<DOC>
[109 Senate Hearings]
[From the U.S. Government Printing Office via GPO Access]
[DOCID: f:27329.wais]
S. Hrg. 109-552
NOMINATIONS OF: RONALD A. ROSENFELD,
EMIL HENRY, AND PATRICK M. O'BRIEN
=======================================================================
HEARINGS
before the
COMMITTEE ON
BANKING,HOUSING,AND URBAN AFFAIRS
UNITED STATES SENATE
ONE HUNDRED NINTH CONGRESS
FIRST SESSION
ON
NOMINATIONS OF:
RONALD A. ROSENFELD, OF OKLAHOMA, TO BE A DIRECTOR OF THE FEDERAL
HOUSING FINANCE BOARD
__________
EMIL HENRY, OF NEW YORK, TO BE ASSISTANT SECRETARY FOR FINANCIAL
INSTITUTIONS, U.S. DEPARTMENT OF THE TREASURY
__________
PATRICK M. O'BRIEN, OF UTAH, TO BE ASSISTANT SECRETARY FOR TERRORIST
FINANCING, U.S. DEPARTMENT OF THE TREASURY
__________
MARCH 1 AND SEPTEMBER 20, 2005
__________
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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
Mark A. Calabria, Senior Professional Staff Member
Jennifer Fogel-Bublick, Democratic Counsel
Jonathan Miller, Democratic Professional Staff
Joseph R. Kolinski, Chief Clerk and Computer Systems Administrator
George E. Whittle, Editor
(ii)
C O N T E N T S
----------
TUESDAY, MARCH 1, 2005
Page
Opening statement of Chairman Shelby............................. 1
Opening statements, comments, or prepared statements of:
Senator Sarbanes............................................. 2
Senator Martinez............................................. 3
Senator Allard............................................... 10
Prepared statement....................................... 13
WITNESS
Frank Keating, former Governor, State of Oklahoma................ 4
NOMINEE
Ronald A. Rosenfeld, to be a Member of the Federal Housing
Finance Board.................................................. 4
Biographical sketch of nominee............................... 14
Additional Material Supplied for the Record
Letter to Senator Paul S. Sarbanes from Al Mansell, President,
National Association of REALTORS<SUP>'</SUP> dated Febrary 28,
2005........................................................... 23
----------
TUESDAY, SEPTEMBER 20, 2005
Opening statement of Chairman Shelby............................. 25
Opening statement of Senator Sarbanes............................ 36
WITNESSES
Orrin G. Hatch, a U.S. Senator from the State of Utah............ 26
Sue W. Kelly, a U.S. Representative in Congress from the State of
New York....................................................... 27
NOMINEES
Emil Henry, of New York, to be Assistant Secretary for Financial
Institutions, U.S. Department of the Treasury.................. 28
Biographical sketch of nominee............................... 43
Patrick M. O'brien, of Utah, to be Assistant Secretary for
Terrorist Financing, U.S. Department of the Treasury........... 30
Biographical sketch of nominee............................... 51
(iii)
NOMINATION OF RONALD A. ROSENFELD
OF OKLAHOMA, TO BE DIRECTOR OF
THE FEDERAL HOUSING FINANCE BOARD
----------
TUESDAY, MARCH 1, 2005
U.S. Senate,
Committee on Banking, Housing and Urban Affairs,
Washington, DC.
The Committee met at 2:13 p.m., in room SD-538, Dirksen
Senate Office Building, Senator Richard C. Shelby (Chairman of
the Committee) presiding.
OPENING STATEMENT OF CHAIRMAN RICHARD C. SHELBY
Chairman Shelby. The hearing will come to order.
Sorry I am late. We had a conference, Mr. Rosenfeld,
Governor Keating, and some days, you cannot get out of it.
This afternoon, the Committee meets to consider the
nomination of Mr. Ronald A. Rosenfeld to be a Member of the
Board of the Federal Housing Finance Board. I appreciate Mr.
Rosenfeld's willingness to appear before the Committee today.
Mr. Rosenfeld, as you all know, received a recess
appointment to the Finance Board and was designated Chairman by
the President. Given the importance of this position, I think
we all understood the Administration's need to move quickly on
this nomination.
The Federal Housing Finance Board oversees the Federal Home
Loan Bank System. The 12 member Banks of the Federal Home Loan
Bank System constitute an important source of liquidity for our
Nation's financial institutions, helping to indirectly finance
mortgages, small business and agricultural loans across the
country. As vital as these institutions are to the financial
health of our Nation, I believe that it is as vital that these
institutions have effective regulatory oversight.
Improving the regulatory oversight of the Federal Home Loan
Bank System has been an important component of this Committee's
efforts to strengthen the regulation of the Nation's housing
Government Sponsored Enterprises, GSE's. It is the Committee's
intention to bring Mr. Rosenfeld back before the Committee as
we consider legislative proposals, Mr. Rosenfeld, to improve
the regulation of the housing GSE's. We talked about this in my
office. The Committee's intention at that time is to examine
the overall condition of the Federal Home Loan Bank System,
among other things.
Mr. Rosenfeld, you bring a long career of both public and
private experience to the Federal Housing Finance Board. Most
recently, you served as President of Ginnie Mae, the Government
National Mortgage Association. Your previous Federal service
includes serving as Deputy Assistant Secretary for Corporate
Finance at the Department of the Treasury.
You have also had several positions at the Department of
Housing and Urban Development, including General Deputy
Assistant Secretary for Housing, Acting Deputy Assistant
Secretary for Multi-Family Housing and Deputy Assistant
Secretary for Single-Family Housing. Clearly, you bring a great
deal of expertise regarding housing and mortgage finance policy
to the Finance Board.
Your knowledge of housing and mortgage finance does not
solely come from the public sector but also from your long-term
involvement in the development of both single-family and multi-
family homes in this country.
I would also note Mr. Rosenfeld's service in State
government. He held the office of Secretary of Commerce in the
State of Oklahoma. Mr. Rosenfeld is a graduate of the Wharton
School at the University of Pennsylvania and the Harvard Law
School.
