
Commission on Employment Policy in the early 1990's. He served
as Trustee and Chair-Elect of the Texas Bar Foundation.
Director of Texas Children's Hospital. President of the
Hispanic Political Action Committee. All of which I think is a
highly commendable record of community involvement and public
service.
As First Vice President of the Export-Import Bank, Mr.
Aguirre would be responsible for much of the day-to-day
management of the Bank, as well as, of course, to play a very
important role in its policy decisions.
He brings very significant qualifications for this
position. We look forward to hearing from him this morning.
Senator Gramm.
COMMENTS OF SENATOR PHIL GRAMM
Senator Gramm. Well, Mr. Chairman, thank you. I think that
you have a statement from Senator Hutchison which we want to
put in the record.
Chairman Sarbanes. I do.
Senator Gramm. I know Eduardo Aguirre. He is an outstanding
person. He has had much success as a citizen, as a business
person. It obviously represents some sacrifice on the part of
his family, with two college-age children, to be coming to
Washington, DC, to take a job which probably pays maybe a
quarter of what he was making, or less.
Eduardo, I want to thank you for your willingness to serve.
The Export-Import Bank is a very important agency that
performs a vital function in world commerce. Your position is
one that has to do with day-to-day management of the bank and
its functions. I think you are eminently qualified to do the
job. And I would just like to thank you for your willingness to
stay.
Mr. Aguirre. Thank you, Senator.
Chairman Sarbanes. Senator Bennett.
COMMENT OF SENATOR ROBERT F. BENNETT
Senator Bennett. No opening statement, Mr. Chairman.
Chairman Sarbanes. Before I swear you in, I will include
Senator Kay Bailey Hutchison's statement in the record. She had
hoped to be able to actually be here with us and to present you
to the Committee, but we are in the closing days of the session
and the demands are pretty great and she was not able to join
us.
I want to quote two short paragraphs from her statement.
She was assuming she would be here. She says: ``It is such an
honor to be here today to introduce Eduardo Aguirre, Jr. to be
the First Vice President and Vice Chairman of the Export-Import
Bank. Of course, it is always an honor to introduce yet another
Texan for an important role.''
We noticed that in these days.
[Laughter.]
Senator Gramm. I do not draw attention to it any more.
[Laughter.]
Chairman Sarbanes. ``And, the Ranking Member will be very
pleased to hear, this Texan has a daughter at Texas A&M!''
Mr. Aguirre. Yes, sir.
Senator Gramm. Don't get behind on your tuition, now.
[Laughter.]
They are getting ready to go up, as I understand.
Chairman Sarbanes. Then next to the closing paragraph she
says, and she is putting a heavy burden on you here: ``Known as
a brilliant thinker and an effective and hard worker, as well
as an important spokesman and advocate, he is known to have the
right touch to create solutions through research and
principle.''
The whole statement will be included in the record.
I would ask you to stand, sir, so that I could administer
the oath.
Do you swear or affirm that the testimony that you are
about to give is the truth, the whole truth, and nothing but
the truth, so help you God?
Mr. Aguirre. I do.
Chairman Sarbanes. Do you agree to appear and testify
before any duly-constituted committee of the U.S. Senate?
Mr. Aguirre. I do.
Chairman Sarbanes. Thank you very much. We would be very
happy to hear your statement, and if any of your family members
are here that you would like to present, we would be happy for
you to do that as well.
STATEMENT OF EDUARDO AGUIRRE, JR.
OF TEXAS, TO BE FIRST VICE PRESIDENT
AND VICE CHAIRMAN OF THE
EXPORT-IMPORT BANK OF THE UNITED STATES
Mr. Aguirre. Thank you, Senator.
Chairman Sarbanes, Ranking Member Gramm, Senator Bennett, I
am very pleased to come before you today as you consider my
nomination to be the First Vice President and Vice Chairman of
the Export-Import Bank of the United States.
Thank you for allowing me the opportunity to introduce my
family, my wife, Maria Teresa Avila, and my son Eddy. Of
course, my daughter Tessie is at A&M studying--hopefully hard.
[Laughter.]
Should the Senate act favorably on my nomination, this will
mark my first full-time service to my adopted country. Almost
40 years ago, I came to this land of freedom and opportunity as
a 15-year-old Cuban refugee with no family, no money, and no
working knowledge of the English language. Along the way, I was
sheltered and taught by Catholic Charities, cared for by the
United Way, and helped by many, many others. Later, a very
affordable U.S. Government student loan program allowed me to
attend college and eventually earn a degree from Louisiana
State University. I have overcome real and imagined obstacles
on my quest to realize my version of the American Dream, and I
am grateful beyond words.
I am extremely proud and humble to have been nominated by
President George W. Bush to serve the United States.
The Export-Import Bank is the official export-financing
agency of the U.S. Government. It supports U.S. exports and
sustains American jobs. If confirmed, I look forward to the
opportunity to work with Chairman Robson, the rest of Ex-Im's
leadership and staff, plus others in the Administration to
advance our country's export financing agenda. Also, I will
welcome the opportunity to work with the Senate and the House
of Representatives.
Thirty-four years in banking have prepared me to accept
this challenge. I hope to bring to the job my broad risk
analysis experience, my management and leadership skills, a
healthy respect for the trust placed on me, an open mind, and
some measure of common sense.
In closing, I want to acknowledge my family as the bedrock
of my value system. We are hard-working, God-fearing people who
strive to give back some of the many blessings that have come
our way.
Mr. Chairman, Senator Gramm, Senator Bennett, I
respectfully ask for your favorable consideration of my
nomination and stand ready to respond to any questions that you
may have.
Thank you for your attention.
Chairman Sarbanes. Thank you very much, sir.
I have a very simple question to start off with. You have
been nominated for a term that expires on January 20, 2005.
Mr. Aguirre. Yes, sir.
Chairman Sarbanes. Is it your intention to serve the full
term if you are confirmed?
Mr. Aguirre. Yes, Senator. My family and I are committed to
fulfill this obligation.
Chairman Sarbanes. All right. I am pleased to hear that. I
am increasingly concerned by people who take these appointments
for a term and then they serve a couple of years and the next
thing you know, they are gone, often off to some sort of
lucrative opportunity, in part based on that service. So, I am
very pleased by that statement.
You headed up the export finance business for Bank of
America at one point in your career?
Mr. Aguirre. At one point in my career, yes, Senator.
Chairman Sarbanes. What in your view are the key obstacles
to U.S. exporters seeking export finance from U.S. banks?
Mr. Aguirre. There are many issues in trying to level the
playing field, I think, not the least of which is the fact that
there are other competing export financing agencies throughout
the world, and certainly in Europe and in Asia and in our own
continent which are prepared to support their exporters.
Therefore, one of the obstacles that I think the U.S.
exporters find is trying to level the playing field as
organizations that are similar to the Export-Import Bank enter
the fray. We have to stay in that competitive arena.
About a quarter of our economy really is dealing with
exports and it is a very important element in this economy. In
a perfect world, I think we would find buyers and sellers and
prices would be set. This is not a perfect world. There are
economic implications. There are political implications. There
are exchange implications and so many other things.
So, I think the Export-Import Bank would come in to try and
add value where value is needed and not where we are not.
Chairman Sarbanes. I think that is a very realistic answer.
