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[109 Senate Hearings]
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S. Hrg. 109-464
NOMINATIONS OF SHELIA BAIR, JAMES B. LOCKHART, III, DONALD L. KOHN, AND KATHLEEN L. CASEY
=======================================================================
HEARING
before the
COMMITTEE ON
BANKING,HOUSING,AND URBAN AFFAIRS
UNITED STATES SENATE
ONE HUNDRED NINTH CONGRESS
SECOND SESSION
ON
NOMINATIONS OF:
SHELIA BAIR, OF KANSAS, TO BE MEMBER AND CHAIRPERSON OF THE BOARD OF
DIRECTORS OF THE FEDERAL DEPOSIT INSURANCE CORPORATION
__________
JAMES B. LOCKHART, III, OF CONNECTICUT, TO BE DIRECTOR OF
THE OFFICE OF FEDERAL HOUSING ENTERPRISE OVERSIGHT
__________
DONALD L. KOHN, OF PENNSYLVANIA, TO BE VICE CHAIRMAN OF
THE BOARD OF DIRECTORS OF THE FEDERAL RESERVE SYSTEM
__________
KATHLEEN L. CASEY, OF VIRGINIA, TO BE A MEMBER OF
THE U.S. SECURITIES AND EXCHANGE COMMISSION
__________
JUNE 8, 2006
__________
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COMMITTEE ON BANKING, HOUSING, AND URBAN AFFAIRS
RICHARD C. SHELBY, Alabama, Chairman
ROBERT F. BENNETT, Utah PAUL S. SARBANES, Maryland
WAYNE ALLARD, Colorado CHRISTOPHER J. DODD, Connecticut
MICHAEL B. ENZI, Wyoming TIM JOHNSON, South Dakota
CHUCK HAGEL, Nebraska JACK REED, Rhode Island
RICK SANTORUM, Pennsylvania CHARLES E. SCHUMER, New York
JIM BUNNING, Kentucky EVAN BAYH, Indiana
MIKE CRAPO, Idaho THOMAS R. CARPER, Delaware
JOHN E. SUNUNU, New Hampshire DEBBIE STABENOW, Michigan
ELIZABETH DOLE, North Carolina ROBERT MENENDEZ, New Jersey
MEL MARTINEZ, Florida
Kathleen L. Casey, Staff Director and Counsel
Steven B. Harris, Democratic Staff Director and Chief Counsel
Peggy R. Kuhn, Senior Financial Economist
Mark A. Calabria, Senior Professional Staff Member
Andrew Olmem, Counsel
Jonanthan Gould, Professional Staff Member
Dean V. Shahinian, Democratic Counsel
Jonathan Miller, Democratic Professional Staff
Lynsey Graham Rea, Democratic Counsel
Joseph R. Kolinski, Chief Clerk and Computer Systems Administrator
George E. Whittle, Editor
(ii)
C O N T E N T S
----------
THURSDAY, JUNE 8, 2006
Page
Opening statement of Chairman Shelby............................. 1
Opening statements, comments, or prepared statements of:
Senator Sarbanes............................................. 4
Senator Crapo................................................ 5
Senator Johnson.............................................. 6
Prepared statement....................................... 22
Senator Dole................................................. 6
Senator Bunning.............................................. 7
Senator Hagel................................................ 8
Senator Reed................................................. 8
Senator Martinez............................................. 8
Senator Allard............................................... 23
NOMINEES
Shelia Bair, of Kansas, to be Member and Chairperson of the Board
of Directors of the Federal Deposit Insurance Corporation...... 9
Prepared statement........................................... 24
Biographical sketch of nominee............................... 25
Response to written questions of:
Senator Shelby........................................... 66
Senator Bunning.......................................... 67
James B. Lockhart, III, of Connecticut, to be Director of the
Office of Federal Housing Enterprise Oversight................. 11
Biographical sketch of nominee............................... 35
Response to written questions of Senator Bunning............. 67
Donald L. Kohn, of Pennsylvania, to be Vice Chairman of the Board
of Directors of the Federal Reserve System..................... 12
Biographical sketch of nominee............................... 43
Response to written questions of Senator Bunning............. 69
Kathleen L. Casey, of Virginia, to be a Member of the U.S.
Securities and Exchange Commission............................. 13
Biographical sketch of nominee............................... 57
Additional Material Supplied for the Record
Statement of Bob Dole, a former U.S. Senator from the State of
Kansas......................................................... 73
(iii)
NOMINATIONS OF:
SHEILA BAIR, OF KANSAS
TO BE MEMBER AND CHAIRPERSON OF
THE BOARD OF DIRECTORS
FEDERAL DEPOSIT INSURANCE CORPORATION
JAMES B. LOCKHART III, OF CONNECTICUT
TO BE DIRECTOR, OFFICE OF
FEDERAL HOUSING ENTERPRISE OVERSIGHT
DONALD L. KOHN, OF PENNSYLVANIA
TO BE VICE CHAIRMAN OF
THE BOARD OF GOVERNORS OF
THE FEDERAL RESERVE SYSTEM AND
KATHLEEN L. CASEY, OF VIRGINIA
TO BE A MEMBER OF THE
U.S. SECURITIES AND EXCHANGE COMMISSION
----------
THURSDAY, JUNE 8, 2006
U.S. Senate,
Committee on Banking, Housing, and Urban Affairs,
Washington, DC.
The Committee met at 10:09 a.m., in room SD-538, Dirksen
Senate Office Building, Richard C. Shelby (Chairman of the
Committee) presiding.
OPENING STATEMENT OF CHAIRMAN RICHARD C. SHELBY
Chairman Shelby. The hearing will come to order. This
morning, we will consider the nominations of four very
distinguished individuals. I appreciate the willingness of the
nominees to appear before the Committee. The panel of nominees,
if confirmed, will have very important responsibilities for
ensuring public confidence in the viability of our Nation's
financial institutions, capital markets, and housing finance
system.
Our first nominee is Ms. Sheila C. Bair, nominated by
President Bush to serve as a Member and Chairman of the Federal
Deposit Insurance Corporation, FDIC. The FDIC, as we all know,
is charged with insuring deposits in banks and thrift
institutions for at least $100,000. In addition, the FDIC is
the primary Federal regulator of banks that are chartered by
the States that do not join the Federal Reserve System, roughly
5,250 banks and savings banks. The FDIC also serves as an
important role as the backup supervisor for the remaining
insured banks and thrift institutions.
The FDIC is currently implementing changes to the Deposit
Insurance Program mandated by Congress in legislation passed
earlier this year. I believe that ensuring that this
implementation process is carried out effectively and in a
manner that tracks the will of Congress will be a key
responsibility of the new Chairman. The nominee understands
that well.
Ms. Bair brings a wealth of financial services experience
to the Federal Deposit Insurance Corporation. Currently a
Professor of Financial Regulatory Policy at the University of
Massachusetts, Ms. Bair has served as Assistant Secretary for
Financial Institutions at the Department of the Treasury, as
Senior Vice President of the New York Stock Exchange and as
Commissioner and Acting Chairman of the Commodity Futures
Trading Commission. She is also the author of numerous articles
on the financial services industry.
Our second nominee with us is James B. Lockhart, III,
nominated to be the Director of the Office of Federal Housing
Enterprise Oversight at the Department of Housing and Urban
Development that we call OFHEO. Mr. Lockhart, for the past
several years, this Committee has made regulatory reform for
the Government Sponsored Enterprises a key priority, as you
well know. The internal controls, risk management, and
accounting problems of the GSE's point to the need for our
efforts to bear fruit in this regard. We will be looking to you
to assume the stewardship of OFHEO and use the authority you
may have available to ensure that these entities, which are so
important to our housing markets, operate in a safe and a sound
manner.
Mr. Lockhart was previously nominated and confirmed to
serve as the Deputy Commissioner for the Social Security
Administration. In that position, he serves as the Agency's
Chief Operating Officer, Secretary to the Social Security Board
of Trustees, and as a member of the Executive Committee of the
President's Management Council. Prior to this, he served as
Managing Director at NetRisk, Incorporated. Earlier in his
career, he served as Executive Director of the Pension Benefit
Guaranty Corporation and has held senior positions at National
Reinsurance, Smith Barney, Alexander & Alexander, and Gulf Oil.
Mr. Lockhart received his bachelor's degree from Yale
University and his master's degree from Harvard.
Our third nominee is Donald L. Kohn, nominated to serve as
the Vice Chairman of the Board of Governors of the Federal
Reserve System. Dr. Kohn took office on August 5, 2002, as a
Member of the Board of Governors of the Federal Reserve System
for a full term ending January 31, 2016.
The Federal Reserve System is in a period of transition.
Chairman Bernanke assumed his position earlier this year and
has the unenviable task of following the much-commended tenure
of Alan Greenspan. Given his extensive background and training,
this Committee was pleased to see Chairman Bernanke assume
those duties. In another type of transition, the future path of
interest rates appears less predictable than it has been in
recent years, and the recent volatility in financial and stock
markets reflects that uncertainty. Additionally, the Federal
Reserve Board is in the process of developing new capital
requirements for our banking system. These requirements are an
extremely important part of our capital regime, and any changes
must be implemented in a thoughtful and deliberative manner
that recognizes and preserves the operation of the existing
minimum capital requirement. For all these reasons, the
Committee is again pleased that President Bush nominated
someone with the depth and breadth of experience that you
possess, Dr. Kohn, to assume the role of Vice Chairman of the
Board of Governors of the Federal Reserve System.
You have a very distinguished record with the Federal
Reserve System already. Before becoming a Member of the Board,
he served on its staff as Adviser to the Board for Monetary
Policy from 2001 to 2002; Secretary of the Federal Open Market
Committee from 1987 to 2002; Director of the Division of
Monetary Affairs, and Deputy Staff Director for Monetary and
Financial Policy. He has also held several positions in the
Board's Division of Research and Statistics: Associate
Director, Chief of Capital Markets, and Economist. Dr. Kohn
began his career as a Financial Economist at the Federal
Reserve Bank of Kansas City.
Dr. Kohn has written extensively on issues relating to
monetary policy and its implementation by the Federal Reserve.
These works were published in volumes issued by various
organizations, including the Federal Reserve System, the Bank
of England, the Reserve Bank of Australia, the Bank of Japan,
the Bank of Korea, the National Bureau of Economic Research,
and the Brookings Institution. Dr. Kohn received a B.A. in
economics in 1964 from the College of Wooster and a Ph.D. in
economics in 1971 from the University of Michigan.
Our fourth nominee today is no stranger to this Committee.