Upon his designation as Chairman, you succeed Ms. Alicia
Castaneda. I want to thank her and acknowledge her service
chairing the Finance Board. I am also happy to hear that she
will remain on the Board.
I want to thank you, Mr. Rosenfeld for appearing before the
Committee today, and after hearing from Senator Sarbanes, I
would want to administer the oath to you.
Senator Sarbanes.
STATEMENT OF SENATOR PAUL S. SARBANES
Senator Sarbanes. Thank you very much, Mr. Chairman.
Unfortunately, I am going to have to depart because of a
conflict in schedule, but I did want to be here to join with
you, Mr. Chairman, in welcoming Ronald Rosenfeld before the
Committee. As the Chairman said, he is being nominated to serve
on the Federal Housing Finance Board and has been designated by
the President to be its Chairman. Mr. Rosenfeld brings with him
a great deal of relevant experience.
He has spent much of his career on housing and real estate
sector and a number of Government positions. In the
Administration of the first President Bush, Mr. Rosenfeld was
the Deputy Assistant Secretary for Single-Family Housing and
the Deputy Federal Housing Commissioner HUD and was the Deputy
Assistant Secretary for Corporate Finance at the Treasury
Department. Most recently, he served as President of Ginnie
Mae.
The President of the Federal Housing Finance Board, which
is the regulator of the Federal Home Loan Bank System, has a
very important and challenging responsibility. The System is
experiencing rapid growth. The System's assets now total almost
$900
billion, compared with $350 billion in 1997, just 8 years ago.
In addition, the Federal Home Loan Banks are one of the world's
largest issuers of debt. At the end of June 2004, the System
had $816 billion in debt outstanding, an increase of more than
$100 billion from a year earlier. There are now two Federal
Home Loan Banks, the Chicago and Seattle Banks, that are
operating under supervisory agreements, so there are obviously
some real challenges with respect to the Federal Home Loan Bank
System, and I am hopeful that Mr. Rosenfeld's extensive
knowledge of the mortgage markets will serve the country well
in his responsibilities at the Finance Board.
Thank you, Mr. Chairman.
Chairman Shelby. Senator Martinez.
STATEMENT OF SENATOR MEL MARTINEZ
Senator Martinez. Mr. Chairman, good afternoon. It is a
real honor for me to participate in this hearing. Mr.
Rosenfeld, I had the great honor and privilege to have him work
while I was at the Department of Urban Development as the
President of Ginnie Mae, and I hold him in high regard, and it
is really a pleasure to welcome him to the Committee, Mr.
Rosenfeld, and to also speak on his confirmation.
I believe one of the most important attributes of the
Chairman of the Federal Housing Finance Board is that the
person have an intimate knowledge of the housing market. He
must also understand the speed at which it changes and can
effectively oversee both the safety and the soundness of the
mission compliance of the entities that it regulates.
I believe that Mr. Rosenfeld is extremely qualified to
succeed in this position. Under his leadership at Ginnie Mae,
he developed new programs and implemented several significant
changes that improved industry process. His accomplishments
include passage of the Soldiers and Sailors Civil Relief Act,
which required all mortgage lenders to limit the interest rates
on mortgage debt to 6 percent for military personnel called to
active duty. He launched a campaign that saves the industry $27
million annually by streamlining documentation requirements,
and internal procedures, and under his leadership, Ginnie Mae
began securitizing loans guaranteed by the Veterans
Administration and the Federal Housing Administration.
The Federal Home Loan Bank System plays a critical role in
our Nation's housing market. By working with the 8,000 member
financial institutions across the country, the Federal Home
Loan Banks ensure that the liquidity needed for residential
mortgage lending is available and affordable. The Federal Home
Loan Banks, however, have also grown substantially in size over
the last decade. The 12 banks together form a $900 billion
system, and legislative changes implemented during the Gramm-
Leach-Bliley opened up membership in the Federal Home Loan
Banks, changed the capital structure to a risk-based model and
also made significant changes to the banks' collateral
structure to ease the flow of liquidity to our communities.
I have known you, sir, and I respect you greatly for your
work, and I look forward to working with you and with this
Committee after your confirmation so that we can move forward
also on legislation to strengthen the regulatory oversight of
the housing Government Sponsored Enterprises. So thank you very
much for your willingness to continue serving, Mr. Rosenfeld.
Chairman Shelby. Governor Keating, welcome to the
Committee. I assume you are here to say a few words about
someone you know real well, so you proceed as you wish.
STATEMENT OF FRANK KEATING
FORMER GOVERNOR, STATE OF OKLAHOMA
Governor Keating. Mr. Chairman and Senator Martinez, thank
you very much for giving me this opportunity to participate in
the presentation of Ronnie Rosenfeld to the Committee. This is
Mr. Rosenfeld's second Senate confirmation. You have noted, Mr.
Chairman, that he was confirmed earlier as President of the
Government National Mortgage Association. I have known Ronnie
Rosenfeld since the late 1980's. We served together at HUD. As
you noted, he was a Deputy Assistant Secretary of HUD as well
as a Deputy Assistant Secretary of the Department of the
Treasury.
He also came to Oklahoma during my first term and served as
Secretary of Commerce with enormous skill, integrity, and
ingenuity. I know Congressman Tom Cole would join me, who is
here today, in encouraging the Committee to act favorably on
the Rosenfeld nomination.
I want to note, Mr. Chairman, if I may, that Mr. Rosenfeld
and I have traveled the world on economic development missions.
I have known him intimately. He is one of those unique
persons--I think Senator Martinez knows this--who has been
extraordinarily successful in business, but he also loves his
country dearly and deeply and wants to give back as much as he
can. And to serve the Government, to serve the Administration,
and to serve the public as he is is a great calling, and in my
judgment, he will serve with absolute integrity, with energy,
with ingenuity, with enterprise, and bring great credit to the
office to which he is seeking confirmation, to his family and
friends, and to the U.S. Senate, which hopefully will confirm
him.