This Committee, actually, with Senator Heinz's leadership, our
former colleague, enacted the Tied Aid War Chest for the
Export-Import Bank. The theory was not that we would move ahead
because, obviously, our preference is that they compete on
price and quality and that is that. But where other countries
were providing really such a break for their exporters, that
it, in effect, pretty well dictated where the business went.
We thought that the Export-Import Bank ought to be able to
counter that. In fact, if it is known that we are going counter
it, it is less likely that others will do it because they
appreciate the competition. Do you have any view on the use of
the Tied Aid War Chest?
Mr. Aguirre. I think it is a tool that is there, hopefully
more as a deterrent than one to be used. In looking at the
history of that particular issue, I think it has been invoked
maybe five or seven times in its history.
It is not one that Ex-Im Bank has chosen to use without a
lot of thought. I believe it is something that is good to have
and perhaps other countries, particularly the Japanese, and
sometimes the Spaniards, may think twice before they put their
efforts in that.
But I think it is a tool that I am glad we have and should
the time come, I can assure you, we will be very judicious in
weighing all the implications before we make a decision.
Chairman Sarbanes. We were able to negotiate these rules at
OECD limiting export credit terms and get other countries to
join in doing that. So, we placed some restraints upon its
indiscriminate use and the favorable terms of it. But now, some
countries--Germany and Canada, for example--have set up private
government sponsored enterprises to supplement the official
export credits, so-called market windows. Now the
nongovernmental credits thus far are exempt from the OECD
rules. So what happens is the combined private official credits
result in financing terms that are significantly more
attractive than what the OECD rules allow.
This is a matter of grave concern to our exporters. I see
my time is expired. I will just leave this thought with you. It
seems to me that the Ex-Im Bank has to pursue a policy that
counters these market windows that are being used by some of
our major competitors, in effect, to so sweeten the terms, that
they completely unbalance the playing field.
I am in favor of a level playing field. If I could achieve
the situation, I wouldn't have any favorable credits on
anyone's part, and then I think that our people can do
perfectly fine on a price and quality competition.
Unfortunately, that is not the situation we face, and I
think we have to counter it. Obviously, they have found another
way to go about it. And unless we make it clear that we are
going to counter it, they are just going to continue, I think,
to go down this path, much to the disadvantage of our
exporters.
So, I really leave that with you. It is an issue that the
Board is wrestling with right now.
Mr. Aguirre. Thank you, Senator.
Chairman Sarbanes. Senator Gramm.
Senator Gramm. Well, Mr. Chairman, first of all, Eduardo,
again, I want to thank you and your family for your willingness
to serve.
I am struck when I look at all the great Cuban Americans at
how Castro turned out to be such a great public benefactor for
America.
[Laughter.]
It is an amazing thing that a person who wished us no good,
who imposed a reign of terror in his own country, and who
clearly hates America and everything it stands for, helped send
so many people to our shores that have turned out to be such
great citizens. It just shows you the law of unintended
consequences.
Again, I am so grateful that you are willing to take this
job. I do not know, Mr. Chairman, whether people come here and
they get a credential and they go out to do something that pays
better, or whether they get caught up in the idea that they
have been appointed to a position by the President and they
cannot say no, and then they get to Washington and decide, this
is not such a great deal. I do not know what it is.
But here is the point I want to make, and I would like to
get your response to it.
I agree with everything that Chairman Sarbanes said about
export financing. It is an irrational economic policy for
nations to subsidize exports. It is roughly equivalent to me
just simply saying, every time I go to the grocery store, well,
let me just add 10 percent to what you are charging. It makes
no sense whatsoever.
The problem is that our individual producers are
disadvantaged relative to people doing the same business if we
do not have a similar policy.
Now, I never know whether we are leading this thing or we
are following it, and it is very hard to tell from where I am
sitting. But I am convinced that if we could have the Bank of
America financing exports and other nations, other exporters in
other countries were getting their financing from private
institutions, that we would be much better off.
I would just like to ask your response to that thesis, and
simply ask you, in your capacity, that if there is ever an
opportunity for the Ex-Im Bank to become involved in these
negotiations and sort of have a multilateral disarmament, if
you would be willing to help lead that effort?
Mr. Aguirre. Senator, I am sure that we will all enjoy
getting to utopia one day. But I do not know that that day is
going to come in my lifetime.
The way I look at this, and I do not know if my memory is
going to serve me right, but I think there is about a trillion
dollars of U.S. exports going on year-in, year-out. The Export-
Import Bank probably gets involved in about 3 percent of that.
It is a very small amount, maybe less. I think where we come
into play is really where exports are difficult to be
transacted, perhaps in countries where we as a government know
more than the average bear in the private sector in terms of
dealings with their own treasuries, and so forth and so on,
where we understand issues of foreign exchange availability
better than the private sector would. I think that is where the
Ex-Im Bank really adds value and an additional element in that
transaction.
Most of the exports that are leaving this country are
really on open account--letters of credit financed by the
private sector or some of them are actually inter-company
transactions between perhaps Ford or General Motors or IBM and
so on, and they are all subsidiaries abroad. So, we do not get
involved in that. I think we come in where it is a little more
difficult. And I think there is a role for an Export-Import
Bank or a similar organization in another country to actually
bridge that gap that would otherwise not be bridged.
Senator Gramm. Thank you.
Thank you, Mr. Chairman.
Chairman Sarbanes. Senator Bennett.
Senator Bennett. Thank you, Mr. Chairman.
I am sitting here thinking I cannot remember a witness who
has been appointed to a position who has as comprehensive a
knowledge of what he is going into as you have displayed here
this morning. Usually, the questions are, well, I will
understand that, or I will get back to you, or so on. I am very
impressed.
Now let me follow up a little on what I thought I heard in
your answer to Senator Gramm, that your services are not just
financial, there is information, there is hand-holding through
the bureaucratic maze. There are other services besides just
the loan that comes to an exporter who says, I really want to
deal with this opportunity overseas and I am not quite sure how
to do it. And you say, well, this is how you do it. Am I right
in that response to what I heard you say to Senator Gramm?
Mr. Aguirre. Yes, Senator. I think the typical perception
of the Export-Import Bank, also any bank, is the financing,
follow the dollars. But we must recognize that over 90 percent
of U.S. exports are actually coming out of small- and medium-
sized businesses. And the Export-Import Bank has been
instructed by the Congress to pay particular attention to
small, medium, and new types of businesses. Those particular
businesses really need an outreach on our part. They need us to
hand-hold at times, to facilitate at others, to work through
the maze of red tape, et cetera.
I think that is a fulfillment that we have in our mission.
To that effect, there are a number of offices that Export-
Import Bank has throughout the country that reaches those
small- and medium-sized exporters to make them comfortable with
that transaction and to assist them.
I do not know if that answers your question.
Senator Bennett. Yes. I just wanted to be sure that I had
understood that correctly.
Thank you, Mr. Chairman. I have no further questions.
Chairman Sarbanes. Thank you.
Mr. Aguirre, thank you very much. We appreciate your
appearance here this morning.
Mr. Aguirre. Thank you, Mr. Chairman, and Senators.
Chairman Sarbanes. Mr. Kroszner, if you could come forward.
There is a vote on, but I think we may be able to get your
appearance in quickly here.