It is Kathleen Casey to be a Commissioner of the Securities and
Exchange Commission. Ms. Casey has served, as we know, as the
Staff Director and Counsel of the Senate Banking Committee for
the past 3\1/2\ years. During this period, the Committee has
considered many significant securities issues, among them
addressing trading abuses in the mutual fund industry,
oversight of the Sarbanes-Oxley Act, the structure of the
capital markets and the hedge fund industry. The Committee has
also reviewed the impact of the global analyst settlement and
increased scrutiny of both credit rating agencies and the self-
regulatory organizations that we call SRO's. In examining these
key issues, the Committee is always mindful of the SEC's role
and its interrelationship with the SRO's, State regulators, and
international regulatory bodies. As Staff Director, Ms. Casey
has acquired substantial expertise in these areas. Beyond this
institutional experience, Ms. Casey has developed a reputation
for her keen intellect, diligence, and consummate
professionalism. Perhaps more importantly, she recognizes the
fundamental importance of honesty, integrity, and fairness in
the operation of our capital markets.
Upon confirmation, Ms. Casey will become a Commissioner at
the Securities and Exchange Commission during a time of great
change in the global markets. The Commission is charged with
protecting investors; maintaining fair, orderly, and efficient
markets; and facilitating capital formation. Recently, the
Securities and Exchange Commission has had to confront a host
of issues, among them, increased retail investment, new
investment products, new investment vehicles, new markets, and
the emergence of publicly traded exchanges with more global
interaction and innovation than ever before. As the flow of
capital has become increasingly international in scope,
regulatory considerations will need to adapt to meet these
changes. On the domestic side, consolidation and exchange
demutualization further demonstrate that change and evolution
are a constant in our financial markets. Again, the Securities
and Exchange Commission must keep pace with these developments.
Prior to working on the Banking Committee, Ms. Casey served
as my Chief of Staff and Legislative Director for a number of
years. She also worked as a Legislative Assistant and Staff
Director for the Subcommittee on Financial Institutions of this
Senate Banking Committee. She received her B.A. from
Pennsylvania State University and her J.D. from George Mason
University. I commend the President for nominating Ms. Casey
and look forward to hearing her testimony and the testimony of
all our nominees this morning.
Senator Sarbanes.
STATEMENT OF SENATOR PAUL S. SARBANES
Senator Sarbanes. Thank you very much, Mr. Chairman.
I am very pleased that this morning, we are considering the
nominations of four highly qualified individuals, and I want to
commend the President and his advisers for sending people of
such quality before us to assume important responsibilities.
Amongst other things, it makes our job a lot easier, so I
welcome it for that reason as well.
At the very outset, I want to pay a special tribute to
Kathy Casey, who has been nominated to serve as a Commissioner
of the Securities and Exchange Commission. Ms. Casey, as the
Chairman observed, has been the Staff Director of this
Committee since January 2003. During that period, the Committee
has reported out many bills. Bills of some consequence number
well into the twenties. Virtually all of them came out of this
Committee unanimously. On only a couple of instances did we
have a division, and a lot of the credit, I think, goes to very
effective staff work.
Mr. Chairman, I am sure you and my colleagues will agree
with me that Senators often get credit for the success of the
Committee, but we know that a large part of the work is done by
the staff.
Chairman Shelby. Absolutely.
Senator Sarbanes. Also, Ms. Casey has led the Committee as
Majority Staff Director in a highly transparent manner, with an
open door policy, an open mind to hearing all points of view,
and with a commitment to try to work toward consensus amongst
the Members of the Committee. And, at a time that has been
marked by fractious division and so forth, this is a welcome
quality and I am sure will be of important service on the
Commission.
Ms. Casey has been an excellent Staff Director. I believe
she will be a very able Commissioner at the SEC, and I am very
pleased and look forward to supporting her nomination.
Let me turn to the other nominees. Sheila Bair, of course,
is also very well known to the Committee. She has been
confirmed three times before, most recently in 2001, when she
served President Bush as Assistant Secretary for Financial
Institutions at the Treasury Department. At Treasury, she
played a lead role in developing policy relating to Federal
Deposit Insurance reform, which obviously is highly relevant
now to the nomination to be the Chair of the FDIC, and on
terrorism risk insurance, which the Cain-Hamilton Group,
ranking how their recommendations were being carried out, this
was the only A that they gave to how it was being implemented.
Chairman Shelby. That is right.
Senator Sarbanes. And we all worked together in trying to
achieve that.
Most recently, she has been teaching at the University of
Massachusetts at Amherst. I have come to know Sheila Bair over
the years, and I want to express my appreciation to her for her
willingness to serve yet another tour of duty in Government as
the Chair of the FDIC.
Don Kohn has served in the Federal Reserve for over 36
years, the last 4 as a Member of the Board of Governors. He is
very highly respected as a consummate and dedicated
professional public servant. As a staff member, he was well
known for his intellect and for being invaluable to both
Chairman Volcker and Chairman Greenspan, and I believe it is
only fitting and appropriate that he is now being considered to
be the Vice Chairman of the Federal Reserve Board.
And Mr. Lockhart, not as well known to this Committee, but
he has had extensive Government experience: Executive Director
of the Pension Benefit Guaranty Corporation from 1989 to 1993
and Deputy Commissioner and Chief Operating Officer at the
Social Security Administration since 2002. He is also currently
serving as Acting Director of OFHEO, and if confirmed, will be
leading OFHEO at, I think, one of the most important times in
its history.
Finally, Mr. Chairman, I want to take this opportunity to
express my appreciation to Roger Ferguson, who served so ably
at the Fed, first as a Member of the Board and then as its Vice
Chairman from October 1999 to April 2006. Among other things, I
would note that he provided a very steady hand and a strong
leadership at the Fed during the crisis surrounding September
11. We will recall that Chairman Greenspan was out of the
country when that tragedy occurred, and Roger Ferguson
responded with, I think, great ability and rendered really a
tremendous service.
I also want to express my appreciation to Cynthia Glassman,
both for her dedicated service at the Securities and Exchange
Commission and before that as a Senior Professional Economist
at the Federal Reserve Board. I want to take this opportunity
to wish each of them well in their future endeavors.
Thank you very much.
Chairman Shelby. Senator Crapo, you have an opening
statement you would like to give?
STATEMENT OF SENATOR MICHAEL CRAPO
Senator Crapo. Thank you very much, Mr. Chairman.
I simply want to join with you and Senator Sarbanes in your
comments about each of those who are on our panel today. We
have very strong candidates for the positions to which they
have been nominated, and I also, because of our close
relationship with Kathy Casey here, want to give her my
personal congratulations and commendations for the great work
that you have done here and the great work that you will do at
the SEC.
Chairman Shelby. Thank you.
Senator Johnson.
STATEMENT OF SENATOR TIM JOHNSON
Senator Johnson. Thank you, Mr. Chairman, and Ranking
Member Sarbanes. I want to thank you for holding this hearing.
We have a very impressive slate of nominees to consider. I
look forward to hearing from them. I would especially like to
offer my congratulations to Ms. Casey, a member of our own
Banking Committee family. She has been with you, Mr. Chairman,
for many years, and I appreciate the hard work she has done on
behalf of this Committee and her service to the financial
services industry. And while her nomination is a loss for us,
it is well-deserved, and I have no doubt she will be a great
asset to the SEC.
I have a number of comments that I would like to share, but
in order to expedite the consideration of this hearing, Mr.
Chairman, what I would like to do is to submit my statement for
the record.
Chairman Shelby. Without objection, it will be made part of
the record in its entirety.
STATEMENT OF SENATOR ELIZABETH DOLE
Senator Dole. Thank you, Mr. Chairman.
While I could talk about all of these outstanding nominees
before us today in some detail, there is one that Bob Dole and
I are especially proud of. Bob has asked that I let you know
that he very much wanted to be here today and is so sorry he
had to be out of town. He wanted to once again introduce Sheila
Bair, the President's nominee for Chairman of the Federal
Deposit Insurance Corporation.
We have known Sheila for 25 years, Mr. Chairman. Earlier in
her career, she served as Bob's Counsel on the Senate Judiciary
Committee, handling issues including civil and constitutional
rights, intellectual property, and judicial reform. Bob and I
knew her to be an outstanding member of his staff, one on whom
we could count for advice and analysis, both of us, a role at
which she certainly has excelled.
Bob was here before this Committee on July 12, 2001, when
he sang Sheila's praises for her confirmation as Assistant
Secretary of the Treasury. He asked that my colleagues on the
Committee keep in mind his high praise and confidence in Sheila
Bair. Within 24 hours of her confirmation for that position,
Mr. Chairman, Sheila was before this Committee, testifying on
the need for deposit insurance reform. If confirmed in this new
role, she will be charged with implementing the reform.
On numerous issues, Sheila has been a great resource to
both Bob and me over the years. She has been a catalyst for
greater action for financial literacy and financial
institutions policy. Both Bob and I are confident that Sheila
will be approved speedily and overwhelmingly, and we both give
her our unqualified support.
I look forward to working with Sheila in this new capacity
on critical issues impacting the financial services industry,
such as the implementation of Basel II. I have some concerns
that the proposed U.S. regulation differs from the
internationally adopted accord and how these differences might
disadvantage U.S. banks of all sizes abroad and on our own
soil.
I am confident that Sheila will keep an open mind at the
FDIC and that she will engage in an open dialogue about the
concerns of some of the industry with regard to the draft rule.
Mr. Chairman, I would ask unanimous consent that Bob Dole's
full statement be made a part of the record.
Chairman Shelby. Without objection, it will be done
I also want to recognize Dr. Don Kohn, who has been
nominated as Vice Chairman of the Board of Governors of the
Federal Reserve. He has very ably served as a Member of the
Board since 2002 and has my full support for this new position.
The Committee will also consider the nomination of Jim
Lockhart to serve as Director of the Office of Federal Housing
Enterprise Oversight. I had the great pleasure of working with
Jim when he was the Executive Director of the Pension Benefit
Guaranty Corporation during my years as Labor Secretary for the
first President Bush. In my role, Mr. Chairman, I served as the
Chairman of the Board of Directors for the PBGC and relied on
Jim's wise advice and counsel. Jim did a great job of reform at
PBGC in his time there and has now dedicated himself to the
daunting task of oversight of Fannie Mae and Freddie Mac. I am
confident, Mr. Chairman, he will do an excellent job there as
well, and he has my unqualified support.
Thank you, Mr. Chairman.
Chairman Shelby. Senator Bunning.
STATEMENT OF SENATOR JIM BUNNING
Senator Bunning. Thank you, Mr. Chairman.
Today, we have four very important nominations before this
Committee. Each of the nominees will fill a high ranking
position at one of the most influential Government agencies
overseeing the financial sector, and each of the nominees will
play a critical role in preserving the safety and soundness of
our national economy.