I cannot think of any more wonderful human being than
Ronnie Rosenfeld to be considered for this position, and I am
very grateful to the President for nominating him and, of
course, to this Committee for considering him, and I will now
turn it over to him for a few remarks, but I will sit back
where I belong, and I thank you so much, Mr. Chairman.
Chairman Shelby. Thank you, Governor Keating.
Mr. Rosenfeld, will you stand and raise your right hand and
be sworn?
[Witness sworn.]
Chairman Shelby. You can be seated. Do you want to
introduce any members of the family? You can do that for the
record.
STATEMENT OF RONALD A. ROSENFELD
TO BE DIRECTOR OF
THE FEDERAL HOUSING FINANCE BOARD
Mr. Rosenfeld. Let me please begin by introducing members
of my family. The number one person in my life is my wife,
Patty, right here.
[Laughter.]
Chairman Shelby. Very good.
Mr. Rosenfeld. Seated next to her is my son, David. David
is one of our six children. The other five are scattered
throughout the world along with eight grandchildren.
Chairman Shelby. Wonderful.
Mr. Rosenfeld. And I would like to introduce some very dear
friends and colleagues who serve in public service. We also
have a number of wonderful friends here who are not in public
service. Let me confine my introductions to public servants:
Stillman Knight, the Deputy Assistant Secretary for Multi-
Family Housing at HUD, Congressman Tom Cole from the Fourth
District of Oklahoma, and I have some colleagues from Ginnie
Mae, my former home for the past 3 and a half years, Mike Franz
and Cheryl Owens, and our Counsel, John Kennedy.
Chairman Shelby. You have them all here.
[Laughter.]
Mr. Rosenfeld. I want you to know that in Ginnie Mae, you
do have a wonderful, first-class organization, and I am really
very proud to have been associated with them.
Chairman Shelby. You proceed as you wish. Your written
testimony will be made a part of the record.
Mr. Rosenfeld. Thank you, sir.
Chairman Shelby. We want to confirm you as soon as we can.
Mr. Rosenfeld. Okay.
[Laughter.]
Chairman Shelby. A lot of nominees would like to hear that
from our Committee.
Mr. Rosenfeld. Mr. Chairman, Senator Martinez, I want to
express my appreciation for the opportunity to appear before
you today and to extend my deepest gratitude to President
George W. Bush for nominating me to be a Director of the
Federal Housing Finance Board. It has been just about 3 and a
half years ago that I appeared before this Committee----
Chairman Shelby. Bring your mike up closer to you.
Mr. Rosenfeld. It has been just about 3 and a half years
ago that I appeared before this Committee seeking confirmation
to be the President of Ginnie Mae. Let me assure you that I
approach this new honor with equally great enthusiasm and even
more relevant experience.
I realize that in citing one's extensive experience, it
carries with it an acknowledgement of one's age. Having started
in my business career as a ``borrower'' by virtue of being a
real estate developer, then moving on to be a ``provider of
capital'' by participating in the investment banking industry,
and then becoming a ``source of credit enhancement'' while
serving HUD as Deputy FHA Commissioner and most recently as
President of Ginnie Mae, and now, if I am confirmed, becoming a
``regulator'' as a Director of the Federal Housing Finance
Board, it is not unreasonable that this journey has taken 40
years.
Chairman Shelby. As Chairman of the Board. Go ahead.
Mr. Rosenfeld. While bringing experience to the Board is
valuable, it should not be one's sole contribution. Bringing a
sense of balance is equally important. We want the 12 Federal
Home Loan Banks to do business, but that goal needs to be
tempered by operating in a safe and sound manner, while
ensuring that the Banks carry out their housing finance
mission. We want the Banks to take advantage of their GSE
status, but we do not want them to abuse it. We want the Banks
to enjoy the fruits of their cooperative structure, but we also
want them to treat each other fairly. While these statements
are generalities, they also are the principles that will guide
us.
We, in the United States, are the envy of the world when it
comes to a housing finance system, and the Federal Home Loan
Banks have been an integral part of that success. Acknowledging
the wisdom of Congress in creating the FHA in 1934, our success
in enhancing homeownership opportunities arises from the
evolving structure of organizations that comprise the housing
finance system. Having been created in 1932, the Federal Home
Loan Banks must continue their evolution in response to the
circumstances that now exist. Meeting today's desire for home
mortgage credit and community development needs merits our best
effort.
The Federal Home Loan Bank System has proven to be a vital
source of support for community-based financial institutions by
facilitating their access to credit. It is my belief that the
viability of local communities and the efforts of small
business people constitute two of the major pillars of our
society. Without community financial institutions, this would
not be the case.
My belief is based upon two important events in my own
life. Starting out in business as an undercapitalized home
builder, I needed a lender that would consider ``character''
when making a loan since I did not have much other collateral
to offer. My early lenders were all community-based
institutions. The other experience was gained while being
Secretary of Commerce of Oklahoma. The wonderful people of
small town and rural America need community financial
institutions, period. It is absolutely necessary that the
viability of the Federal Home Loan Bank System be sustained.
If I am confirmed, I pledge to President Bush and to
Members of this Committee that I will do my very best to ensure
that the Federal Home Loan Bank System will be managed in a
prudent manner, recognizing its purpose in the current
environment in which it operates.
Thank you.
Chairman Shelby. Thank you, Mr. Rosenfeld.
I have a number of questions. I will try to move them on.
The future of the Federal Home Loan Bank System, we talk about
that a lot, and as you well know, we are considering
legislation dealing with GSE's, including Fannie Mae, Freddie
Mac, and the Federal Home Loan Bank System, and we are planning
to ask you to come back up to help us learn more about the
challenge that we are facing, and you have indicated you would
do that.
The Federal Home Loan Bank System has undergone a
tremendous amount of change since its birth in 1933. You of all
people know that. With the decline of the thrift industry,
membership in the System was expanded beyond the savings and
loans. With this expansion of membership has come an expansion
of responsibilities and also challenges. What do you see as the
future direction of the System?