As you are coming forward, let me say that Randall Kroszner
has been nominated by the President to be a Member of the
Council of Economic Advisers, a three-member council.
He is a graduate of Brown, an M.A. and Ph.D. from Harvard.
He served as a Junior Staff Economist for a year with the
Council of Economic Advisers and he has been on the faculty of
the Graduate School of Business at the University of Chicago
since 1990, now a full professor. And he was the Associate
Director of the George Stigler Center for the study of the
economy in the State at the University of Chicago.
He has had an extensive publication performance, much of it
on financial regulation and similar things. We are pleased to
welcome him before the Committee.
Senator Gramm, do you have a statement?
Senator Gramm. He looks too young to me.
[Laughter.]
Chairman Sarbanes. If you would stand, sir, and take the
oath.
Do you swear or affirm that the testimony that you are
about to give is the truth, the whole truth, and nothing but
the truth, so help you God?
Mr. Kroszner. I do.
Chairman Sarbanes. Do you agree to appear and testify
before any duly-constituted committee of the U.S. Senate?
Mr. Kroszner. I do.
Chairman Sarbanes. We would be happy to hear any statement
you have. If it is lengthy, we will include it in the record
and you can summarize. And if you have anyone you want to
introduce, we would be happy for you to do that.
STATEMENT OF RANDALL S. KROSZNER
OF ILLINOIS, TO BE A MEMBER OF
THE COUNCIL OF ECONOMIC ADVISERS
Mr. Kroszner. Thank you very much.
I have a short written statement for the record. I will
provide a very short summary of that now.
Mr. Chairman, other distinguished Members of the Committee,
I am very pleased and honored to appear before you today as
President Bush's nominee to be a Member of the Council of
Economic Advisers.
One person who I do want to recognize from my family is my
mother, who is sitting here right behind me, who has been
providing me with support for 39 years.
I am a little bit older than I might look.
Chairman Sarbanes. He is older than he looks, right?
Mr. Kroszner. Exactly as the Chairman has said, should I be
confirmed, this would actually be my second opportunity to
serve as part of the Council of Economic Advisers. Fourteen
years ago, I took a year leave from graduate school to serve on
the staff of the Council and there I learned the valuable role
that the Council plays in providing advice and analysis in
economic policy.
If confirmed, I will have the privilege of working with an
absolutely superb staff who come to Government for a year or
two to provide empirically grounded, theoretically grounded
advice and analysis of important economic issues that are
before us.
Mr. Chairman, you have summarized my background quite well.
I just also wanted to mention that I have worked with a lot of
international financial institutions, such as the IMF, World
Bank, and the Inter-American Development Bank, as well as the
Federal Reserve Board and regional Federal Reserve banks on
numerous macroeconomic and regulatory policies.
I have also been a Visiting Professor at the Stockholm
School of Economics and the Free University of Berlin.
The United States and the world economy obviously faces
many challenges, but also many opportunities. As part of my
portfolio at the Council, I will be looking at international
economics, macroeconomic issues, and a variety of regulatory
issues.
So, I would like to thank you very much, Mr. Chairman, and
the Committee, for the prompt consideration of my nomination
and I would be delighted to answer any questions that you might
have.
Chairman Sarbanes. When you say the issues that you would
be looking at, I take it you engaged in a discussion with
Chairman Hubbard and presumably McClellan as well.
Mr. Kroszner. Yes.
Chairman Sarbanes. To work out the allocation of
responsibility.
Mr. Kroszner. Yes.
Chairman Sarbanes. Your portfolio, then, is to be what,
now?
Mr. Kroszner. Primarily international economic issues,
macroeconomic issues, and certain regulatory issues, depending
as they come up.
Chairman Sarbanes. Senator Gramm.
Senator Gramm. Mr. Chairman, let me say that I think that,
with this confirmation, we will have three outstanding Members
of the President's Council of Economic Advisers.
I said during the Clinton Administration that I thought his
appointments were excellent people. I think that is true during
the Bush Administration.
Certainly, the nominee before us has excellent credentials.
Any department of economics in any college or university in
America would be happy to have the nominee on their faculty.
Are you going to remain the editor of the Journal of Law
and Economics?
Mr. Kroszner. No. I have already resigned from being
editor, so that I can devote full time to the Council of
Economic Advisers.
Senator Gramm. I was going to urge you to do something
about your backlog in consideration, but I won't. Thank you.
[Laughter.]
Chairman Sarbanes. Senator Bennett.
Senator Bennett. Thank you, Mr. Chairman.
Mr. Kroszner was courteous enough to come by my office, and
I visited with him. And like the rest of you, I am impressed
with him and will be happy to vote for his nomination.
Chairman Sarbanes. I understand that you have a leave of
absence from the University of Chicago for 2 years. Is that
correct?
Mr. Kroszner. That is correct.
Chairman Sarbanes. And is there a possibility of its
extension at the end of that time?
Mr. Kroszner. In certain extraordinary circumstances, one
can request an additional year's leave. But that is something
that I was not able to negotiate up front.
Chairman Sarbanes. Well, I would say, given the comments I
made earlier about serving out your term and everything,
although you do not exactly have a term--we realize this
limitation that most universities place on their people leaving
and then returning and we just have to, in a sense, I think,
accommodate in order to be able to draw highly qualified people
into public service.
We do not really expect someone to give up a tenured
faculty position. Sometimes it happens because they stay on.
But in any event, you are certainly committed for the 2 year
period. Is that correct?
Mr. Kroszner. Yes.
Chairman Sarbanes. I have no further questions. In a sense,
I do not want to say saved by the vote because I do not think
there was anything to save you from.
[Laughter.]
Ordinarily, I think we would have had a somewhat longer
hearing with you and explored some of the economic issues. But
since we have a vote, I am going to bring this hearing to a
close.
Thank you very much, sir.
Mr. Kroszner. Thank you very much.
Chairman Sarbanes. The hearing stands adjourned. We will
try to figure out when we can vote on the nominees.
[Whereupon, at 11:37 a.m., the hearing was adjourned.]
[Prepared statements, biographical sketches of the
nominees, response to written questions, and additional
material supplied for the record follow:]
PREPARED STATEMENT OF SENATOR KAY BAILEY HUTCHISON
It is such an honor to be here today to introduce Eduardo Aguirre,
Jr. to be the First Vice President and Vice Chairman of the Export-
Import Bank of the United States. Of course, it is always an honor to
introduce yet another Texan for an important role--and, the Ranking
Member will be very pleased to hear, this Texan has a daughter at Texas
A&M.
At this time, as our war against terrorism heats up, and as America
faces a struggling economic situation, it is critical that we have a
highly qualified person in charge of keeping our economy robust. By
facilitating U.S. exports through financing that supplements private
capital, the so-called Ex-Im Bank will be a pivotal part of our
Nation's recovery.
This is a decisive time for our Nation as we engage many nations
both as our enemies and as our allies in our fight against terrorism--
and as we engage them not just on a war level, but on a monetary one as
well. Mr. Aguirre's wealth of knowledge and experience, especially in
international finance, as well as his vision and character more than
qualifies him for this position.