Two of the nominees face immediate challenges in their
jobs. The Government Sponsored Enterprises like Fannie and
Freddie must be cleaned up, and the risks that they pose to our
economy must be brought under control. That is a job that we
must act on in Congress in addition to what is done by the
Office of Federal Housing Enterprise Oversight. Also, the
Federal Reserve is at a point where it is going to do some
serious damage to our economy if its Members are not careful.
I hear a lot of talk about inflation showing up, but there
are two things we need to keep in mind when talking about
inflation: First, our inflation measures are backward-looking.
Second, there is a lag between Fed action and when we have an
impact on inflation and the economy. Both of those should lead
the Fed to be cautious when taking action to fight inflation.
I am afraid the Fed is going to overshoot this year just as
they did the last time. Overshooting will have a devastating
impact on this economy and maybe worse than before, because of
the artificially inflated housing prices this time around. I am
not alone in my concern, either. All you need to do is look at
the stock market since the Fed's last action to see that the
markets are really worried. Just this week, the Dow is down 317
points, mostly because of talk from the Fed Chairman that has
everyone convinced there are going to be more rate hikes
coming. I am very worried about this not just because of all of
the money people are losing in the markets but because of the
lasting damage that could be done to the economy.
I thank all the nominees for coming before the Committee
today, and I congratulate them on their nomination by the
President. I especially want to congratulate Ms. Casey, who has
served this Committee well over the years. One thing that
sticks out most in my mind was her help with my TVA provisions
2 years ago. Mr. Chairman, it is always nice to see our staff
succeed and go on to bigger and better things, and I
congratulate both of you.
Thank you.
Chairman Shelby. Thank you.
Senator Hagel.
STATEMENT OF SENATOR CHUCK HAGEL
Senator Hagel. Mr. Chairman, thank you.
I would only add that it is a remarkable opportunity when
we have before us four exceptional individuals that represent
competency and commitment to causes greater than their own
self-interest. We are grateful for your service and for your
willingness to once again take on big assignments with
significant consequences in these jobs, and, in particular, I
would add my note of appreciation to our own Ms. Casey's
nomination. I am strongly supporting each of these four
nominees and look forward to work with them.
Thank you very much.
Chairman Shelby. Senator Reed.
STATEMENT OF SENATOR JACK REED
Senator Reed. Thank you very much, Mr. Chairman, and I do
want to commend all the nominees.
I have had a chance to meet with Ms. Bair, Mr. Lockhart,
and Governor Kohn and am impressed with not only the quality of
their thought but also their commitment to public service and
thank you, and a special thanks to our local nominee. Kathy
Casey has served this Committee with great distinction, great
fairness, great integrity, and it is a delight and pleasure to
see you here today for your nomination.
Thank you, Mr. Chairman.
Chairman Shelby. Senator Martinez.
STATEMENT OF SENATOR MEL MARTINEZ
Senator Martinez. Thank you, Mr. Chairman.
I very much appreciate the opportunity I have had to work
with Ms. Casey as Secretary of HUD and then here in this
Committee, and I am delighted for the opportunity that she has
here today. It looks like the votes are going pretty well for
you on the Committee.
[Laughter.]
So, I am happy to forecast a confirmation for you.
[Laughter.]
But I am also very interested in discussing the issues
facing OFHEO. It is a very important time at a very important
entity and just very much appreciate the steps you have taken
but also very much look forward to discussing with you where
the future might lead in terms of the work at OFHEO, and I
likewise commend and congratulate the other nominees for their
public service and their desire to serve.
Thank you.
Chairman Shelby. Will all four of you stand, hold up your
right hand, and be sworn.
[Witnesses sworn.]
Chairman Shelby. Ms. Bair, we will start with you. Do you
have anybody you want to recognize here this morning?
Ms. Bair. Yes, I certainly do: my husband, Scott Cooper, my
husband and best friend is here with me. My son, Preston
Cooper.
Chairman Shelby. Okay.
Ms. Bair. And my daughter, Colleen Cooper.
Chairman Shelby. Great.
Ms. Bair. They are here, and I trust the Committee will
understand if they do not----
Chairman Shelby. Mr. Lockhart, do you have anybody here
with you today?
Mr. Lockhart. My wife, Cricket, and her brother.
Chairman Shelby. Mr. Kohn.
Mr. Kohn. My wife, Gail; my son, Jeff; my niece, Sarah
Friedman; my mother, Pat; and my niece, Marcy Friedman.
[Laughter.]
Chairman Shelby. You brought them all.
Mr. Kohn. It takes a crowd to support me, I think.
Senator Sarbanes. I wondered where this large crowd came
from.
[Laughter.]
Chairman Shelby. Ms. Casey.
Ms. Casey. I have my father, Bernie Casey, and my mother,
Kathy Casey, and several friends.
Chairman Shelby. Thank you all.
Ms. Bair, I will start with you, but all of your written
testimony will be made part of the hearing record of the
Banking Committee in its entirety. If you will sum up briefly
your remarks, because we have a lot of Senators here.
STATEMENT OF SHEILA BAIR, OF KANSAS
TO BE MEMBER AND CHAIRPERSON OF
THE BOARD OF DIRECTORS
FEDERAL DEPOSIT INSURANCE CORPORATION
Ms. Bair. Thank you, Senator. I have a short statement. I
will be brief.
Thank you very much. It is a pleasure to appear before you
this morning with such a distinguished panel. At the outset, I
would like to thank the President for having the confidence in
me to lead this historic agency. Established in the throes of
the Great Depression, the FDIC restored depositor confidence in
our crippled banking system and since that time has served as a
beacon of safety for the financial assets of the average
consumer. It is a well-run, well-respected agency, comprised of
4,500 dedicated staff and a Board of Directors who bring a
broad depth of experience as well as a rich diversity in
regulatory viewpoints. It will be my privilege to work with
these outstanding individuals if confirmed by the Senate.
I would like to thank my family for their support of my
decision to accept this nomination and their willingness to
disrupt their lives to move back to Washington, DC. I have
introduced my family. I would also like to thank my parents,
Dr. Albert and Clara Bair, who are quite elderly and could not
join me this morning. Finally, I would like to recognize my
former boss, Senator Dole, for his help in this endeavor and
all the other challenges I have undertaken over the past two
decades. Washington can be a difficult place to navigate, and
having someone of high stature and integrity to guide you is
crucial. I was fortunate enough to have Senator Dole as a
mentor. His wise counsel and advice have always served me well.
Another benefit of my association with the Senator was the
opportunity to get to know the senior Senator from North
Carolina. Elizabeth, I thank you for those kind words. I first
had the privilege of meeting Elizabeth Dole in the 1980's, when
we worked on so-called ``gender gap'' issues in the Reagan
Administration, to show you how old I am.
[Laughter.]
I have seen first-hand her formidable intellect, strong
work ethic, and utmost dedication to public service, and I am
very glad she is on this Committee and that perhaps we will
have the chance to work together again.
The last time I appeared before this full Committee, I was
the President's nominee to be the Assistant Secretary for
Financial Institutions, as was noted. Upon my confirmation for
that position, my first assignment was to represent the
Administration on deposit insurance reform. If confirmed by the
Senate, I will play a role now in the implementation of that
comprehensive new law. Deposit insurance reform is just one of
the many major policy issues confronting the FDIC: ILC's, Basel
II and IA, regulatory burden, antimoney laundering; the list
goes on. There is no shortage of cutting edge issues at the
FDIC, and for many, there are no easy answers. But as one who
loves public policy and believes that Government can be a force
for positive change, I do welcome these challenges.
In concluding, I would reiterate my strong commitment to
the millions of individuals who rely on the FDIC for security
and peace of mind in protecting their deposits. As the
ownership society evolves, it is important for everyday working
men and women to know that they have a safe haven for a
selected portion of their financial assets. It is equally
important to the functioning of our banking system that
consumers have confidence in their banks. The FDIC stands
proudly at that intersection, and I look forward to the
opportunity to serve this fine agency.
Thank you very much, Mr. Chairman.
Chairman Shelby. Mr. Lockhart.
STATEMENT OF JAMES B. LOCKHART, III, OF CONNECTICUT,
TO BE DIRECTOR
OFFICE OF FEDERAL HOUSING ENTERPRISE OVERSIGHT
Mr. Lockhart. Chairman Shelby, Ranking Member Sarbanes, and
Members of the Committee, it is a real honor to be before you
today as President Bush's nominee for the Director of the
Office of Federal Housing Enterprise Oversight, OFHEO.
This will actually be my fourth opportunity for public
service. The first was as a Naval officer aboard a nuclear
submarine, the USS George Washington Carver. The boat's motto
is one that has always stuck with me, which is ``Strengthen
through Knowledge,'' and it is going to be important in this
upcoming job as well.
As was noted, I have also had the opportunity to run the
Pension Benefit Guaranty Corporation, to be the Deputy
Commissioner and Chief Operating Officer of Social Security,
and for the past month, the Acting Director of OFHEO.
But despite all of that time in Government, I have spent
most of my career in the private sector in financial services.
As such, I have extensive experience with many of the issues
the Enterprises, Fannie Mae and Freddie Mac, are facing, which
include internal controls, risk management, systems
development, investments including asset-backed securities,
mortgages, guarantees, and capital management.
A secure retirement and homeownership are key components of
the American Dream. In many ways, trying to make those dreams
come true has been the mission and goal of all three agencies
for which I have worked. The three also share a need for
strengthening. At PBGC, I was charged with shoring up the
agency so that it could better fulfill its mission of
protecting the private sector pensions of Americans. Social
Security's mission of ``ensuring economic security for the
Nation's people'' is a very important one, and we did a lot of
work to improve service and strengthen stewardship. We need to
do more on ensuring sustainable solvency for future
generations.
Obviously, OFHEO is a much smaller agency than Social
Security. Almost everything is in the Government. And just last
week, it only had its 13th anniversary. But it does have an
extremely important and compelling mission, and that mission
is: ``to promote housing by ensuring the safety and soundness
of Fannie Mae and Freddie Mac and to strengthen the Nation's
housing finance system.'' These two companies own or guarantee
about 41 percent of the residential mortgages in the United
States and are amongst the largest guarantors and borrowers in
the world economy.
There are four key goals that OFHEO needs to accomplish to
fulfill our mission. First and by far the biggest is to ensure
the safety and soundness of the Enterprises. My first
challenge, as you know, at OFHEO was to complete the Special
Examination Report of Fannie Mae and to negotiate a settlement
agreement. The work on the report was almost done when I
arrived, and we were able to issue it and the settlement
agreement on May 23. I look forward in the future to having an
opportunity to testify before this Committee on that
settlement. We must continue to monitor both Fannie Mae is and
Freddie Mac's compliance and progress with their agreements. As
the Chief Executive Officers of both companies have told me, it
will take them several years of hard work to change the
corporate culture and to strengthen internal controls, risk
management, and accounting systems to acceptable levels.