Safety and soundness has to be number one.
Mr. Rosenfeld. I think the system will continue to perform
an enormously significant function in providing liquidity for
housing needs and community needs in our financial
institutions, particularly the smaller financial institutions.
I think that the providing of capital needs, as you indicated,
in a safe and sound manner, I think there are a number of
activities in which the Federal Home Loan Banks have been
involved which merit a review and certainly a constant
awareness of how they are progressing, and we have to keep in
mind that this growth must always be tempered with it being
consistent with our mission and executed, as you point out
again, in a safe and sound fashion.
I have no concern about the need for the System nor the
fact that it will exist, but as a regulator, one is always
concerned about how it is done and that it be done properly.
Chairman Shelby. Serving on the Finance Board, I believe,
is your first experience as a regulator.
Mr. Rosenfeld. Yes, it is.
Chairman Shelby. Often in the past, the Finance Board has
played the role of a cheerleader, in a sense, for the System as
well as a regulator. Could you distinguish for the record here,
for the Committee hearing record, what in your mind separates
the responsibilities of a regulator like the Finance Board from
an organization like Ginnie Mae.
Mr. Rosenfeld. In the case of Ginnie Mae, as in the case of
any business, and Ginnie Mae is a business.
Chairman Shelby. Sure.
Mr. Rosenfeld. It is a well-run business, and it makes a
substantial amount of money every year. And it would like to do
more business, and it would like to make more money. I am very
familiar with what it is to run a profit-making business. It is
an entirely different world from being a regulator. The
objectives, are, quite frankly, quite different. The purpose is
quite different.
Chairman Shelby. And should be quite different.
Mr. Rosenfeld. They should be quite different, and I think
that a regulator has a lot of responsibilities.
By all means, they should be supportive, but they should
not be a cheerleader. And if I may use the term, as a
regulator, I will tend to be, if I am confirmed, a strict
constructionist in sticking close to the book as opposed to
being an advocate of unsound growth.
Chairman Shelby. There has been some concern about the
concentration of advances within the Federal Home Loan Bank
System. Something like 2 percent of members account for over 40
percent of all advances. Could such a high concentration of
advance usage present any safety and soundness concerns for the
System?
Mr. Rosenfeld. I really do not believe that they present
safety and soundness issues. I think--you are raising, a very
significant point here, and that is that if you look at--in
terms of dollar advances, there is an enormous concentration of
dollar loans to big banks. On the other hand, if you look at
concentration in the sense of the number of banks with which we
deal, as we sit here, we deal with about 5,000 banks who
currently, as we speak, are doing business with one of a number
of Federal Home Loan Banks.
So we do have a concentration of dollars but not
necessarily a concentration of business relationships. The
reason I am not concerned about the safety and soundness in the
sense of those advances is the advance business is
fundamentally a very secure business. You are advancing funds
against appropriate security. The purpose that those
institutions serve in terms of providing liquidity to home
finance is consistent with our mission. So that, in and of
itself, does not present a safety and soundness issue, as far
as I am concerned.
Chairman Shelby. Does it present anything dealing with
corporate governance of the individual Federal Home Loan Banks?
Mr. Rosenfeld. Yes, it does, given the nature of the
governance structure of the boards, and from time to time,
these larger banks may have some disproportionate either
bargaining power or governance power that is something one has
to be very cognizant of.
Chairman Shelby. Senator Martinez. I want to call him the
Secretary, but we will stop that.
Mr. Rosenfeld. I might.
Senator Martinez. I am just getting used to not being
called Secretary. Anyway, thank you, Mr. Chairman.
Mr. Rosenfeld, shortly after your nomination to the Federal
Housing Finance Board, there was an announcement by you of new
appointments or rather not making new appointments but simply
reappointing or extending those directors whose terms would
expire in the year 2004 for 6 months, and then, shortly after
that, it was rescinded. Would you care to explain to the
Committee the circumstances surrounding that?
Mr. Rosenfeld. Yes, Senator. I could respond to a friend by
saying it was my way of getting away from obscurity but----
[Laughter.]
--there is really more to it than that.
When I got to my position as an appointee under the recess
process program, it became very apparent that the appointment
of public interest directors or outside directors, is another
way to put it, the process was not working in the context of
what the banks had become. The banks had become much larger, as
was noted earlier, and certainly, they had become much more
sophisticated.
And the process of appointments of outside directors and
public interest directors historically had been really more in
the nature of an honorarium type thing or a reward for some
particular relationship or service. That simply was not a
prudent basis of providing governance for these institutions.
When I got there, I was informed that approximately 30 outside
directors terms were expiring on December 31. And we felt that
it was not prudent, given lack of an appropriate process to
merely reappoint them or somebody else in their place with whom
we had not had the opportunity of really venting their
qualifications.
So based upon the opinion of my deputy counsel and the head
of our Office of Supervision, we made a determination that we
would have the retiring directors hold over for a period not to
exceed 6 months, the theory being that it would give us the
opportunity to perhaps work out a more appropriate process and
yet not lose the benefit of the experience and talent that was
currently sitting in these seats. Particularly, there were, I
believe, 9 of the 30 expiring terms were either chairmen or
vice-chairmen of their respective bank boards.
Having made that determination, I believe it was December
30 that we then sent out a notice to the banks indicating that
these bank directors whose terms were expiring could be held
over for a period not to exceed 6 months. Thereafter, I
received a call from White House Counsel asking me if I would
have any objection to forwarding a copy of what we had done to
the Justice Department, which my answer, of course, was I would
be happy to do it, and we did.
And sometime thereafter, the Justice Department notified
White House Counsel that we did not have the authority to
create holdover positions. We were so advised that that was the
situation. At that point, the board agreed with me that we
needed to rescind that order, and we did rescind it.
We are now in the process of attempting to develop an
appropriate process for public interest or outside directors.