Mr. Aguirre retired from Bank of America, one of the largest banks
in the United States, in September, where he was the President of its
International Private Bank. He currently serves on the National
Commission for Employment Policy, on the Board of Regents of the
University of Houston System, and as the Chairman of the Board of
Trustees of the Texas Bar Foundation. In addition, he serves on
numerous other professional and civic Boards, including the Texas
Children's Hospital, Operacion Pedro Pan Group Inc., and Houston
Livestock Show and Rodeo--many of you may have heard me tell the story
of when I took Senator Mikulski to this Rodeo. Trust me, it is an
experience!
A recipient of many honors, Mr. Aguirre is a graduate of Louisiana
State University, and of the American Bankers Association National
Commercial Lending Graduate School. Most important, he and his wife
have lived in Houston for 27 years, and raised their two children
there.
Known as a brilliant thinker and an effective and hard worker, as
well as an important spokesman and advocate, he is known to have the
right touch to create solutions through research and principle.
I cannot think of anyone better to fill the position of the First
Vice President and Vice Chairman of the Export-Import Bank, and
therefore it is my honor to introduce my friend Eduardo Aguirre, and to
encourage all of you to support his nomination.
PREPARED STATEMENT OF ALLAN I. MENDELOWITZ
Board Member-Designate, Federal Housing Finance Board
November 15, 2001
Mr. Chairman, Senator Gramm, Members of the Committee, it is an
honor to appear before you today to testify on my nomination to be a
Member of the Board of Directors of the Federal Housing Finance Board
(Finance Board). I would like to thank President Bush for nominating me
and I would like to thank you, Senator Sarbanes, and Senator Daschle
for your encouragement and support.
I would also like to thank my wife of almost 35 years, Shereen, who
is here today. Without her support and encouragement I never would have
been able to arrive at this point. She has been a reservoir of unending
patience over the years in the face of many evenings when--unplanned--I
stayed late in the office, weekends spent at work, and long absences
when on travel.
Last, I have had the opportunity to work with your Committee over
the past two decades in several different capacities and on a number of
diverse issues. It has been a privilege to work with the staff of this
Committee because they stand out for their integrity, dedication, and
talent. I would like to take this opportunity to express my
appreciation, in particular, to Steve Harris, Marty Gruenberg, and Pat
Malloy (who served the Committee for many years in the past) of the
Majority staff, and Wayne Abernathy of the Minority staff.
The Federal Home Loan Bank (FHLBank) System plays an important role
in promoting homeownership and lending by community financial
institutions. In a time of rising direct capital market intermediation,
the FHLBanks provide small community financial institutions access to
the liquidity needed to meet the demand for creditworthy loans in their
communities. The role of the Finance Board is to assure both the safety
and soundness of the FHLBank System and the achievement of the public
purposes for which the System was created.
This is a time of great change and complex challenges for the
FHLBank System. Some changes have been mandated by statute and others
are the result of the rapidly evolving state of financial institutions
and markets in this country.
The Gramm-Leach-Bliley Financial Services Modernization Act
mandated the Finance Board to develop a modern risk-based capital rule
for the FHLBanks. That mandate included a very tight timeframe under
which the rule had to be completed. The Finance Board received broad-
based substantive input, including comments and suggestions, from
FHLBank members, the Congress, Executive Branch agencies, trade
associations, and the FHLBanks themselves. The final capital rule
received widespread support and was completed within the timeframe
mandated by Congress. As required by statute, every FHLBank submitted a
proposed capital plan to the Finance Board by the end of October and we
are in the process of reviewing them. This could not have been achieved
without the hard work and skills of the Finance Board's staff, which I
have found to be some of the most capable and committed professionals
with whom I have had the opportunity to work.
Another important matter with which we are grappling is how to
respond to the implications for the FHLBank System of the dramatic
changes that are taking place in the financial markets, in general, and
the membership of the FHLBanks, in particular. The Finance Board has
received several unprecedented petitions that have prompted
consideration of these issues. These petitions, which have been
received from three FHLBanks, request that some FHLBank members be
allowed to join more than one FHLBank. These applications were the
result of changes in the membership of the FHLBank System that followed
from mergers and acquisitions that cut across the boundaries of
different FHLBank districts.
To respond to the broad ranging and complex issues raised by these
petitions, the Finance Board on September 26, 2001, issued a
Solicitation for Comments that addresses the full range of issues
raised by these petitions. I look forward to receiving good, creative,
and thoughtful comments from all interested parties. I also look
forward to working with this Committee, and others in the Congress, on
this important issue. The resolution of these complex issues will
require good information and analysis, and careful and thoughtful
deliberation.
In closing, I would like to say again that I am honored to appear
before you. If confirmed, I pledge to work closely with the Committee
and continue the longstanding spirit of cooperation that has existed
between the Federal Housing Finance Board and the Congress. I would
also like to pledge to you today that I will work hard to ensure the
safety and the soundness of the System and to ensure that the FHLBanks
fulfill their public mission.
Mr. Chairman, this concludes my statement and I will be happy to
try to answer any questions you or the Committee may have.
PREPARED STATEMENT OF FRANZ S. LEICHTER
Board Member-Designate, Federal Housing Finance Board
November 15, 2001
Mr. Chairman, Senator Gramm, and distinguished Members of this
Committee, thank you very much for the opportunity to appear before
your Committee. It is a great honor and privilege to be here as
President Bush's nominee to the Board of Directors of the Federal
Housing Finance Board.
I want to express my appreciation to you, Mr. Chairman, Senator
Daschle, and to my Senator who sits on this Committee and who I call a
friend, Senator Schumer. I want to acknowledge the presence of my wife
Melody Anderson and thank her for her support and encouragement.
I have had the distinct pleasure of serving on the Federal Housing
Finance Board (Finance Board) since August 2000. It has been a
productive and stimulating experience. The Federal Home Loan Bank
(FHLBank) System plays an important role in promoting affordable
homeownership in America. The FHLBank System is a key source of
liquidity for small community financial institutions to meet the credit
needs in their communities. The role of the Finance Board is to ensure
both the safety and soundness of the FHLBank System and the achievement
of the public policy mission for which the System has been created.
I think we can all take pride in the System's Affordable Housing
Program (AHP), which the Congress had the foresight to enact as part of
FIRREA in 1989. This year the AHP topped the billion-dollar mark.
The System continues to evolve to meet the needs of a rapidly
changing financial sector. Some changes have been mandated by statute
and others are the result of consolidation in the financial services
industry.
The Finance Board is presently in the process of implementing a new
risk-based capital structure to implement the provisions of the Gramm-
Leach-Bliley Financial Modernization Act. I am pleased to say that the
Finance Board met the timeframe set forth by the Congress and approved
the final capital rule in December 2000 after a process in which we
received input from key constituencies of the FHLBank System, including
FHLBanks, its members, Congress, the Executive Branch, and trade
groups. As required by statute, each FHLBank submitted a proposed
capital plan by the end of October 2001. At this time, the Finance
Board staff is reviewing the plans and we expect that the capital plans
will be approved and in place shortly. The staff of the Finance Board
deserves great credit for the professional and expeditious manner in
which they have handled this capital process.
A crucial issue facing the System is how to respond to the dramatic
changes that are taking place in financial markets and the implications
of these changes on membership in the FHLBanks. Several institutions
have petitioned the Finance Board to address directly the issue of
membership changes as a result of mergers and of acquisitions across
the boundaries of different FHLBank districts.