The next two goals that we need to fulfill are
recommendations from the Fannie Mae Special Examination, and
the first is that we need to continue to strengthen our
regulatory infrastructure. The recommendation is we must
continue to support legislation to provide the powers essential
to meeting our mission.
I have been very impressed with the OFHEO team, but we have
a lot of progress yet to make. There is a lot of hard work to
do, and we need the tools to do that work. In particular,
legislative reform of the Agency is critical. The Agency must
have powers on par with other financial regulators, including
budget flexibility. OFHEO also needs safety and soundness
powers equivalent to the banking regulators such as flexible
capital standards and strong receivership powers.
The fourth goal is to promote efficient financial markets
to support homeownership through educational efforts. Over the
years, great progress has been made in homeownership, which at
69 percent is near an all-time high. A key role that OFHEO can
play with your help is to ensure that Fannie Mae and Freddie
Mac, which have been important elements of this growth, are
restored to full health and are properly focused on their core
mission.
I look forward to working closely with the Members of this
Committee and the professional and highly dedicated OFHEO team
to address these challenges so that our Nation's housing
finance system continues to be vibrant, safe and sound.
Thank you.
Chairman Shelby. Governor Kohn.
STATEMENT OF DONALD L. KOHN, OF PENNSYLVANIA
TO BE VICE CHAIRMAN OF THE
BOARD OF GOVERNORS OF THE FEDERAL RESERVE SYSTEM
Mr. Kohn. Thank you, Chairman Shelby, Senator Sarbanes,
Members of the Committee, I am honored to have been nominated
by President Bush to be the Vice Chairman of the Board of
Governors of the Federal Reserve System, and I am grateful to
this Committee for scheduling this hearing so expeditiously. I
have enjoyed a long and productive relationship with the
Banking Committee and its staff over the years, working
together to determine how the Federal Reserve can best
contribute to the economic well being of our citizens. As a
Governor, and if you confirm me, as Vice Chairman, I look
forward to continuing to be part of the shared pursuit of that
objective.
The Board's Vice Chairman has a very limited role under the
Federal Reserve Act--to preside over the Board in the absence
of the Chairman. By tradition and practice, however, the Vice
Chairman has played a leadership role within the Federal
Reserve System. He or she has acted as the Chairman's deputy or
alternate in important international groups; has headed ad hoc
committees within the Board, System, or Federal Open Market
Committee to help develop policy alternatives for consideration
by the larger group, has helped the Chairman to lead the Board,
and has worked closely with the Chairman in a variety of
circumstances, including when responding to disturbances in the
financial sector that had the potential of affecting the
broader economy.
The Federal Reserve faces considerable challenges today in
meeting the responsibilities that you have given us for
fostering price stability and maximum employment at a time of
rapid change in the U.S. and global economies; for helping
maintain a safe and sound banking system and stable and
efficient payments and financial systems in the face of
innovations and financial instruments and institutions; and for
protecting and educating consumers as they take advantage of
the greater variety and sophistication of financial instruments
available to them. I believe that my long and wide experience
within the Federal Reserve, at a Reserve Bank and at the Board,
on staff and as Governor, along with my close working
relationship with Chairman Bernanke, will enable me to make an
even greater contribution to the work of the Federal Reserve as
the Board's Vice Chairman should you choose to confirm me to
this position.
Thank you.
Chairman Shelby. Ms. Casey.
STATEMENT OF KATHLEEN L. CASEY, OF VIRGINIA
TO BE A MEMBER OF THE
U.S. SECURITIES AND EXCHANGE COMMISSION
Ms. Casey. Mr. Chairman, Ranking Member Sarbanes, and
Members of the Committee, I am honored to appear before you
today. I am deeply grateful and humbled by the President's
nomination to serve as a Commissioner on the Securities and
Exchange Commission, and I thank the President for this great
honor.
I would also like to express my sincere gratitude to
Chairman Shelby, the Members of the Senate Banking, Housing,
and Urban Affairs Committee, and the staff. It has been both a
privilege and a joy to work on the Committee. As has so often
been noted, this Committee has a long history of collegiality
and bipartisanship. I believe this well-deserved reputation
stands as a testament to the Committee's effectiveness and
makes work, even on difficult and divisive issues, not only
challenging but also rewarding.
I have also been fortunate to work with extraordinarily
smart, capable, and professional staff. I have come to know and
respect all of them, but I would like to particularly thank
Steve Harris, the Minority Staff Director, for his friendship
and support over these past several years. It has been
invaluable to me, and working with you has been a real
pleasure, so thank you, Steve. The Securities and Exchange
Commission is the world's preeminent market regulator. Having
had the opportunity to work with members and staff of the
Commission over the years, it is easy to see why.
Over the past 13 years, I have had the opportunity to work
on a broad range of legislative and oversight issues affecting
our capital markets and the work of the SEC. This experience
has given me a deeper understanding of the legal and regulatory
framework that guides our securities markets and has provided
me with insight into the public policy considerations that
underpin it.
Further, I believe that this experience has given me a
strong appreciation of the important role the Securities and
Exchange Commission plays in protecting investors and ensuring
the integrity and efficiency of our capital markets. I have a
deep respect for the efficiency and productive power of our
capital markets.
I believe we should let market forces work. As it has often
been said, we have the deepest, most liquid, and efficient
markets in the world. Millions of Americans invest in them
every day and rely on the market's vibrancy and depth to build
and secure their futures. But we should never lose sight of one
fact: Our capital markets enjoy this preeminent status because
they are the most transparent. Because of this transparency,
people in the United States and around the world have
confidence in their integrity.
This confidence in our markets is due in large part to the
disclosure requirements of our securities laws. Full and
accurate disclosure is the key to transparency. But if
disclosure is to be meaningful to ordinary investors, it must
be understandable. I believe that Chairman Cox has identified
in a most tangible way a promising initiative that could help
demystify financial disclosure for everyday Americans and
empower them with meaningful and understandable information to
guide their decisionmaking.
As has also been evidenced in the past, while strong and
dynamic, our markets can be roiled if investors do not have
confidence that they are fair. It is therefore important that
investors believe that fraud and misconduct will be pursued and
penalized. The SEC must play a leading role in policing our
markets and in enforcing the law. Firm but fair enforcement
ensures that misconduct of the few does not erode the
confidence of the many.
Our markets also continue to rapidly evolve and change in
an increasingly global marketplace. This promises tremendous
benefits for U.S. investors but also poses unique challenges.
The SEC will play a vital role in ensuring that our regulatory
framework is able to adjust to those changes and continue to be
responsive to the needs of investors and to market forces. The
SEC is already undertaking these efforts proactively to look
ahead and to discuss with international counterparts how the
SEC can continue to fulfill its mission in this changing
marketplace.
The President has nominated me to take the seat being
vacated by Commissioner Cindy Glassman. I would like to note
that she has been an extraordinary Commissioner, and should I
be confirmed, I hope to serve as ably as she has.
On a final and personal note, I would like to thank
Chairman Shelby again for giving me the privilege to serve him
and this Committee. Working in the U.S. Senate has been the
most rewarding and enjoyable experience of my life, and I will
cherish the knowledge, wisdom, and friendships that I have
gained here.
I think it is often easy to forget in the day-to-day course
of business what a tremendous honor it is to work here. I
recall fondly one of my first days on the job for Senator
Shelby. The Senate was considering a very controversial and
contentious bill, and I had to accompany him to the Senate
floor for the debate. I was very nervous, and despite the fact
he kept calling me by the wrong name----
[Laughter.]
--I think he called me Peggy----
[Laughter.]
--I was still thrilled.
[Laughter.]
It really did not matter that he did not know my name at
the time. What mattered most was that I was sitting behind a
U.S. Senator on the floor of the U.S. Senate, and it is with
this humility and desire to continue to serve the public
interest that I thank you again for the opportunity to appear
before you today, and I would be pleased to answer any
questions.
Chairman Shelby. Thank you.
Governor Kohn, I will start with you. This week, Chairman
Bernanke, as you know, and the Atlanta Fed Bank President, both
spoke about their concerns regarding inflation. Senator Bunning
has brought that up already, and he should. What are your views
regarding the recent inflation data, and what data between now
and the Federal Open Market Committee meeting at the end of
June will you be watching most closely or some of it to see
what is raising its head out there, and what are your concerns
as far as price stability? That is important.
Mr. Kohn. I agree with you, Mr. Chairman, that price
stability is important, and I have found the recent inflation
data somewhat troubling. As Senator Bunning noted, they are
backward looking. That is about price increases in the last few
months, but they were higher than I had anticipated, and that
raises a warning flag that something might be entrain. In
addition, some measures of inflation expectations over the
longer-run have crept up just a little: Surveys of households
and financial market expectations of inflation. It is not a big
move, but it is an upward move.
Chairman Shelby. Does that feed the psychology of
inflation?
Mr. Kohn. I think people are reacting to some extent to the
energy price situation. The economy is facing a somewhat more
difficult situation now because of the rise in energy prices,
which has both tended to raise inflation and also tended to
dampen activity going forward.
I think a lesson from our economic history, the 1960's and
particularly the 1970's, is that prosperity, the maximum
employment that the Congress has instructed the Federal Reserve
to foster, can only happen under conditions of price stability.
When inflation begins to rise, that undermines economic
performance.
Chairman Shelby. It undermines our whole monetary system.
Mr. Kohn. It undermines the confidence in our currency; it
undermines our monetary system; and in the process will not
permit the economy to produce at its full potential. So, I
think at this stage, we have to acknowledge the economy is
slowing down, and that will help to dampen inflation pressures,
but at the same time, there are some danger signs out there
that we need to be quite attentive to.
Chairman Shelby. Thank you.
Mr. Lockhart, a question for you, if I could. OFHEO just
signed, and you mentioned this in your statement, a written
agreement with Fannie Mae to implement remedial measures as a
result of the special exam that went on. This agreement
includes, among other things, provisions on capital plans,
internal controls, and a growth limit.
The scope of this agreement has led some to question why
any additional legislation is needed, since OFHEO seems to be
able to take strong action when necessary. In that context, do
you believe that legislation is needed to strengthen the
current regulatory structure for you to do your job, and if so,
what elements do you believe are critical for a strong reform
package?
Mr. Lockhart. Yes, we did negotiate a settlement agreement
with Fannie Mae and the reason we were able to do that is
because they were basically in extremis. This is a company that
cannot be audited, cannot produce accounts, has questionable
internal control problems and risk management concerns, and we
felt it was prudent to limit their growth.