While we are not waiting until legislation occurs, because it
may not occur, I would make note to you, Senator, that in the
legislation, as we have seen it, it suggests that the
appointment process not be done by the regulator but by the
banks and that the salary caps on the directors be removed.
Those are very significant improvements in the structure if
they were to occur.
Senator Martinez. Mr. Rosenfeld, one further question in
the remaining moments I have. The Federal Housing Finance Board
normally has the authority to preapprove new products and
programs that the Banks wish to engage in also but also
designates a trial period to make sure that those programs will
be successful before full implementation. So prior to it
undertaking a program, they seek your approval, and then, there
is even a trial period before it can be fully implemented.
And I wanted to find out from you how long it takes for
this process, if you know, and additionally, whether or not, in
any sense, has there been any feedback that this process
stifles innovation or in any way diminishes the Banks' ability
to compete in the marketplace.
Mr. Rosenfeld. Senator, I do not know how long it takes.
That issue has not come before me at this point. But I think I
can respond to your question in that I think it is very
important that a regulator, including the Federal Housing
Finance Board, have the ability to approve new business
activities on the part of the 12 Banks.
It is important for a variety of reasons; number one, I
think it is important that the new activity be consistent with
our basic business mission; number two, it is something that
can be operated and governed in a safe and sound way; and
number three, it does not expose us to excessive risk. Does it
slow down progress or the ability of an institution to make
money? Probably, it does, but I think that is a worthwhile
cautionary analysis that is well-taken, because at the end of
the day, as I think we all realize, we are dealing in a large
sense of the word with our money. It is not their money; it is
our money, and our money, I think, merits a kind of scrutiny
and review that we would all like to see our money have when
people are thinking about doing something with it.
So, I do think a regulator needs that approval.
Senator Martinez. Thank you, Mr. Chairman.
Chairman Shelby. Senator Allard.
STATEMENT OF SENATOR WAYNE ALLARD
Senator Allard. Mr. Chairman, thank you. I do have some
comments I would like to put in the record.
Chairman Shelby. Without objection, it will be made part of
the record.
Senator Allard. So, Mr. Rosenfeld, generally, I think you
are good nominee, and that is basically what I have said in the
comments I have just submitted in the record. I think you have
a proven record, and I think you will do a good job at the
Federal Housing Finance Board.
My question is one of concern on the secondary mortgage
markets. You have had some experience there. And I have always
felt that we needed to have more competition in that area. Even
from an economic development point of view in the State, I do
not like to see you put all the eggs in one basket, or even in
business, I do not think it is a good idea to put all your eggs
in one basket.
In effect, that seems to be what is happening now, where we
are putting maybe too many eggs in just a few basket, as far as
the secondary markets are concerned. As you know, I have
introduced proposals such as the Ginnie Mae Choice legislation
to promote greater competition. As we are considering reform of
the GSE's, many Members are considering various proposals to
promote competition.
I want to hear your general views about competition. Do you
think it benefits consumers, and would you comment on how you
think competition might help us in the secondary market, if at
all?
Mr. Rosenfeld. Senator, first of all, let me thank you for
your kind words, but as a general matter, I believe that
competition is good. I think in the vast majority, not
necessarily all, but the vast majority of cases, competition
has benefitted the consumer.
I think when you are dealing with GSE's, you are dealing
with a very special creation of the Congress, and I think that
that creation must be looked at in the context of what Congress
wants the system to be like. This is not a question of a
retailer being added to a market that may have been a
quasimonopoly. This is a different structure. And I think
specifically what we are talking about here is in the secondary
mortgage market, you have Fannie Mae, Freddie Mac, and Ginnie
Mae, and in the conventional market, you have Fannie Mae and
Freddie Mac.
I think, quite frankly, that whether that field should be
broadened with another participant doing roughly the same thing
is really a matter for the Congress. I have enormous respect
for what Congress has created, and to materially change the
relationship that creates the secondary mortgage market, I
think should go back to the architect of the original project,
which is the Congress.
Senator Allard. You know, there is an implied guarantee
there, because they have just gotten so big and so important
that they fall into the issue of too big to fail. I think many
of us worry about future obligations out here. I am not saying
that we are anywhere near a crisis or anything with these
organizations; in fact, I think they have done a lot to make
sure that we have adequate housing in this country. We have to
recognize the role that they have played in making sure that we
have enough housing. We are at historic homeownership rates
right now.
But I guess I would like to have some assurance that you
would be willing to work with us, lend some suggestions, maybe
some criticism as we work on some of these proposals.
Mr. Rosenfeld. Not only, Senator, would I be willing to
work with you, but I would also enjoy working with you. One of
the great privileges of having the opportunity that I will have
if I am confirmed is to do exactly that, so I would look
forward to it.
Senator Allard. Now, let me get down to the Federal Home
Loan Bank's Affordable Housing Program. It has been, I think,
an important source of affordable housing and ownership in this
country. I would like to have your assessment of the program,
whether you believe it is working well or not. Do you believe
there are any areas of the program which we could improve? And
I think the second part of that question is the most important.
I would really like to get your honest assessment about it and
if there are any areas that you think could improve. I would
also like to know if there is improvement that is needed,
whether there is something we can do in this Committee that
would help that happen.
Mr. Rosenfeld. I think that as a general proposition, what
you refer to is our Affordable Housing Program, which for the
benefit of those, perhaps in the audience, who do not know what
that is, 10 percent of the profits of the Federal Home Loan
Bank System go to affordable housing in the form of grants, low
interest rate loans, or some subsidy.
It is my understanding, and again, I have only been there a
relatively short time, is that this program has really been
enormously successful. We had the privilege of meeting with
some community groups not too long ago, and by and large, their
feeling was almost unanimous that these programs have worked
quite well. I think one of the benefits of our program and our
structure is the fact that we deal in dollars. We make dollars,
and we spend dollars as opposed to making dollars and trying to
meet some mission goal, which is a little tougher to do. And I
think our program is relatively clean and crisp.