In order to address the issues raised in these petitions in a
System-wide manner, the Finance Board issued a Solicitation for
Comments in September 2001 that focuses on the range of issues raised
by the petitions. Any solutions must take into account that the
financial markets have changed significantly since the System was
created in 1932 to serve small savings institutions. The Finance Board
looks forward to receiving comments from all interested parties to help
guide us in taking appropriate action within the present statutory
framework. I look forward to working with the Committee, and others in
the Congress, on this important issue. The resolution of these complex
issues will require a great deal of careful reflection and analysis.
In closing, if confirmed, I promise to work hard to ensure the
safety and soundness of the System and to ensure that it meets its
public policy mission. I would like to reiterate that it is an honor to
appear before this Committee. I will continue the tradition of
cooperation that has existed between the Federal Housing Finance Board
and the Congress.
Mr. Chairman, this concludes my statement and I will be pleased to
try to answer any questions you or the Committee may have.
PREPARED STATEMENT OF RANDALL S. KROSZNER
Board Member-Designate, Council of Economic Advisers
November 15, 2001
Mr. Chairman and other distinguished Members of the Committee, I am
pleased and honored to appear before you today as the President's
nominee to be a Member of the Council of Economic Advisers.
Should I be confirmed, this would be my second opportunity to be
part of the Council. Fourteen years ago, I took a year leave from
graduate school to serve on the staff of the Council. There I learned
about the valuable role that the Council plays in providing advice and
analysis of economic policy. If confirmed, I will have the privilege of
working with a superb group of economists who are at the Council.
I am on leave from the Graduate School of Business of the
University of Chicago where I am Professor of Economics. I have also
been a Research Associate of the National Bureau of Economic Research
and Associate Director of the Center for the Study of the Economy and
the State at the University of Chicago. I have worked with
International Monetary Fund, World Bank, and Inter-American Development
Bank, the Federal Reserve Board, and regional Federal Reserve Banks on
numerous policy issues. In addition, I have held visiting
professorships at the Stockholm School of Economics and the Free
University of Berlin.
The United States and world economies face many opportunities and
challenges. The portfolio of issues that I will focus on will include
international and macroeconomic issues, as well as a number of
regulatory issues. I look forward to having your input and advice on
these issues.
In closing, I would like to take this opportunity to thank you, Mr.
Chairman, and the Committee for the prompt consideration of my
nomination. Mr. Chairman, I would be delighted to answer any questions
you and the other Members of the Committee may have.
RESPONSE TO WRITTEN QUESTIONS OF SENATOR SARBANES FROM ALLAN I.
MENDELOWITZ
Q.1. Several of my colleagues on the Senate Banking Committee
have expressed concern over the possible adverse impact to the
Federal Home Loan Bank of New York and its programs resulting
from the acquisition of The Dime Bank by Washington Mutual.
There is a concern that the departure of The Dime Bank from the
Federal Home Loan Bank of New York would have adverse
consequences for the viability of the Bank and its funding of
the Affordable Housing Program. It is my understanding, that at
the last meeting of the Federal Housing Finance Board of
Directors, the Chairman directed the staff to develop
alternative solutions that would enable Washington Mutual to
continue to do business with the Federal Home Loan Bank of New
York in place of The Dime.
In order to better understand the implications of such an
action, I would like to know to what extent would the departure
of The Dime's business affect the stability and viability of
the Federal Home Loan Bank of New York?
A.1. The departure of a large member like The Dime will reduce
the assets, capital, and profits of the Federal Home Loan Bank
of New York (FHLBNY). I believe, however, that the departure of
The Dime will not have a material adverse impact on the
viability and stability of FHLBNY. I reached this conclusion
for a couple of reasons. The first reason is that the relative
size and profitability of FHLBNY is not diminished by the
departure of The Dime Bank. For example, FHLBNY is the third
largest of the 12 FHLBanks both before and after The Dime's
departure. The second reason is that the departure of The Dime
does not adversely affect the ability of FHLBNY to pay
competitive dividends or provide other services to the
remaining member institutions of FHLBNY.
I used financial data from midyear 2001, which was about
the time that Washington Mutual (WAMU) announced its intended
acquisition of The Dime Bank, to try and understand the impact
of The Dime's departure on FHLBNY. In doing the analysis, I
used the most conservative assumptions possible. That is, all
possible impacts were estimated using assumptions that would
yield the most adverse impact on the financial condition of
FHLBNY. Therefore, all other things being equal, it is likely
that FHLBNY will fare better than the conclusions I reached in
my assessment of the impact of The Dime's departure, and it is
highly unlikely that it will fare worse.
For example, in assessing the impact of The Dime departure
on operating costs, the analysis used the assumption that there
would be no reduction in the operating costs of the FHLBNY.
That is, FHLBNY is assumed to have the same number of staff,
administrative costs, rent, etc., whether or not FHLBNY has or
does not have The Dime book of business. The treatment of the
profitability of the advances held by The Dime is treated in
the same conservative approach. The profitability of FHLBNY's
advances to The Dime is assumed to be the average profitability
for all of FHLBNY's advances. This assumption is used even
though it is my understanding that all of The Dime's advances
are very short and such advances tend to be less profitable
than longer term advances for an FHLBank. The Dime's advances
typically have only a few days maturity because they are used
to fund mortgages held by The Dime for the very short period of
time that passes between when the mortgages are closed and when
they are subsequently resold to the secondary market. The
spread on advances--the source of profits earned on advances--
tends to be much narrower for very short-term advances than it
is for medium- and long-term advances. (A reasonable estimate
is that the spread earned on very short-term advances is in the
8 to 10 basis points range, while the spread on longer term
advances tends to be in the 18 to 20 basis point range.)
As regards the relative size and profitability of FHLBNY,
as compared to other FHLBanks in the Federal Home Loan Bank
System (FHLBank System), they are not adversely affected by The
Dime's departure.
In addition, FHLBNY, after the departure of The Dime, will
continue to be significantly larger than it was in the recent
past. Using the midyear 2001 financial data as the point of
comparison, FHLBNY's total assets without The Dime would still
be 6 percent to 9 percent larger than they were with The Dime
only 1 year before, that is, at midyear 2000. This result
reflects the fact that FHLBNY has grown rapidly in recent
years. However, new advances extended to The Dime did not cause
that growth. As the following graph shows, advances to The Dime
were fairly level over the past half-decade.
The financial analysis also demonstrates that the Return on
Equity of FHLBNY may actually increase slightly with the
departure of The Dime. This outcome results from the fact that
the departure of The Dime will likely reduce the equity of
FHLBNY by more than it will reduce profits. Each of the
remaining shareholders may have an absolutely larger share of
the remaining profits of the FHLBNY after The Dime's departure.
As a result, the ability of FHLBNY to pay competitive dividends
and to preserve the value proposition for other members will be
maintained--or even enhanced--after The Dime's membership
ceases.
This particular consequence of The Dime departure on FHLBNY
should not come as a surprise. It is a reflection of the basic
structure of the FHLBank System. As a cooperative system, the
capital stock of an FHLBank is designed to expand and contract
as members are added or lost. There are a number of examples,
over the past decade, of FHLBanks that have successfully
expanded and contracted in response to gaining or losing
members. The issues surrounding The Dime departure form FHLBNY
are not unique in the System.
