Loan Banks. immediate threat from Fannie Mae, Freddie Mac or the Federal Home However, the lack of impending doom will not impede this Committee's progress to ensure that the current scenario does not change. The time to act is not after a institution has failed, it is before there is ever any trouble. Further, I intend to meet the September 15, 1991 statutory deadline set forth in the Omnibus Budget Reconciliation Act of 1990. While the Committee will be considering legislation crucial to the banking system this year and such legislation may at times take priority over the issues before us today, I will move legislation on these issues a expeditiously as possible. However, I must say that the failure of the Department of Treasury to present its legislation in a timely manner will obviously impede the Committee's consideration of the legislation. One thing I am interested in learning is when we can expect to receive the legislation. The witnesses that will appear before us today will each present a different perspective on how the risks to the government should be minimalized. All the witness agree that the current regulatory structure is insufficient. The Department of Treasury will advocate a OCC-like bureau within HUD to regulate Fannie Mae and Freddie Mac and would continue the regulation of the Federal Home Loan Banks by the Federal Housing Finance Board. The GAO will propose a single regulator for all GSEs including Sallie Mae, the Farm Credit System, and Freddie Mac. CBO will discuss these options and others including the option of allowing the Federal Housing Fiance Board to regulate Fannie Mae and Freddie Mac. All of these options have some merit and I will be very interested in hearing our witnesses discuss the relative merits of each proposal. While the witnesses do not agree on the regulatory structure there does seem to be agreement on the need for enhanced regulatory powers of any safety and soundness regulator. I am interested in the exact nature of these proposed powers, for example should these entities be able to oversee the salaries paid to corporate executives or set stringent guidelines for low income housing activities, and the types of enforcement powers such a regulator would need. Further I am concerned about capital levels. While capital can not protect completely protect the Government from risk of loss, sufficient levels of capital can provide some protections and will ensure that management acts in a prudent manner. I am interested in learning form the witnesses whether additional capital is needed and what steps should be taken to ensure that Fannie Mae, Freddie Mac and the Banks have adequate capital. I welcome the witnesses here today. OPENING REMARKS OF HONORABLE MARGE ROUKEMA HOUSING SUBCOMMITTEE GOVERNMENT SPONSORED ENTERPRISES 5/15/91 Mr. Chairman, I want to commend you for holding this hearing today as we receive testimony on the results of the Treasury and CBO study of FREDDIE MAC, FANNIE MAE and the other GSES. Our Subcommittee oversight responsibilities require us to review these CBO and Treasury reports on these GSE's. However, I do not want this hearing to send premature false signals that something is drastically wrong with these GSES. FREDDIE MAC and FANNIE MAE were created to provide an affordable and adequate supply of mortgage credit to those citizens seeking the American dream of homeownership. We continue to support this objective and must be careful that we not take any action which would cause either of these organizations to retreat from those missions. On the other hand, the S&L debacle and the potential problem of FHA solvency requires that we examine the safety and soundness of these organizations and the risk to which the Federal government has been exposed by the activities of these entities. I strongly believe, as I did when we developed the FIRREA bill, and as we are doing in our Financial Institutions Subcommittee on banking reform, that capital adequacy and strengthened regulation are absolute musts. I believe this Committee should pursue legislation which gets us moving toward those goals. It is in this context that we meet today to examine the recommendations of the Agencies here to testify. I, for one, believe it is reasonable to explore the separation of the functional regulation of the GSES from the safety and soundness regulation as we did in FIRREA when we split created both an Office of Thrift Supervision and a separate insurance fund. For this reason, I am concerned about the Treasury recommendation for an "arms length" organization within HUD which would oversee the safety and soundness issues and why an independent regulator, modeled along the lines of the FDIC, would not be preferable. I will be interested in Treasury's explanation of what "arms length" really means. In addition to the question of who should regulate the GSES, it will be necessary to explore other issues such as: ⭑ Should there be statutory minimum capital requirements for the GSES and who should establish those levels. Should private rating agencies be asked to evaluate management quality and business risks. What enforcement powers will the ultimate GSE regulator need? Having raised these issues Mr. Chairman, I do not believe we need to rush into any immediate answers and that we should receive today's testimony in the spirit of the first of several rounds of oversight of these GSE. Thank you. FOR RELEASE ON DELIVERY STATEMENT OF THE HONORABLE ASSISTANT SECRETARY OF THE TREASURY SUBCOMMITTEE ON HOUSING AND COMMUNITY DEVELOPMENT Mr. Chairman and Members of the Subcommittee: It is a pleasure to be here today to discuss the results of the Treasury's second study of Government-sponsored enterprises or GSEs. This study was submitted to Congress on April 30. The failure of many federally insured thrift institutions in the 1980s, and the massive Federal funding required for their resolution, have focused the attention of the Administration and Congress on other areas of taxpayer exposure to financial risk. With this concern in mind, Congress enacted legislation requiring the Secretary of the Treasury to study and make recommendations regarding the financial safety and soundness of GSEs. The Financial Institutions Reform, Recovery, and Enforcement Act of 1989 (FIRREA) requires the Treasury to conduct two annual studies to assess the financial safety and soundness of the activities of all Government-sponsored enterprises. The first of these studies was submitted to Congress in May 1990. NB-1272 2 The Omnibus Budget Reconciliation Act of 1990 (OBRA) requires the Treasury to provide an objective assessment of the financial soundness of GSES, the adequacy of the existing regulatory structure for GSES, and the financial exposure of the Federal Government posed by GSES. In addition, OBRA requires the Treasury to submit to Congress recommended legislation to ensure the financial soundness of GSES. Legislation reflecting the approach identified in the April 30th report will be submitted shortly. The 1991 study is intended to meet the study requirements of FIRREA and OBRA. It includes an objective assessment of the financial soundness of the GSES, which was performed by the Standard & Poor's Corporation (S&P) at the Treasury's request. The study also includes the results of the Treasury's analysis of the existing regulatory structure for GSEs and recommendations for changes to this structure. Based on the S&P analysis of the financial safety and soundness of the GSES, we have concluded, as we did last year, that no GSE poses an imminent financial threat. Because there is no immediate problem, there may be the temptation to follow the old adage "if it's not broke, don't fix it". We, however, believe that this course of action would be inappropriate. experience with the troubled thrift industry and the Farm Credit System in the 1980s vividly demonstrates that taking action once The |