Senator Allard. From a safety and soundness standpoint, you
are comfortable with it, then.
Mr. Rosenfeld. Oh yes.
Senator Allard. Is that what you are saying by clean and
crisp?
Mr. Rosenfeld. Well, we have a clean, competitive program--
Senator Allard. I see.
Mr. Rosenfeld. --of people who want the benefits of these
funds that will be given out. They are dealt with in a
businesslike way. Their proposals are well-screened, well-
thought-out and so on. So it is well-executed. And, quite
frankly, of the various issues that have come under some degree
of criticism since I have been at the Federal Housing Finance
Board, the Affordable Housing Program has not. It is almost
universally well-regarded.
However, in answer to the second part of your question,
yes, I think it can be improved. I can tell you we are bringing
some people on board, and we are looking very carefully at
exactly the appropriateness of where some of these dollars are
going, how much leverage we are getting out of them. We are
finding that in some of the Banks, they have come up with
criteria that may be inconsistent with other programs. One of
my friends, Gabe Mehreteab, from the NHP Foundation pointed out
to us the other day that there are some serious inconsistencies
between the programs of various banks and HUD programs, so we
are looking at that thing.
The other area that I think merits some attention: As you
know, bank charters have tended to move around in the last
number of years, and the AHP contributions normally go where
the charter is as opposed to where the bank may do its
business. And there is some potential there for some
improvement in terms of how the benefits of the program,
perhaps can be more equitably assigned.
Senator Allard. Thank you. Since I brought up the safety
and soundness, you are comfortable with safety and soundness
provisions that we have in that program right now?
Mr. Rosenfeld. You mean in the AHP?
Senator Allard. Yes.
Mr. Rosenfeld. Yes, I am generally comfortable with that.
Senator Allard. Generally with the Federal Home Loan Banks,
you are okay?
Mr. Rosenfeld. Senator, as a regulator, I suspect I will
never be comfortable, but I will sleep tonight.
[Laughter.]
Senator Allard. Thank you for being willing to serve. I
appreciate it, and thank you, Mr. Chairman.
Chairman Shelby. Mr. Rosenfeld, I have another question for
you and maybe a couple for the record.
Mr. Rosenfeld. Sure.
Chairman Shelby. But I will not hold up your confirmation.
Perhaps the largest financial risk that I see facing all
the housing GSE's is the interest rate risk. It is always
there. In the recent past, the Federal Home Loan Banks began
purchasing mortgages from their members. This has increased
their risk profile. The management of interest rate risk has
presented several Federal Home Loan Banks with accounting and
financing difficulties, as you are very aware.
Are you satisfied at this point, or maybe you have not been
there long enough, with the risk management techniques of the
Federal Housing Finance Board, of the members, and are you
going to be getting into the details of all of this as a
regulator?
Mr. Rosenfeld. Senator Shelby, let me assure you we will be
very active in getting into these programs. I concur with your
opinion that the major risk in the Federal Home Loan Bank
System is interest rate risk in these mortgage programs, and
they are a matter of concern to us as they should be, but I
assure you that we will be very vigilant in really getting into
them and making sure that they do not create a risk beyond what
may be appropriate.
Chairman Shelby. And we look forward to having you come up
at a properly called hearing as we formulate the GSE
legislation, because your input, I think, would be welcome.
Mr. Rosenfeld. Thank you.
Chairman Shelby. Thank you for your appearance today. We
will expedite your nomination as soon as we can.
The hearing is adjourned.
[Whereupon, at 2:52 p.m., the hearing was adjourned.]
[Prepared statement, biographical sketch of nominee, and
additional material supplied for record follow:]
PREPARED STATEMENT OF SENATOR WAYNE ALLARD
I would like to thank Chairman Shelby for convening today's
hearing. I appreciate that, as always, he remains dedicated to moving
nominees forward promptly.
I am pleased to welcome Ronald Rosenfeld back to the Banking
Committee. Mr. Rosenfeld has spent the last 3 years as the President of
Ginnie Mae, where he has performed admirably. As Chairman of the
Housing Subcommittee, I have had many opportunities to hear about the
good work he has done in that capacity. He has an extensive background
in housing and finance, and it is to our benefit that he has agreed to
continue his service to America as Director of the Federal Housing
Finance Board.
Mr. Rosenfeld, you will be taking on a significant challenge at the
Federal Housing Finance Board. The last decade has been a time of
tremendous change at the Federal Home Loan Banks: The changes enacted
in Gramm-Leach-Bliley, industry consolidation, and now regulatory
reform have shifted the challenges before the Finance Board.
In light of these changes, though, I want to mention one consistent
theme: Safety and soundness. No matter what particular issue the Board
or any subsequent regulatory entity may consider, it must be done
through the lens of safety and soundness.
The Federal Home Loan Banks are an important source of liquidity
for many financial institutions, particularly small, independent,
community banks, such as those in Colorado. To neglect or ignore safety
and soundness at the Federal Home Loan Banks could be detrimental to a
number of entities.
America is fortunate to have a record high homeownership rate. I
look forward to working with you to find ways that the Federal Home
Loan Banks can continue to help create new homeowner families in a
safe, sound manner.
Again, welcome, and I look forward to your testimony.
<GRAPHIC(S) NOT AVAILABLE IN TIFF FORMAT>
NOMINATION OF:
EMIL HENRY, OF NEW YORK,
TO BE ASSISTANT SECRETARY,
FINANCIAL INSTITUTIONS AND
PATRICK O'BRIEN, OF UTAH,
TO BE ASSISTANT SECRETARY,
TERRORIST FINANCING
U.S. DEPARTMENT OF THE TREASURY
----------
TUESDAY, SEPTEMBER 20, 2005
U.S. Senate,
Committee on Banking, Housing, and Urban Affairs,
Washington, DC.