But we most definitely need legislation, and I strongly
believe that. We need the powers of a bank regulator that the
people next to me have. We need to be able to set capital
limits and do that in a flexible manner, and we need to
consider not only market and credit risks but also operational
and systemic risks. We certainly need budget flexibility and
receivership powers. The new Agency should be the one that
looks at mission compliance and new products and have
independent litigation authority. The Enterprises should be
required to register with the SEC. So there are a whole series
of things in the legislation that would be extremely useful and
really make us a much better regulator.
Chairman Shelby. Ms. Bair, deposit insurance reform.
Ms. Bair. Yes.
Chairman Shelby. The deposit insurance reform legislation
passed earlier this year allows, as you well know, the FDIC to
set the designated reserve ratio within a range rather than
mandating a specific reserve ratio. This is a big sea change.
This flexibility allows the FDIC, which you will chair, to
build up the Deposit Insurance Fund during good economic times
as insurance against any future bad times, which makes sense.
That is common sense.
We are currently in a period of record bank profits and no
bank failures; keep our fingers crossed. Do you intend to use
this flexibility in setting the reserve ratio? You probably do
not want to tell us everything you are going to do or signal
everything, and I understand that.
[Laughter.]
Ms. Bair. Right.
Chairman Shelby. But this does give you a lot more power,
in a sense.
Ms. Bair. Right; it does, and 5 years ago, I was testifying
in favor of it for precisely those reasons. An important
component of this was to get rid of the 23 basis point cliff,
the premium shock, if you will, when reserve ratios fell below
the DRR. So now, we have a range. We have the ability to smooth
the premiums according to economic cycles and also better
reflect risk differentiation in our premium structure.
These are important tools. I agree with you. We need to
closely follow legislative intent. I know you, Mr. Chairman,
continue to have a keen interest in how we implement this new
law.
Chairman Shelby. Certainly. We all have a keen interest.
Ms. Bair. Having worked for the Senate, I know how
important it is for agencies to try to follow the statutory
structure and intent, and we will do so going forward. And I am
just glad that we have the flexibility now that we did not have
before.
Chairman Shelby. Thank you. Basel capital standards.
Ms. Bair. Yes.
Chairman Shelby. I will direct this question to Ms. Bair
and also Governor Kohn; Dr. Kohn and Ms. Bair, the Federal
Reserve, the FDIC, you are both regulators, are presently
preparing the rules that will implement the Basel II capital
accord. Basel II aims to modernize U.S. capital requirements to
make sure banks hold capital commensurate with the risks they
assume, among others.
While modernizing capital requirements is a laudable goal,
the most recent quantitative impact--Senator Sarbanes has
brought this out many times up here--quantitative impact study
indicated that Basel II could result in a drastic decline in
the capital that the U.S. banks hold, which is troubling to a
lot of us. Such a reduction in capital standards could increase
bank failures, which we have not had lately in the United
States. This is especially worrisome to us as the Committee
charged with protecting the taxpayers, among other people, who
are on the hook if a bank fails because the Federal Government
ensures bank deposits, Ms. Bair.
Accordingly, I will start with you, Governor Kohn, do you
support maintaining the leverage ratio to make sure that banks
are sufficiently capitalized?
Mr. Kohn. I do, Mr. Chairman.
Chairman Shelby. Okay; Ms. Bair.
Ms. Bair. Yes, Mr. Chairman, I do. And I would add
editorially I do not think anybody at this point is arguing we
should get rid of the leverage ratio. I think we are beyond
that issue.
Chairman Shelby. You have given that up.
Ms. Bair. Yes.
Chairman Shelby. Senator Sarbanes.
Senator Sarbanes. Thank you very much, Mr. Chairman. I am
aware that a vote has begun. I will try to move very quickly
here.
Actually, the regulators, and this goes to a follow-up on
the Chairman, have now put forward a proposal that has certain
benchmarks for the reduction of capital which would help to
address this concern over the safety and soundness of the
banking system, which was greatly increased by this
quantitative impact study, which showed an over 15 percent
aggregate decline in capital; half the participating banks
getting capital reductions of over 25 percent; and one bank
nearly a 50 percent capital reduction.
Of course, that raises a lot of red flags and a lot of
alarms. But I understand now that some of the major banks are
trying to undercut or undermine this concerted position that
our regulators have put forward now, which encompasses within
it measures to try to guard against any substantial decline in
capital. Do you have a view on that issue?
Mr. Kohn. Senator Sarbanes, I think any decline in capital
should be limited and certainly should be limited to any
commensurate reduction in risk or improvement in risk
management in the banking system. I voted in favor of the
proposal that the Federal Reserve put out for comment. That
proposal contained a gradual phase-in of the Basel capital
accords. It contained provisions for dialogue back and forth
between the supervisors and the banks to make sure the banks
were adequately measuring and ensuring against risk, and it
contained the trigger points that you mentioned.
So, I think it is important that the safety and soundness
of the banking system be protected. The goal of Basel II is to
build a safer and sounder banking system, and I certainly would
oppose anything that I thought would undermine the safety and
soundness of the system.
Senator Sarbanes. Ms. Bair.
Ms. Bair. Yes, I agree. I think the QIS-IV results were
quite problematic, and everyone deemed them to be unacceptable.
I know there are some concerns now in the large bank community.
I think the regulators have reached agreement on an NPR. It is
currently undergoing OMB review. OCC and OTS must have their
proposed rules cleared by OMB before they can be released, and
the FDIC plans to wait until OCC and OTS are prepared to go
forward as well.
I think the forum for these concerns and arguments is the
comment period, and they should come forward with arguments,
and that is the whole point of having a comment period. I, and
I know everyone else, will read all the comments very
carefully, and if there are better approaches, they will be
considered, but all four regulators have agreed on this
approach, which is going to be reflected in the NPR.
Senator Sarbanes. Mr. Lockhart, as currently constituted,
the Office of Federal Housing Enterprise Oversight, OFHEO, is
part of HUD, although it is directed by the statute to act
independently of HUD and of the Administration for purposes of
overseeing the safety and soundness operations of the GSE's,
which is supposed to act as an independent regulator, which I
think is a very important feature with respect to all of our
financial institution regulators.
Now, and indeed, all of the legislative measures in the
Congress to strengthen OFHEO provide actually for it to come
out from under HUD and be independent. There are differing
proposals, but they are all in agreement on that particular
point. I want to ask you just a question or two about how you
view the importance of independence for the Director of OFHEO.
I am additionally prompted to put this question to you
because of a story in The New York Times in February of last
year. ``In the midst of a fractious debate over changes to
Social Security, a senior official of the agency that
administers the program has been joining Republican Members of
Congress at public events around the country devised to promote
personal retirement accounts.''
And my concern is also heightened a bit by a story in the
American Banker about a month ago: what new chief brings to
OFHEO, and then goes on to say that one of the most important
things is that you have been a friend of President Bush since
the two attended prep school and college together.
So if I have this concern about the independence of the
regulator in carrying out those responsibilities, I think you
will understand why these, and there have been some other press
reports that I could also cite, raise some question about the
independence of the person who would become the Director of
OFHEO.
Mr. Lockhart. Certainly, on the independence issue, I
strongly believe in it. I have actually worked in two
independent agencies, the PBGC and the Social Security, so I
understand the issues of independence, and I applaud the
legislation for strengthening that independence and also
combining us with the Federal Housing Finance Board, because I
think that is another way to give strength.
One of Social Security's key missions was educating the
American people about the future of Social Security, and that
is the role I played. I did town halls with both Democrats and
Republicans and sometimes both at the same time, so it was a
very bipartisan effort.
Yes, I did an educational effort, but I was not strongly
supporting personal accounts. What I was really looking at was
the future of the Agency and the need to change the system for
future generations. And that is really what Social Security
reform is about. But I understand independence, and I strongly
believe in it.
Senator Sarbanes. It is certainly an important dimension to
any financial regulator, and we will be watching that very
carefully.
Mr. Chairman, I do not have any questions of Kathy Casey. I
mean, we know her well. We have seen her at work.
Chairman Shelby. You have asked her a lot of questions in
the past.
[Laughter.]
Senator Sarbanes. I thought I would try to make up for it a
little bit this morning.
[Laughter.]
I would note, though, that under your leadership, the
Committee has held a number of hearings on such subjects as
separating the business and regulatory functions of the self-
regulatory organizations, giving the SEC more authority with
respect to the credit rating agencies, and monitoring the hedge
funds, and I hope Ms. Casey will pursue those interests once
confirmed. And I also urge her--I do not think I need to do
this, but just for the public record--to strive to continue to
ensure that America's capital markets remain the gold standard
of the world with respect to the protection of investors.
I perceive some effort to move to lower denominators, and I
think we have to be very careful about that. It is always
argued now, particularly the globalization and competition,
that we have to go to this lower standard, but past experience,
as I read an article, shows that in the past, when we have
sought to protect the investor, we got this kind of reaction
initially for a little bit, and then, everyone started moving
toward the higher American standard. And my own view is we
should come at this question with that frame of mind.
Mr. Chairman, I think we are going to miss the vote if we
do not----
Chairman Shelby. Senator Martinez.
Senator Martinez, Mr. Lockhart, as you know, knows a lot
about housing.
Mr. Lockhart. Yes, he does.
Chairman Shelby. Secretary of Housing and Urban
Development; he used to be at the table, but we are glad to
have him up here.
Senator Martinez. Yes, sir, I am happy to be up here, and I
will try to be brief. I know we have to go vote, but Mr.
Lockhart, I did not want to fail to ask a couple of very
specific things relating to your testimony. One was in answer
to a question earlier, you indicated, obviously, the
independence of OFHEO is something that we all acknowledge. I
always felt uncomfortable having OFHEO under my tutelage at the
same time I had no real functional oversight over what they
did, and I do understand as well the need for there to be
broader legislative authority on budgeting and financial
soundness and all of the things you mentioned.
One that concerns me, though, is mission compliance and new
product approval, particularly new product approval. Some of
the legislative ideas that we have thrown around merged that
with some participation, significant participation, or leaves
it at HUD, particularly as it relates to new product approval,
and I wonder if you have any fixed views on how that should
work or whether, in fact, it should be a shared role between
the HUD Secretary and OFHEO?
Mr. Lockhart. New product approval is important, and from
time to time, the companies have gotten into trouble with new
products. I think it should be a shared responsibility. We have
a lot of inherent expertise. We have examiners in there every
day, we are looking at what they are doing. And we are
discovering not every day, hopefully, but occasionally that
they have not complied with the approval process. So, I think
it is very important to not only have a stronger responsibility
at the new entry but also work with the HUD team.
Senator Martinez. Also, prior approval, not just after the
fact, you know, when in fact there has been a practice
established.