Therefore, the departure of The Dime will neither
negatively affect the viability or stability of the FHLBNY nor
will it adversely affect the ability of FHLBNY to meet the
needs of its other members. Consequently, the departure of The
Dime will not affect the ability of FHLBNY to fulfill its
housing finance and community development responsibilities.
Q.2. How would the departure of The Dime affect the Affordable
Housing Program at the Federal Home Loan Bank of New York?
A.2. There are two ways to look at the impact of The Dime's
departure from FHLBNY on the Affordable Housing Program. The
first is the impact of The Dime's departure on the available
funding for AHP. The second is the impact of The Dime's
departure on the ability of FHLBNY member institutions to
effectively use AHP funds. I believe that the departure of The
Dime will not have a large impact on the availability of AHP
funds in the FHLBNY district, nor will The Dime's departure
adversely affect the ability of FHLBNY members to effectively
use AHP funds.
Availability of AHP Funds at FHLBNY: The departure of The
Dime Bank from FHLBNY will lower funding of AHP at FHLBNY. For
the year 2001, FHLBNY had $31 million available for AHP. The
departure of The Dime will likely have a maximum adverse impact
on funds available for AHP of about $3 million per year, or
about 10 percent of FHLBNY's AHP funds available for allocation
in 2001.
The FHLBNY district currently has 11.0 percent of the U.S.
population. At the funding level for AHP in 2001, the FHLBNY
district had 12.6 percent of the FHLBank System's total funding
for AHP. In other words, its share of AHP funds was 1.6 percent
more than its district's share of the U.S. population. With the
departure of The Dime, the FHLBNY district will have about 11.4
percent of the FHLBank System's AHP funds (assuming that the
New York AHP funds decline by $3 million, but the total FHLBank
System's funds remain the same). That is, after the departure
of The Dime, FHLBNY will still have a larger share of the total
AHP funds than its district's share of the U.S. population.
Therefore, while the departure of The Dime will reduce FHLBNY
AHP funds, everything else equal, the AHP program in the New
York district would not be subjected to a large absolute or
relative reduction in the annual AHP funds.
Effective Utilization of AHP Funds: Different member banks
make greater or lesser use of the AHP. Some member banks make
very good use of the funds, while others make very little use
of the program. As a general rule, larger institutions tend to
be more active users of the AHP relative to smaller
institutions. This tends to be the case because the AHP
requires members to make a significant commitment of resources
to a potential beneficiary project: Preparing applications,
monitoring of compliance with rules and regulations during a
project's development, and additional post-completion
monitoring and certification that may stretch a decade into the
future. Because The Dime is a relatively large member, with
approximately 15 percent of the advances outstanding from
FHLBNY, the loss of The Dime Bank could represent the loss of
an active AHP supporter from the program. If this were true,
the effective utilization of AHP funds could be adversely
affected. However, this does not appear to be the case. In the
first 12 years of the program, The Dime successfully applied
for AHP funding for beneficiary projects in only 7 of those
years. Over the life of the program, the nine successful Dime
initiated applications accounted for only 3.9 percent of all
AHP funds that were allocated competitively by FHLBNY.
Therefore, the loss of The Dime is not likely to represent a
material reduction in the ability of FHLBNY member institutions
to support the AHP and effectively use the available AHP funds.
In fact, over the life of the program more than 120 different
FHLBNY member institutions have successfully applied for AHP
funds.
If there is still a concern that some sort of temporary
action is needed during the interval of time during which the
FHFB will be deliberating on the complex implications of the
rise of interstate banking and the cross-district mergers, WAMU
has within its own capacity the ability to resolve this matter
without any extraordinary action by the Finance Board. If a
member bank ceases to exist because it is absorbed in a merger
or acquisition, the outstanding advances do not become due and
payable on the cessation of membership. The outstanding
advances are permitted to mature and roll off the books of the
FHLBank based on their original terms. If WAMU were to instruct
The Dime to roll over its existing advances (before the
acquisition closes) into new ones with a longer term, these
advances would remain on the books of FHLBNY until they come
due. For example, if The Dime were to extend its book of
advances for a period of 2 years, The Dime advances--and their
associated profits and AHP funding--would remain on the books
of FHLBNY for 2 years, irrespective of the end of The Dime
charter and its membership in FHLBNY. In a similar case, FHLBNY
has advances taken out by Summit (a member which was merged
into Fleet Bank in March 2001) that do not mature for 15 years
and will remain on the books of FHLBNY until 2016.
RESPONSE TO WRITTEN QUESTIONS OF SENATOR BENNETT AND SENATOR
CRAPO FROM ALLAN I. MENDELOWITZ
Q.1. Although the Finance Board has complied with the Gramm-
Leach-Bliley Act of 1999 and capital plans have been submitted
by the twelve Federal Home Loan Banks, there is concern the
Finance Board may not act to approve these new capital plans
for some time. In fact, some industry representatives claim the
Finance Board has stated it may be until next spring until
capital plans are approved. It is very important to approve the
capital plans soon to assure a permanent capital base that is
stable and will enhance safety and soundness for the System.
When can you estimate that the Finance Board will be starting
to approve the capital plans and will they approve all the
plans simultaneously or on an individual basis?
A.1. I am pleased to report that the approval process is
currently underway. The staff of the Finance Board is
evaluating each plan in terms of its internal consistency and
examining how it affects the System as a whole. We are also
evaluating the technical capabilities of the FHLBanks to
fulfill their responsibilities under the plans. It is my hope
that we can finish this process quickly. My preference is to
start approving individual plans sooner rather than later. When
we find that the capital plan of any individual FHLBank is
complete and meets the requirements of the capital rule, that
the FHLBank has the technical capability to implement all
aspects of the plan, and that the proposed capital plan does
not adversely affect the System as a whole, if confirmed, I
would be prepared to promptly consider a Board recommendation
for the approval of that plan.
Q.2. As consolidation of the financial arena continues we will
continue to see merging across FHLBank districts. As we know
the financial world is changing and the System itself rests on
the ability of the Finance Board to change with the times.
Rules and regulations restricting membership when financial
institutions merge from neighboring districts are outdated and
are hampering the ability of the FHLBank System to adapt to the
times and market fluctuations. When do you see the Finance
Board addressing the multidistrict membership issue and
specifically do you see the Finance Board ruling to allowing
member banks to become members in adjoining FHLBank districts?
A.2. The Finance Board is actively addressing this issue. In
September 2001, the Finance Board issued a request for comments
to address the dramatic changes taking place in financial
markets and the membership of the FHLBanks. The breadth and
quality of the responses to this request for comments are very
important because the Finance Board does not yet have all of
the information and analysis needed to reach a conclusion on
the full implications of these changes, including the issue of
multidistrict membership. I will continue to maintain an open
mind on this issue predicated on the expectation that I will
receive the necessary legal, financial, and public policy data
and analysis on which to make a sound decision. I see no reason
why the Finance Board will not be in a position to resolve
these issues next spring. Any action the Finance Board may
consider will, of course, be limited to the authority provided
in our statute.
RESPONSE TO WRITTEN QUESTIONS OF SENATOR SARBANES FROM FRANZ S.
LEICHTER
Q.1. Several of my colleagues on the Senate Banking Committee
have expressed concern over the possible adverse impact to the
Federal Home Loan Bank of New York and its programs resulting
from the acquisition of The Dime Bank by Washington Mutual.