The Committee met at 10:06 a.m., in room SD-538, Dirksen
Senate Office Building, Senator 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 nominees for two very important
positions at the Department of the Treasury: Mr. Patrick
O'Brien for the position of Assistant Secretary of the Treasury
for Terrorist Financing and Mr. Emil Henry, Jr., for the
position of Assistant Secretary of the Treasury for Financial
Institutions.
Mr. O'Brien, you have been nominated by the President to be
Assistant Secretary for Terrorist Financing at an absolutely
critical period. As the events of September 11 recede from
immediate memory, your job will be to help provide the
leadership and clear guidance necessary to maintain and
continue the efforts to ensure that this Nation's financial
system will not be exploited by those who would do us harm.
It will largely be your responsibility to bring Treasury's
vast but not limitless resources to bear on the tasks involved
in finding, following, fracturing, and sometimes freezing the
money supply lines used to support terror. Your considerable
experience at the Department of Justice should serve you well
in meeting the challenges that are before you.
Mr. Henry, the Assistant Secretary for Financial
Institutions, your position, must also handle very significant
issues. Our financial markets are the envy of the world. They
are also highly complex and dynamic. The regulation and
oversight of the markets must ensure fairness, transparency,
and certainty while at the same time remaining flexible enough
to allow for innovation and growth. This involves establishing
a balance where both safe and sound operations and
profitability are possible. Achieving and maintaining this
balance is not easy. It requires considerable thought and
constant attention.
Mr. Henry, as someone who has spent the better part of 20
years in the private sector, I am sure you recognize the
importance of this balance and it would be my hope that through
your tenure in public service, you would remain constantly
mindful of it.
I am looking forward to hear from our nominees, but first,
we have some important people here with us, Senator Hatch, my
colleague and friend, will introduce, I believe, Mr. Pat
O'Brien.
Senator Hatch, do you want to proceed?
STATEMENT OF ORRIN G. HATCH
A U.S. SENATOR FROM THE STATE OF UTAH
Senator Hatch. Thank you, Mr. Chairman. This is a rare
privilege to appear before the Banking Committee and especially
before you.
Chairman Shelby. Thank you.
Senator Hatch. But it is my pleasure this morning to
introduce to you Patrick O'Brien, the President's nominee to be
Assistant Secretary of the Treasury for Terrorist Financing. I
think they should change that title a little bit, Secretary for
Terrorist Financing. That is interesting.
[Laughter.]
I strongly support his nomination and urge you to vote
favorably so that he may be confirmed as quickly as possible.
Pat is here this morning with his parents Jack and Terry
and his lovely family, his wife, Maureen, and their daughters,
Molly and Margaret. Pat is a graduate of the University of
Notre Dame and the University of Minnesota Law School. He has
had a variety of professional experience as a Federal law clerk
and in private practice, as an officer in the U.S. Army Reserve
and as a prosecutor and of course has had an experience with
us. I first met Pat in 1999, when I invited him to join the
staff of the Senate Judiciary Committee.
During his time with the Committee, he worked on a variety
of important oversight and law enforcement issues. He proved
himself to be smart, intelligent, a capable lawyer, with sound
judgment and an ability to work well with others.
Pat left the Committee in July 2001 to join the Department
of Justice, where he has held a number of significant positions
over the last several years. He was the principal Deputy
Assistant Attorney General for Legislative Affairs during the
tumultuous times following September 11, 2001. He later served
at the FBI as Counsel to FBI Director Mueller, where he worked
on a number of important national security issues, including
the initial standup of the Terrorist Threat and Integration
Center and as the primary contact for the FBI with the
September 11 Commission.
In September 2004, Pat returned to Main Justice as Senior
Counsel to the Deputy Attorney General. Since then and to the
present day, Pat has worked daily on counterterrorism issues
for the Justice Department. Among other things, he represents
the Justice Department on the Interagency Terrorist Financing
Policy Coordinating Committee, the PCC, chaired by the National
Security Council. The PCC is the policy body dedicated to
targeting and disrupting terrorist financing networks and
building international coalitions to cut off financial flows to
terrorists.
Now, this background, coupled with his strong character,
his integrity and leadership skills make him very well-suited
to be successful as the future Assistant Secretary for
Terrorist Financing. I know Pat really well. I was proud to
have him work with us. He did a great job on the Judiciary
Committee. You could rely on him. He is somebody that I have
total faith in of his integrity and honesty, and I think we are
lucky to have him in this particular position, and I urge the
Committee to support his nomination, and I know, Mr. Chairman,
you will do everything you can to see that he is approved as
soon as possible.
Chairman Shelby. I will. That was a good introduction.
Thank you, Senator Hatch.
Senator Hatch. Thank you so much.
Chairman Shelby. Congresswoman Kelly, you are here to
introduce, I understand, Mr. Henry.
STATEMENT OF SUE W. KELLY
A U.S. REPRESENTATIVE IN CONGRESS
FROM THE STATE OF NEW YORK
Mrs. Kelly. I am.
Thank you, Chairman Shelby. I appreciate your inviting me
to testify on behalf of my good friend, Emil Henry, in his
nomination for Assistant Secretary of the Treasury for
Financial Institutions. I have known Emil for a number of
years, and I can testify to his character, common sense, and
commitment to our community.
Emil is a cum laude graduate of Yale University. He
received an MBA from Harvard Business School. He has had a
spectacular career in finance, pioneering new developments in
the venture capital and business development areas and is very
well respected by his peers.
As a member of the Small Business and Financial Services
Committees in the House, I can honestly say that the ideas
pioneered by Emil Henry have created thousands of jobs in this
country. Emil shares a commitment to eradicating lyme disease
in our area, which is a very large problem. Senator Dodd, who
is a Member of this Committee, knows very well what I am
talking about.
Emil has raised a number of funds. He has made the
community aware. He has done a great deal of effort in terms of
making our community and quality of life good. His credentials
in terms of financial services are impeccable. His credentials
in terms of community service are equally impeccable. Emil is a
family man, he has been devoted to his wife since they first
met in their freshman year in college. I urge this Committee to
act swiftly in favor of his confirmation to allow him to begin
to put his mind and his character into a new career of public
service for our Nation.