Mr. Lockhart. That is true.
Senator Martinez. And then, one other thing: I want to
commend you for your report and for the settlement. I think it
is important. I think it is well done. I am concerned about the
liability of this company now of $400 million, Fannie Mae, and
I wonder, I know in your report you indicated or instructed
that there be some review as to compensation paid to officials
of the company in the past which might have been tainted by
what appears to have been a manipulation of books in order to
trigger extraordinary and extravagant bonuses.
What would be your attitude toward pursuing of that issue
and those issues, and what response have you had, if any, from
Fannie Mae so far?
Mr. Lockhart. There was the $400 million fine that was paid
to the Government, the SEC, and OFHEO, and as the SEC Chairman
said, they committed fraud. We believe, and we have in our
settlement agreement, that the first line of defense should be
that the Board of Fannie Mae should go after these individuals
and try to get restitution, that is disgorgement of some of the
bonuses paid. We have that in the agreement for both previous
management and present management.
Senator Martinez. But do you not think they owe that to the
shareholders, in fact?
Mr. Lockhart. I believe they owe it to the shareholders
and, if the company fails, we have already referred it to our
General Counsel. They will be looking into it as well.
Senator Martinez. Have you had any response from Fannie
Mae?
Mr. Lockhart. We have talked to Fannie Mae. I talked to the
Chairman of the Board last week and I have another meeting
scheduled, I think, next week on the topic. We will continue to
work with them on that. We expect to have a report. They have
appointed four independent directors to look at this, and we
expect to receive a report 30 days after we signed the
agreement.
Senator Martinez. Very good.
Chairman Shelby. Senator Martinez, for the record, we are
going to have Mr. Lockhart and Chairman Cox up to the Committee
as an oversight hearing to detail what went on at Fannie Mae,
what their findings are, and go from there.
Senator Martinez. I look forward to that and thank you for
making that hearing available.
Chairman Shelby. Very good.
Senator Martinez. I believe it is an important hearing.
And thank you, sir, and thank all of you and congratulate
you on your appointments. Thank you.
Chairman Shelby. As you can tell by the absence of
Senators, we have a huge vote on the floor of the Senate. Our
time is gone. We are going to recess, because I have some
questions that I might want to ask at least for the record and
give the others an opportunity. We will stand in recess until
we get back here, maybe 10, 15 minutes.
[Recess.]
Chairman Shelby. The hearing will come back to order.
As you well know, we have had a big vote on the floor. I do
not know if any other Senators have any other questions. I have
some questions for the record that we would submit to you, but
what we would like to do is move all four of your nominations
as expeditiously as possible. Senator Sarbanes, I think, joins
me in that, and we would do our best to move you quickly,
because you have important nominations and important jobs to
do.
We thank you for waiting. We thank you for your patience,
but more than that, we thank you for offering to serve the
American people. The hearing is adjourned.
[Whereupon, at 11:33 a.m., the hearing was adjourned.]
[Prepared statements, biographical sketches of nominees,
response to written questions, and additional material supplied
for the record follow:]
PREPARED STATEMENT OF SENATOR TIM JOHNSON
Mr. Chairman, Ranking Member Sarbanes, I want to thank you for
holding this important hearing today. We have before us an impressive
slate of nominees to consider, and I look forward to hearing from them.
I would especially like to offer my congratulations to Ms. Casey,
a member of our own Banking Committee family. She has been with you,
Mr. Chairman for many years, and I appreciate the hard work she has
done on behalf of this Committee and her service to the financial
services industry. And while her nomination means a loss for us, it is
well-deserved, and I have no doubt that she will be a tremendous asset
to the SEC.
Mr. Chairman, there are a few issues that I would like to raise
this morning.
First, our Nation is blessed with the strongest and most resilient
economic and financial system the world has ever known. And what makes
our system strong and resilient is the diversity of the system, and the
fairness of it.
Our system is based on the impartial allocation of credit, and
consumers and small businesses have a wide choice of credit providers,
which means that the terms and cost of that credit are determined by
the market, and not central planners.
That system is being threatened today, in my opinion, by some of
the world's largest corporations that are trying to get into the
banking business by taking advantage of an obscure loophole in the
law--the ILC loophole.
I am concerned that this growing trend of commercial firms
chartering or acquiring ILC's is putting us on a path toward a
dangerous concentration of economic power that would rival all but a
handful of nations, and it would create a system where conflicts of
interest would run rampant.
I know that both Wal-Mart and Home Depot are operating within the
letter of the law in their pursuit of a banking affiliate. And I
recognize, Ms. Bair that you will not be able to comment on those
specific applications pending before the FDIC, but you should know that
Congress never intended for this loophole to be exploited in this
manner, and I believe that we must carefully consider the precedent
that is being set, and the adequacy of the supervisory and regulatory
structure of ILC's before heading down what is arguably dangerous and
irreversible course. Kieretzu did not work in Japan; there is no reason
to believe it would work here.
Now I should say to my colleague from Utah that I mean no harm to
the ILC's chartered in his State that are serving small niche markets.
That is precisely why the loophole was allowed to exist when other
loopholes were closed in the CEBA Act of 1987.
But we need to draw the line somewhere, and I would suggest that
the best way to protect the existing ILC's is to begin to consider ways
to stem the tide and restrict further expansion of this loophole. I
would like to work toward that goal and I invite the Senator from Utah
to join me in protecting the integrity of our financial system.
Our long history of keeping banking and commerce separate has
served this Nation well. Now is not the time to abandon it. I am also
interested in Ms. Bair's views on Basel II and how she views her role
going forward. I am troubled by several aspects of the latest draft
rule, which is currently being reviewed by the Office of Management and
Budget and could yet be changed prior to its publication in the Federal
Register.
Basel II was intended to create a risk-based capital regime.
However, because of what I presume are political compromises, the
latest draft would impose a heavy regulatory burden on large banks,
while ironically reducing their competitiveness in the global
marketplace. In fact, the draft ANPR would impede the ability of
larger, U.S.-based banks from competing on a level playing field with
their international competitors. While safety and soundness of our
insured depositories is of course paramount, the last thing we should
be doing is making it harder for American banks to compete, both at
home and abroad.
In addition, I am deeply troubled that the draft rule contains a
loophole to exempt ILC's from operational risk capital standards. In my
view, any insured depository institution which has a significant volume
and value of transactions that could directly or indirectly affect the
payments system, should be required to capitalize that risk.
Operational risk is not a function of the nature of the parent company;
it is a function of the scale and complexity of the activity taking
place inside of the insured depository institutions.
I recognize that the agencies appear to have reached a consensus
with this latest draft. However, Ms. Bair, I would hope that you will
keep an open mind at the FDIC, and be willing to hear through the very
serious concerns that some parties have raised about the draft rule,
even if it means revising the rule prior to its publication in the
Federal Register.
Finally, there is still a very real issue of consumer access to
affordable, short-term credit. Ms. Bair, I share the view you expressed
in your study entitled, ``Low Cost Payday Loans: Opportunities and
Obstacles'' that cautioned,
Though they are not identified and marketed as payday loan
alternatives, fee-based bounce protection programs are
functionally equivalent to payday loans when used by customers
as a form of credit.
I agree with your conclusion that ``When used on a recurring basis
for small amounts, the annualized percentage rate for fee-based bounce
protection far exceeds the APR's associated with payday loans.'' And I
support your recommendation that the same APR disclosure requirements
that apply to payday loans should also apply to fee-based bounce
protection programs.
I hope that you share my view that competition for ``small
dollar'' credit services must be maximized. There is something to be
said for striking the right balance between regulation, consumer
protection, and effectively meeting consumers' credit needs. I have a
real concern if financial services are pushed outside of a regulated
environment due to increased regulatory requirements, because it can
open the door for abuse and inevitably results in less consumer
protection. It is critical that the regulatory environment is one that
supports short-term credit products and one in which such products can
thrive while providing the greatest benefit to the consumer.
Thank you all for being here this morning. I look forward to your
testimony and I hope that the Committee will move quickly with your
nominations.
----------
PREPARED STATEMENT OF SENATOR WAYNE ALLARD
I would like to thank Chairman Shelby for holding this hearing.
Today, we are considering a number of nominees for key positions at the
agencies under the Committee's jurisdiction.
First, we will consider the nomination of Sheila Bair to be
Chairman of the FDIC Board of Directors. In this position she will be
instrumental in ensuring the safety and soundness of our banks. Ms.
Bair will also be responsible for implementing the recently enacted
deposit insurance changes, as well as responsibility for a decision on
Wal-Mart's pending application for deposit insurance.
Next, we have the nomination of Donald Kohn to be the Vice Chairman
of the Board of Governors of the Federal Reserve System. Given the
recent change in leadership from Chairman Greenspan to Chairman
Bernanke, I look forward to learning more about Governor Kohn's
leadership plans.
Third, we will hear from James Lockhart, who is nominated to be the
Director of OFHEO. Mr. Lockhart certainly has experience leading
troubled agencies, given his experience at PBGC and the Social Security
Administration. While I appreciate your willingness to take on this
challenge, Mr. Lockhart, I hope that we are able to put you out of
business very soon by enacting fundamental reform of GSE regulation. As
I am sure you would agree, OFHEO in its current form is unable to
provide the necessary regulatory oversight.
Finally, I would like to make special mention of the nomination of
Kathy Casey to be a Member of the Securities Exchange Commission. As
everyone is well aware, Kathy has spent a number of years working for
Senator Shelby, and I would like to join my colleagues in thanking her
for her service. Not only has she served the Chairman with distinction,
but she has also served each one of us as well. Kathy has fostered an
open and inclusive atmosphere that has allowed Members to have their
concerns addressed in a fair, bipartisan manner. Thanks to her skills
and expertise, this Committee has achieved a number of legislative
victories. We will all miss her as the Committee Staff Director, and
while it is tempting to put a hold on her nomination to keep her here,
I offer my thanks and best wishes as she moves forward. Kathy, you will
undoubtedly be a great asset to the SEC, and they are lucky to have
you.
In closing, I would encourage all the nominees to become familiar
with the Government Performance and Results Act (GPRA), which has been
named ``PART assessment'' by the Administration. The Results Act is a
key tool in giving them the focus and vision to carry out effective,
efficient programs. I would exhort the nominees to become familiar with
the appropriate strategic plans, annual performance plans, annual
accountability reports, and financial statements. If properly utilized,
they can help you achieve success in meeting your mission.
Thank you, Mr. Chairman.
PREPARED STATEMENT OF SHEILA BAIR
Member of the Board and Chairman-Designate
Federal Deposit Insurance Corporation
June 8, 2006
Chairman Shelby, Ranking Member Sarbanes, and Members of the
Committee. I am pleased to appear before you this morning as the
President's nominee to be the next Chairman of the Federal Deposit
Insurance Corporation. At the outset, I would like to thank the
President for having the confidence in me to lead this historic agency.