There is a concern that the departure of The Dime Bank from the
Federal Home Loan Bank of New York would have adverse
consequences for the viability of the Bank and its funding of
the Affordable Housing Program. It is my understanding, that at
the last meeting of the Federal Housing Finance Board of
Directors, the Chairman directed the staff to develop
alternative solutions that would enable Washington Mutual to
continue to do business with the Federal Home Loan Bank of New
York in place of The Dime.
In order to better understand the implications of such an
action, I would like to know to what extent would the departure
of The Dime's business affect the stability and viability of
the Federal Home Loan Bank of New York?
A.1. Chairman Sarbanes, I would like to thank you for voting to
confirm my nomination to the Board of Directors of the Federal
Housing Finance Board (Finance Board). Your help in shepherding
my nomination through this process has been invaluable and I am
most grateful.
In response to your inquiry regarding The Dime Savings
Bank's (The Dime) acquisition by Washington Mutual, there would
be some adverse impact on the New York Federal Home Loan Bank
(NYFHLB) should the business of The Dime leave the New York
district. An analysis based on the current Dime's activity with
the NYFHLB indicates that the NYFHLB would lose annually
approximately $27 million in net income and its assets would be
reduced by $8 billion. The NYFHLB's Affordable Housing Program
(AHP) allocation would be reduced by approximately $3 million,
or 10 percent of the AHP funds available for allocation in
2001. The Dime represents 11 percent of the total advances of
the NYFHLB and 10.9 percent of capital. In terms of the AHP,
The Dime currently has projects totaling approximately $7.5
million and could be expected to produce similar volume in the
future. While this AHP amount is not a huge share of total AHP
projects at the New York Bank, it does represent a sizable
investment of 1,479 units--vital housing needed in this period
of economic difficulty in New York.
Another issue for the Finance Board to consider if The
Dime's activities were transferred to the San Francisco Federal
Home Loan Bank (SFFHLB), where Washington Mutual is a member,
is that it would increase Washington Mutual's advances in the
SFFHLB to $115 billion, 48 percent of the SFFHLB's total
advances.
The NYFHLB has asked that a waiver be granted permitting
Washington Mutual to continue with the activities of The Dime
even though it is a member of the SFFHLB. This raises the issue
of multidistrict membership. As you know, the Finance Board has
issued a Solicitation of Comments dealing with the wide variety
of complex issues surrounding multidistrict membership.
In resolving the multidistrict membership issue, my goal is
to first ensure the safety and soundness of the Federal Home
Loan Bank System and to maintain its cooperative character. I
would like to see multidistrict membership resolved in a way
that ensures the continued viability of the System, treats all
members fairly but takes into account the differing needs of
members of various sizes.
The Finance Board is now considering whether it is
appropriate to maintain the status quo in the NYFHLB by
permitting The Dime activity to be continued by Washington
Mutual while the Finance Board acts on a system-wide resolution
of the multidistrict membership issue. The Finance Board must
determine whether the immediate termination of the business
relationship between The Dime and the NYFHLB upon the merger
with Washington Mutual could prove to be an unnecessary
disruption in the business operations of the NYFHLB if the
Finance Board ultimately determines that an institution may be
admitted to membership in more than one FHLBank. In making this
decision, we are considering the views of all interested
parties and maintaining close communications with Members of
Congress and your staff.
I look forward to working with you on this and other issues
facing the Federal Home Loan Bank System in the foreseeable
future. If you have any questions, please contact me.
RESPONSE TO WRITTEN QUESTIONS OF SENATOR BENNETT AND SENATOR
CRAPO FROM FRANZ S. LEICHTER
Senator Bennett and Senator Crapo, I would like to express
my gratitude for your consideration of my nomination for
Director of the Federal Housing Finance Board. I offer the
following response to your follow-up questions:
Capital. The Federal Home Loan Banks submitted final
capital plans in October 2001. Prior to the submission of those
final plans, the Finance Board gave the Banks feedback on their
draft capital plans. Accordingly, much progress has already
been made in reviewing the capital plans of the Federal Home
Loan Banks.
If confirmed, I would urge the Federal Housing Finance
Board to move expeditiously to approve the capital plans.
Throughout this approval process, I have sought to ensure the
safety and soundness of the Federal Home Loan Bank System. This
involves a complex analysis of both policy and technical
issues. In addition, we must work toward commonality among the
plans, to make sure that no one Federal Home Loan Bank has the
advantage over another.
Multiple-District Membership. The issue of the
multidistrict membership for members of the Federal Home Loan
Bank System poses a great challenge to the System. In
September, the Finance Board issued a Solicitation of Comments
to address this issue. I have urged an open process with input
from the Federal Home Loan Banks, its members, community and
trade groups, as well as Congress. Multidistrict membership
requires the consideration of numerous legal and policy issues.
Upon confirmation, I would seek a solution that preserves the
safety and soundness and the cooperative nature of the System.
It is my hope that this issue will be dealt with expeditiously.
Again, I would like to thank you for the confirmation
hearing graciously afforded to me last week. I look forward to
working with you on capital and multidistrict membership, as
well as other important issues facing the Federal Home Loan
Bank System. If you have any further questions, please feel
free to contact me.
RESPONSE TO WRITTEN QUESTIONS OF SENATOR SARBANES FROM JOHN T.
KORSMO
Q.1. Several of my colleagues on the Senate Banking Committee
have expressed concern over the possible adverse impact to the
Federal Home Loan Bank of New York and its programs resulting
from the acquisition of The Dime Bank by Washington Mutual.
There is a concern that the departure of The Dime from the
Federal Home Loan Bank of New York would have adverse
consequences for the viability of the Bank and its funding of
the Affordable Housing Program. It is my understanding, that at
the last meeting of the Federal Housing Finance Board of
Directors, the Chairman directed the staff to develop
alternative solutions that would enable Washington Mutual to
continue to do business with the Federal Home Loan Bank of New
York in place of The Dime.
In order to better understand the implications of such an
action, I would like to know to what extent would the departure
of The Dime's business affect the stability and viability of
the Federal Home Loan Bank of New York? How would the departure
of The Dime affect the Affordable Housing Program at the
Federal Home Loan Bank of New York?
A.1. As I have only recently been confirmed to become a
Director of the Federal Housing Finance Board, I have not had
an opportunity to fully explore the extent of the effect on the
Federal Home Loan Bank of New York (FHLBNY) of the departure
from membership of The Dime Savings Bank of New York. It is my
understanding, however, based on information provided by
Finance Board staff, that the loss of The Dime Bank would, to
some extent, have a negative impact on FHLBNY's book of
business and operating income and diminish the resources
available for FHLBNY's Affordable Housing Program (AHP).
According to the Finance Board staff, as of November 30,
2001, The Dime held 11.7 percent of the total outstanding
advances of the FHLBNY ($6.698 billion out of $57.190 billion).