Established in the throes of the Great Depression, the FDIC restored
depositor confidence in our crippled banking system and since that
time, has served as a beacon of safety for the financial assets of the
average consumer. It is a well-run, well-respected agency comprised of
4,500 dedicated staff and a Board of Directors who bring a broad depth
of expertise, as well as a rich diversity in regulatory view points. It
will be my privilege and honor to work with these outstanding
individuals if confirmed by the Senate.
I would also like to thank my family for their support of my
decision to accept this nomination and their willingness to disrupt
their lives to move back to Washington. Joining me this morning are my
husband and dearest friend, Scott Cooper, and the two best kids in the
world, Preston and Colleen. I would also like to thank my parents, Dr.
AE and Clara Bair for all of their support. Finally, I would like to
recognize my former boss, Senator Robert Dole, for his help in this
endeavor and all the other challenges I have undertaken over the past
two decades. Washington can be a difficult place to navigate. Having
someone of high stature and integrity to guide you is crucial. Early in
my career, I was fortunate to have Senator Dole as a mentor. His wise
counsel and advice have always served me well.
Another benefit of my association with Senator Robert Dole was the
opportunity to get to know the senior Senator from North Carolina. I
had the privilege of first meeting Elizabeth Dole in the 1980's, when
we worked on so-called ``gender gap'' issues during the Reagan
Administration. I have seen first hand her formidable intellect, strong
work ethic, and utmost dedication to public service. I am very glad
that she serves on this Committee and that we may have the opportunity
to work together again.
The last time I appeared before the full Committee, I was the
President's nominee to be the Assistant Secretary for Financial
Institutions of the Treasury Department. Upon my confirmation for that
position, my first assignment was to represent the Administration on
deposit insurance reform. If confirmed by the Senate, I will play a
central role in the implementation of that comprehensive new law.
Deposit insurance reform is just one of many major policy issues
confronting the FDIC. Industrial loan companies, Basel II and IA,
regulatory burden, antimoney laundering and USA PATRIOT Act
enforcement, identity theft, Federal preemption, the list goes on.
There is no shortage of cutting edge issues at the FDIC, and for many,
there are no easy answers. But as one who loves public policy and
believes that the Government can be a force for positive change, I
welcome these challenges.
There are two additional issues which I care about deeply and where
the FDIC has been notably active: Financial education and banking
services for underserved populations. As part of the FDIC's financial
education efforts, I hope to place a particular emphasis on school-
based education and the integration of math and financial curriculums,
which I believe can improve both financial literacy as well as math
scores. Regarding underserved communities, I hope to work with industry
leaders and other regulators to encourage more products to facilitate
asset accumulation among lower-income families. To paraphrase financial
columnist Jane Bryant Quinn, saving money may not make you rich, but it
can help keep you from poverty. So much of the emphasis in the past has
been on the extension of credit to underserved populations. We need to
do at least as much to promote savings and asset preservation.
In concluding, I would reiterate my strong commitment to the
millions of individuals who rely on the FDIC for security and peace of
mind in protecting their deposits. As the ownership society evolves, it
is important for every day working men and women to know that they have
a safe haven for a selected portion of their financial assets. It is
equally important to the effective functioning of our banking system
that consumers have confidence in their banks. The FDIC stands proudly
at this intersection. I look forward to the opportunity to serve this
fine agency.
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RESPONSE TO WRITTEN QUESTIONS OF SENATOR SHELBY
FROM SHEILA BAIR
Q.1. As an academic you have written about the future of
financial regulation, including the possibility of a
fundamental restructuring of the banking, securities, and
insurance regulators such as the consolidation of agencies. How
will your views on the future of financial regulation impact
your leadership of the FDIC?
A.1. As an academic, I advocated long-term reforms toward
greater consolidation and coordination among the various
financial regulators. Your GSE bill, Mr. Chairman, is one good
example of this concept. By combining OFHEO and the FHFB, the
legislation would give the combined regulator more stature and
a broader jurisdictional base to avoid regulatory capture. As
Chairman of the FDIC, one of my highest priorities will be to
maintain effective working relationships with other financial
regulators to ensure a safe and sound banking system. I am
fortunate to already have strong working relationships with
many of the top regulators. To that end, I will embrace
consensus approaches to improving financial supervision, but I
do not expect to be advocating significant structural changes
at this time.
Q.2. The size of the loss to the insurance fund resulting from
the failure of Superior Bank in 2001 led to criticisms that the
OTS and the FDIC had failed to recognize warning signs and to
act in a timely manner. Because the FDIC is frequently in the
role of back-up regulator, it is to some extent dependent upon
the information it receives from other regulators. What steps
do you intend to take to ensure adequate communication and
coordination between the FDIC and other regulators?
A.2 I believe that the FDIC's authority as back-up supervisor
is key to its ability to prudently administer the Federal
deposit insurance program. The FDIC and the other banking
regulators reached an agreement in January 2002 on protocols to
ensure that necessary information is shared between the FDIC
and the primary Federal regulator and any disputes are resolved
expeditiously. The agreement also provided the FDIC with
greater access to information regarding some of the largest
banks. My sense is that this agreement has been working well. I
intend to work closely with my colleagues at the other
regulatory agencies to ensure that this cooperative
relationship continues. While I believe that the current
structure is working, I will not hesitate to exercise the
FDIC's back-up authority in appropriate circumstances if it
becomes necessary.
Q.3. Although our dual banking system has a great number of
benefits, it can pose certain jurisdictional challenges,
particularly when issues span jurisdictional lines among
agencies. In 2003, you suggested creating a rulemaking council
composed of the heads of all the major financial regulatory
agencies to coordinate the formulation of rules having cross-
jurisdictional impact. Do you believe your proposal is still
relevant in the current regulatory environment?
A.3. I think the bank regulators, for the most part, work well
together. When I suggested the rulemaking council, it was to
include the functional regulators (SEC and CFTC), as well as
insurance regulators. The extended ongoing discussions between
the SEC and the bank regulators regarding Regulation B is one
example where such a council might assist in the resolution of
a cross-jurisdictional issue.
RESPONSE TO WRITTEN QUESTIONS OF SENATOR BUNNING
FROM SHEILA BAIR
Q.1. We have experienced a period of relative stability in the
banking sector. What do you see as the biggest threats to the
banking system today?
A.1. By virtually any measure, the banking industry is doing
very well. The industry is well-capitalized and has experienced
5 consecutive years of record earnings--and recently reported
another record quarter. Areas of concern are high and volatile
energy prices and an emerging slowdown in some housing markets.
These are areas of risk most likely to have an impact on the
general economy and ultimately to have an impact on banking
performance. I am also concerned about growing levels of
consumer debt and the fact that the personal savings rate in
the first quarter for 2006 and for all of 2005 was actually
negative. This has not occurred since the Great Depression.
Personal savings act as a cushion against unexpected adverse
economic conditions. A lack of savings reduces the financial
flexibility of households, which poses risks for them and the
financial institutions which serve them. The FDIC will need to
monitor all of these risks closely in the coming months;.
Currently, however, the banking industry remains healthy.
Indeed, there has not been a bank failure in almost 2 years--an
historic record.
Q.2. Do you think that retailers such as Wal-Mart and Home
Depot could be honest brokers if they are let into the banking
sector?
A.2. If I am confirmed, I may have to act on regulatory matters
involving the two companies cited in your question. For that
reason, I cannot comment at this time on their circumstances. I
can say as Chairman of the FDIC, I will work to ensure that all
participants in the banking sector treat consumers and
customers fairly.
RESPONSES TO WRITTEN QUESTIONS OF SENATOR BUNNING
FROM JAMES B. LOCKHART III
Q.1. The Office of Federal Housing Enterprise Oversight has the
authority to impose cease and desist orders and civil money
penalties on GSE's, but lacks explicit authority to take
actions against employees and consultants, or to remove
officers and directors. In other words, you cannot take any
action against the very people who promoted the culture of
corruption at Fannie Mae. With such limited enforcement power,
wouldn't you agree that leads to a pretty ineffective
regulator?
A.1. The lack of such enforcement powers, that are similar to
other financial institution regulators, does adversely affect
our effectiveness.
OFHEO has authority to direct an Enterprise to install
qualified individuals, but cannot directly remove a senior
executive or a director. Should the Enterprise object, the
process contained in OFHEO's statute could take years to
conclude.
OFHEO does not have explicit authority to remove officers
and directors from an institution as do depository institution
regulators.
OFHEO does not have authority to act against consultants,
such as the power of depository institution regulators to act
against ``institution-affiliated parties.''
Among the problems surrounding OFHEO's enforcement
authorities are the standards set in the statute are very high,
and the procedural steps that are required are time consuming.
One example is that the statute sets a 2-year statute of
limitations regarding discharged employees versus 6 years for
other safety and soundness regulators who have more time to
build their cases and press for potential settlement. In sum,
OFHEO has enforcement authorities but these authorities are
undermined by procedural hurdles and missing explicit powers.
Q.2. There are serious concerns about the capability of the
Office of Federal Housing Enterprise Oversight to effectively
regulate GSE's. As late as June 2002, the regulator reported
that Fannie Mae's implementation of the derivatives accounting
rule had a sound basis even though regulators were already
aware that the Enterprise was operating under improper
accounting methods. Do you think that oversight of Fannie Mae
and Freddie Mac has kept pace with their growing portfolios? Is
the regulator equipped to regulate these enterprises?
A.2. In retrospect, there is no doubt that the prior culture at
both the Enterprise and OFHEO contributed to what was known and
when on the accounting issues. It can also be said that in 2002
OFHEO did not have all the tools and staff it needed to ensure
safety and soundness of the Enterprises. Since then, management
has been strengthened and the budget and staff have doubled.
However, OFHEO still needs the full safety and soundness powers
of a bank regulator, budget flexibility and other powers in the
proposed legislation.
In June 2002, OFHEO was not aware that the Enterprises were
operating under improper accounting methods. However, OFHEO
through it risk-based safety and soundness examination program
had begun to recognize a need for additional staff with
selected expertise including but not limited to accounting. In
a January 2001 memorandum, a proposal for strengthening the
examination program was outlined. The memorandum included a
proposal to create a specialized Examination Activities group
that would include a team of accountants that would evaluate
accounting policies and treatments for specific transactions
and hedges. As the financial resources became available to
OFHEO, the accounting team began with the hiring of an
Examination Manager in the Fall of 2002, which increased to a
team of four during 2003.