In addition, The Dime holds 11.1 percent of FHLBNY's capital
stock ($404 million out of a total of $3.644 billion). The
reduction in revenue and income that would result from the
withdrawal of The Dime's capital stock is, of course,
proportional to The Dime's share of the total. While I believe
it would be too strong a statement to suggest that these
reductions would ``affect the stability and viability of the
Federal Home Loan Bank of New York,'' I think there is little
question there would be an adverse effect on the Bank's
Affordable Housing Program. Given this year's estimated AHP
set-aside of $30.3 million, the reduction in AHP funds in the
first year without The Dime would be $3.37 million, again using
estimates provided by the Finance Board staff. Because each
dollar of AHP ``seed'' money is leveraged at a ratio of around
16 to 1, that $3.37 million may, in reality, translate to a
potential loss of approximately $50 million in development
funds. Subsequent years' AHP amounts would also be reduced
proportionately. Given the competitive nature of the AHP
process and the large number of applicants, this year as in the
past, The Dime is not currently likely to sponsor winning AHP
projects that claim 11 percent of total AHP funds. The loss of
the funding generated by The Dime's business, however, would
have a negative impact on other FHLBNY member lenders by
reducing the pool of already-scarce funding available for
community investment and affordable housing in the New York /
New Jersey region, and, in the wake of the September 11
attacks, the need for these subsidies may be even greater than
in more normal years.
Loss of The Dime's activity has an additional impact on the
remaining member lenders of FHLBNY. Given the cooperative
nature of the Federal Home Loan Bank System, participation in
the System by large members, including The Dime, helps reduce
the cost of products and services made available to all Federal
Home Loan Bank members, including the smallest members. This
allows members to better serve the financial needs of their
communities with lower-cost products. The large-volume FHLBank
customers carry more of the overhead and contribute more to the
bottom line than some of the smaller members and, in so doing,
help produce more reasonable dividends on the member lenders'
capital investment and make liquidity, lower-cost funding, and
technical assistance more readily available to all FHLBank
members.
Financial services consolidation is likely to continue,
and, as it does, we will be required of necessity to consider
its impact on the Federal Home Loan Bank System. For that
reason, the Federal Housing Finance Board on September 26,
2001, approved a Notice and Solicitation of Comments
specifically seeking to identify the issues surrounding
multiple FHLBank membership and the implications of such
membership on the System as a whole. The notice solicits public
comment on a series of policy questions relating to whether a
single financial institution should be permitted to become a
member concurrently of more than one FHLBank, with particular
attention given to the situation in which a member of one
FHLBank acquires or merges with a member institution in a
different FHLBank district.
The assumption at this point is that Washington Mutual's
acquisition of The Dime will be completed before the Federal
Housing Finance Board has had an opportunity to review the
results of the solicitation for public comment and, if needed,
to promulgate appropriate regulations. (The comment period, in
fact, has recently been extended until March 4, 2002.) In
anticipation of a near-term closing of the Washington Mutual-
Dime deal, Senators Schumer and Clinton, of New York, and
Senators Toricelli and Corzine, of New Jersey, have in a letter
requested that the Federal Housing Finance Board conditionally
``approve individual applications (such as FHLBNY's waiver
request) on one track and on another track thoughtfully draft
and implement the regulations necessary to maintain an
efficient and balanced FHLBank System.''
The management and staff of the Federal Home Loan Bank of
New York are to be commended, not only for the successful
evacuation of their facility on September 11 without any loss
of life, but also for the speed and efficiency with which they
were back up and running, despite the complete destruction of
their headquarters and the inconvenience of operating from
temporary quarters. But the reality is that the full effect of
the attack on the operation of the Bank and on the economy of
the region is yet to be fully felt and measured. What is clear
even from the fragmentary data is that the area has taken a
terrible ``hit,'' and perhaps thousands of jobs have been lost.
Given the surrounding circumstances and the timing of the
Washington Mutual-Dime transaction, I believe that the request
of the FHLBank of New York for some form of ``status quo''
relief, narrow in scope, limited in time, and consistent with
the need not to prejudice or impair the full and careful review
of the underlying issue of multidistrict membership, should be
considered. Action aimed at holding the FHLBank of New York's
largest customer ``in place'' while the Federal Housing Finance
Board addresses the multidistrict membership issue does not
strike me as unreasonable, particularly when we recognize the
added imperative of providing the New York bank a measure of
stability and continuity at a time of extraordinary stress on
the New York / New Jersey regional economy. As has been
suggested by the four New York and New Jersey Senators, we
should not fail to acknowledge the value to the morale of the
region that even such a limited show of support by a Federal
agency could provide.
RESPONSE TO WRITTEN QUESTIONS OF SENATOR BENNETT AND SENATOR
CRAPO FROM JOHN T. KORSMO
Q.1. Although the Finance Board has complied with the Gramm-
Leach-Bliley Act of 1999 and capital plans have been submitted
by the twelve Federal Home Loan Banks, there is concern the
Finance Board may not act to approve these new capital plans
for some time. In fact, some industry representatives claim the
Finance Board has stated it may be until next spring until
capital plans are approved. It is very important to approve the
capital plans soon to assure a permanent capital base that is
stable and will enhance safety and soundness for the System.
When can you estimate that the Finance Board will be starting
to approve the capital plans and will they approve all the
plans simultaneously or on an individual basis?
A.1. As a nonincumbent nominee to the Federal Housing Finance
Board, I have not been involved to date, of course, in the
Board's capital plan review process. I am aware, however, that
the Finance Board worked closely with the Federal Home Loan
Banks throughout the period of capital plan development and, as
a result, the Finance Board staff does not anticipate any major
problems in approving the plans as submitted. My assumption is
that, once it is assured that the plans meet the requirements
of the capital rule and, taken together, do not adversely
affect the safety and soundness of the Federal Home Loan Bank
System as a whole, the Finance Board will act expeditiously to
approve the individual plans. I can assure you that, if
confirmed, that will be my intention.
Q.2. As consolidation of the financial arena continues we will
continue to see merging across FHLBank districts. As we know
the financial world is changing and the System itself rests on
the ability of the Finance Board to change with the times.
Rules and regulations restricting membership when financial
institutions merge from neighboring districts are outdated and
are hampering the ability of the FHLBank System to adapt to the
times and market fluctuations. When do you see the Finance
Board addressing the multidistrict membership issue and
specifically do you see the Finance Board ruling to allow
member banks to become members in adjoining FHLBank districts?
A.2. As you know, the Finance Board has issued a Notice and
Solicitation of Comments on the question of multiple Federal
Home Loan Bank memberships. The solicitation seeks comments on
the implications for the Federal Home Loan Bank System of
precisely the type of structural changes occurring in its
membership base that you cite. Comments are due by January 2,
2002. I believe the issue is broader, however, than simply
allowing member banks to become members in adjoining Federal
Home Loan Bank districts. I appreciated Senator Gramm's remarks
at the November 15 hearing for Finance Board nominees when he
said, ``I think it is time for a comprehensive review, and I
would just like to ask each of you when you are confirmed to
sit down and look at the mission of this agency.'' It thus
appears that consideration of the multiple membership question,
by affording the Finance Board the opportunity to conduct a
comprehensive review of its form and function, could not have
come at a more opportune time. I have not prejudged the
multiple district membership issue. There may be a number of
methods, for example, by which changes in the membership
structure of individual banks can be accommodated without
jeopardizing either their safety and soundness or their
participation levels in their affordable housing programs. Once
all the comments are in and the data has been carefully
evaluated, however, I believe the Finance Board, working with
members of the Congress, should, again, move expeditiously to
answer the policy questions raised by changes in the nature and
structure of the Nation's financial markets. If confirmed, I
promise to do just that.