As OFHEO assessed the risk at the Enterprises, the Agency
continued to recognize the need for additional specialized
staff. In 2003, the Director established two new supervisory
offices: The Office of the Chief Accountant which has a current
staff of 12 employees, 9 of which are CPA's, and the Office of
Compliance which has a current staff of 14 employees, including
11 compliance examiners. The Office of Examination has also
been expanded since 2002 adding 60 plus examiners in
specialized areas like model, credit, market, and operational
risk over the past 4 years.
In summary, OFHEO has increased its staffing level each
year. Today, OFHEO has 226 employees and plans to staff up to
250 by the end of the fiscal year. As mentioned above the
majority of the increase in staffing has been in the direct
supervision areas.
OFHEO continues to assess the optimal skill sets needed to
keep pace with Fannie Mae and Freddie Mac growth and their
changing business risk and adjust OFHEO staffing accordingly.
Despite this growth in staffing, OFHEO does need independence
from the appropriations process and improved authorities.
Q.3. Do you think that the split oversight of GSE's between HUD
and the regulator weakens the ability to regulate this sector?
A.3. Government Sponsored Enterprise regulation would be
enhanced by having both new products and affordable housing
programs located within the same agency that oversees safety
and soundness. This is the model of bank regulators and has
worked very well. OFHEO has worked cooperatively with HUD and
has been given the opportunity to provide its input on the
safety and soundness of product offerings subject to HUD
review.
As the proposed legislation has the HUD Secretary as a
board member, the revamped GSE regulator would continue to
cooperate with and seek advice from HUD.
Q.4. HUD approved and increased funding for ADC construction
loans, eventually granting permanent approval of the program.
Given what the regulator knew about Fannie Mae, do you think
Fannie Mae should have been allowed to expand into construction
loans? Could this be an example of the weakness of divided
regulation of this sector?
A.4. OFHEO is reviewing the operation of the ADC program at
Fannie Mae for safety and soundness and does consider
construction-related lending a higher risk area requiring
strong oversight. At this point, OFHEO is not satisfied that
the existing controls are adequate to the expanded program.
Furthermore, OFHEO has concerns about Fannie Mae actions in
expanding business lines at a time of fundamental problems with
its overall control and management structures.
Begun as a pilot program in 1990, HUD lifted the cap on the
program's size in 2003. OFHEO was asked to provide its views on
the operation of the program at that time. OFHEO indicated that
the controls were adequate, but ongoing review was required
should the program grow. OFHEO communicates regularly with HUD
on its examination of the program's operation.
As noted above, consolidation of new program authority with
routine examination for safety and soundness should be
beneficial.
RESPONSE TO WRITTEN QUESTIONS OF SENATOR BUNNING
FROM DONALD L. KOHN
Q.1. To date you have not dissented from any of the Fed's
interest rate actions, including the most recent increase. Will
you commit to being an independent voice on the Fed and to
speaking up when you have a different viewpoint than the
Chairman or other members?
A.1. My responsibility as a member of the Board of Governors
is, and if I am confirmed by the Senate as Vice Chairman of the
Board will be, to provide my own best judgment on all policy
issues facing the Board and the Federal Open Market Committee.
I pledge to uphold that responsibility by expressing my views
in Federal Reserve deliberations and by voting for the actions
that I believe will best foster the attainment of the Federal
Reserve's legislated objectives.
Q.2. As we have seen for the last few weeks, and particularly
the last 3 days, the financial media and stock markets are
following the words of you and your Fed colleagues extremely
close. Just a slight change in words from previous statements
can drive the markets up or down. Have you learned anything
from those episodes, and are you going to be careful about what
you say and where you say it?
A.2. Clear communication about the macroeconomic situation and
monetary policy is an important aspect of the transparency and
accountability of monetary policymaking by an independent
central bank. My colleagues and I at the Federal Reserve
recognize both that financial market participants closely
scrutinize our statements for the implications for the future
course of the economy and monetary policy and that markets can
sometimes react sharply to what is perceived as new
information. Consequently, we try to exercise great care in
such communications, a practice that I myself have followed to
date and will in the future.
Q.3. How long does it take for the Fed's actions to affect the
economy? In other words, how long of a lag is there between Fed
rate increases or cuts and the action's impact on the economy?
And what kind of impact have we seen from the current stretch
of Fed tightening?
A.3. Changes in the stance of monetary policy have substantial
economic effects, but the timing of those effects is uncertain
and varies over time. Empirical estimates of the lag between a
change in the funds rate and its full effect on aggregate
output range from as short as one quarter to as long as a year
and a half; the estimated lag in the response of inflation is
also variable but tends to be somewhat more drawn out. Some of
this variability reflects differences across time in the extent
to which financial markets anticipate future policy actions. In
the current episode, Federal Reserve communications have
enabled investors to anticipate much of the rise in the funds
rate that has occurred over the past 2 years and incorporate
those expectations into prices in financial markets, speeding
up the response of real activity and inflation relative to a
situation in which policy actions are less well-anticipated.
Actual and expected increases in short-term interest rates have
likely already contributed to damping some forms of interest-
sensitive spending, most notably in the housing sector.
Q.4. In a speech last fall, you noted the importance of taking
global trends into account when measuring inflation. Would you
expand on what global trends the Fed should be looking at, what
impact they have, and if you think the Fed is properly taking
them into account?
A.4. Globalization, which encompasses the various trends toward
greater integration of product and financial markets across
countries, has been going on for some time, but it has
accelerated in the past 15 years or so as the economies of
eastern Europe moved toward market-based systems and China,
India and other east Asian economies emerged as important
players in the global trading system.
Among the trends we must monitor are the effects of these
emerging market economies on inflation and output in the United
States. To date, demands from these economies appear to have
contributed to the rise in energy and other commodity prices,
which is boosting overall inflation here, while their supply of
low-cost exports seems to have been placing some limited
downward pressure on our underlying inflation rate. But that
latter result may not persist; it stems in part from the
imbalance of production over spending in some of those
economies and the constraints some have placed on the
appreciation of their currencies, neither of which is likely to
be sustained indefinitely.
More generally, the increasing integration of national
economies means that what happens in other countries can have a
greater effect on prices and incomes here in the United States.
Information on foreign economies, financial markets, commodity
markets, and exchange rates, along with staff projections for
our trading partners, all feed into our consideration of the
U.S. economic outlook.
Policymakers need to factor into their decisions the
implications of globalization for the determination of
inflation and output, and we do. In the end, however, we cannot
lose sight of the fundamental truth that in a world of separate
currencies that can fluctuate against each other, the ultimate
responsibility for ensuring stable prices and maximum
sustainable employment in the United States rests with the
Federal Reserve.
Q.5. What inflation measures do you think are the most
important? And what forward-looking measures do you think are
useful?
A.5. I believe that it is important to monitor a range of
inflation measures in conducting monetary policy. No single
measure can, by itself, provide enough information with which
to form a well-founded judgment about the prospects for
inflation and economic growth. Among the many inflation
measures I consider are indexes of consumer prices (including
the Personal Consumption Expenditure price index and the
Consumer Price Index)--both the headline indexes and the
indexes that exclude the erratic prices of food and energy; the
price index for gross domestic purchases (the broadest price
measure of domestically purchased goods and services); and the
price index for Gross Domestic Product (the broadest price
measure of domestically produced goods and services). The
Federal Open Market Committee provides a forecast of core PCE
price inflation in the semi-annual Monetary Policy Report to
Congress because the Members of the Committee believe this
index provides a reasonably clear indication of underlying
inflation pressures. But looking also at a variety of other
price measures helps me to gain a deeper understanding of
underlying inflation pressures and, more generally, of the
array of factors influencing the economy.
Similarly, I find it useful to look at a variety of
forward-looking measures of inflation when considering the
economic outlook. These include both survey-based measures of
inflation expectations, such as those from the University of
Michigan Survey Research Center and Professional Forecasters
surveys of the Federal Reserve Bank of Philadelphia, and
market-based measures, such as those derived from inflation-
indexed Treasury Bonds and futures markets. Each measure is
useful because it provides information about inflation
expectations from a different perspective and thus helps to
form a more complete picture of how individuals view the
outlook for inflation. These expectations in turn influence the
path that inflation actually will follow, and it is the
forecast of that path into the future that helps to shape the
policy decision in the present.
STATEMENT OF BOB DOLE
A Former U.S. Senator from the State of Kansas
June 8, 2006
Mr. Chairman and Members of the Committee, I am sorry I cannot be
here to re-introduce the Committee to Ms. Sheila Bair, the President's
nominee for Chairman of the Federal Deposit Insurance Corporation.
Unfortunately, I am out of the city on business.
Sheila is already known to you through her previous confirmation as
Assistant Secretary for Financial Institutions at the Department of the
Treasury and through her frequent dealings with this Committee, over
many years, from within and outside of Government.
I am proud to offer my unqualified support for Sheila again, for
this nomination--as I did for her previous nomination--which I am
confident will be approved speedily and overwhelmingly.
I have known Sheila for 25 years. Earlier in her career, she served
as my Counsel on the Senate Judiciary Committee, handling issues
including civil and constitutional rights, intellectual property, and
judicial reform. As I am sure many of you can recall, she was an
outstanding member of my staff whom I counted on for advice and
analysis, and she never failed me.
She has gone on to do many other good jobs and has held several
important posts. As a current Dean's Professor of Financial Regulatory
Policy at the Isenberg School of Management at the University of
Massachusetts-Amherst, she has continued her strong record of research,
analysis, and writing on financial institutions policy. She has become
an advocate for financial literacy and recently authored a children's
book. Sheila has continued her strong record of service and
contribution to this area of public policy.
Prior to her position at the University of Massachusetts-Amherst,
Sheila was responsible for the development and implementation of
Administration's policies with regard to financial institutions policy
at the Treasury Department. Immediately after being confirmed for that
position--in fact, within 24 hours if I am not mistaken--she was before
this Committee again testifying on behalf of deposit insurance reform.
If confirmed to head the FDIC, of course, she will be charged with
implementing that new law.
At Treasury, Sheila handled bank regulatory policy, insurance,
Government Sponsored Enterprises, critical infrastructure protection,
securities regulation, consumer protection, and financial education,
among other issues. In that position, she dealt directly with the
Office of Thrift Supervision, the Comptroller of the Currency, the
Federal Reserve Board, and the FDIC.
I will not delve too deeply into more of her history and extensive
experience which qualify her for this position, much of which was part
of my statement before this Committee on July 12, 2001, when I
supported her confirmation for Assistant Secretary of Treasury. But I
would like to reiterate my support. I would like to reiterate how proud
I am to have had her as a former member of my Senate staff.
Mr. Chairman and Members of the Committee, thank you for your
previous support for Sheila, and thank you for your continued support
for her. I know she will serve us well in this new position.
Thank you.