Thank you very much, and I know you will consider him
carefully and well. I hope you will consider him very
favorably.
Chairman Shelby. Thank you, Congresswoman.
Mrs. Kelly. Thank you.
Chairman Shelby. If Mr. Henry and Mr. O'Brien will stand,
raise your right hands and be sworn.
[Witnesses sworn.]
Chairman Shelby. Thank you. Your written testimony, both of
you, will be made part of the record in its entirety. Which one
of you wants to go first? Just sum up.
Mr. O'Brien. At your pleasure.
Chairman Shelby. Okay. Mr. Henry, go ahead.
STATEMENT OF EMIL HENRY, OF NEW YORK
ASSISTANT SECRETARY FOR FINANCIAL INSTITUTIONS
U.S. DEPARTMENT OF THE TREASURY
Mr. Henry. Thank you.
Thank you, Chairman Shelby, Ranking Member Sarbanes,
Members of the Committee. Thank you for the opportunity and the
privilege to appear before you today to discuss my nomination
to become the Assistant Secretary of the Treasury for Financial
Institutions. And before my formal statement and with your
indulgence, if I could introduce the members of my family that
are here today.
Chairman Shelby. That would be ideal. We would like that,
both of you.
Mr. Henry. And behind me in the second row, my wife Jody.
She and I graduated from Yale together. She is my best friend,
and she is a full-time mother. And next to her is my father. My
father was the Chairman of the Federal Communications
Commission under Presidents Kennedy and Johnson; and then, my
daughter, Madeleine, who is 13; my mother, Sherry Henry. She
was a President Clinton appointee at the SBA running the
women's office and has long been an advocate for women's
issues; and my daughter Parker, who is 12. I have another son,
who is Parker's twin brother, and he is pursuing his dream at a
tennis academy in Florida today. He wished he could be here,
but he could not.
Chairman Shelby. Okay.
Mr. Henry. I would like to begin by expressing my thanks to
President Bush for nominating me for this important position. I
am truly honored to have his confidence and, if confirmed, I
will focus daily upon earning and re-earning the trust he has
placed in me. I would also like to thank Secretary Snow, Under
Secretary Randal Quarles, and the other fine individuals the
President has nominated to the Treasury for their support. If
confirmed, I look forward to working with them on the many
important issues currently before the Treasury, and many more
to come.
My thanks also to my friend and Congresswoman Sue Kelly for
taking the time to come here today, and for her very thoughtful
and kind introduction. Representative Kelly and I share a
beautiful hometown, Katonah, New York. Her constituents,
including myself, hold her in very high esteem for her
attention to her district and for her measured wisdom on the
House Financial Services Oversight and Investigation
Subcommittee and for her leadership on terrorist financing
issues.
Last, I would like to thank my parents behind me for
inspiring me to enter public service. From the time I could
recognize my own name, I have believed that public service was
not only a high calling but also a natural part of one's
productive life.
I come before you today in the longstanding tradition of
one who has spent his entire career in the private sector
before being called to service. As my resume shows, I have no
formal public service experience. Yet, I do have over 20 years'
experience on Wall Street and in the financial community, and
much of my time has been spent at a senior level in some of the
more sophisticated and complex sectors of the capital markets.
All of the firms I have been associated with have the
highest regard of their peers and of the financial community.
At First Boston, my first job after graduating from Yale, I was
fortunate to be picked to work in the Capital Markets Division,
which, at the time, was at the forefront of the advent of early
derivatives, such as interest rate swaps, options, and futures.
And then, at Morgan Stanley, I was a member of a team charged
with building a preeminent principal investment business, a
business involving management buyouts, equity and debt
financings, mergers, and acquisitions and bank financings. For
the past 15 years, I have been at Gleacher Partners, where I am
now Managing Director and also Chairman of our core investment
business and a member of our Investment Committee. Our
businesses invest in a sophisticated array of alternative
investments, including private mezzanine debt, private equity,
and hedge funds, where our investments are exposed to most of
the products and services offered in today's capital markets.
I believe my experience has given me a broad and deep
understanding of the activities of the financial institutions
that participate in today's increasingly complex and very fast
moving capital markets. As founder and chairman of an
investment business, I appreciate the essential importance of
safety and soundness in our markets and institutions. I
understand the value of disclosure and transparency, and I am
sensitive to the importance of balancing the costs and the
benefits of regulation.
If confirmed, I believe my role as Assistant Secretary
would benefit from my extensive experience and I would hope to
complement the extraordinary reservoir of talent at the
Treasury, and, in my judgment, the most effective organizations
are those populated by individuals whose skills and experience
truly do complement each other.
I would also look forward to working closely with the
Members of this Committee and the House Financial Services
Committee on crucial issues such as GSE reform and terrorism
risk insurance. I will also devote myself to the oversight of
the critical infrastructure of our Nation's financial
institutions. The recent disaster in the Gulf States highlights
the vital need to be prepared for natural or man-made
disasters, and if confirmed, I expect to spend a significant
amount of my time focusing on the preparedness of the U.S.
financial system.
Thank you again for the honor and the privilege to appear
before you today, and I would certainly be pleased to answer
any questions you may have.
Chairman Shelby. Mr. O'Brien, do you have some people you
would like to introduce?
STATEMENT OF PATRICK M. O'BRIEN, OF UTAH,
TO BE ASSISTANT SECRETARY FOR TERRORIST FINANCING
U.S. DEPARTMENT OF THE TREASURY
Mr. O'Brien. Yes, I do. Good morning. With your permission,
I would like to introduce, in the second row, first of all, my
mother and father, Jack and Terri O'Brien from Minneapolis,
Minnesota; my wonderful wife, Maureen, and our two daughters,
whom you have probably heard a little bit from already, Molly,
who will be 2 in December, and Margaret, who just turned 4
months old. I am extremely blessed to have such a wonderful
family, and I will never be able to repay them for the love and
support they have provided me, for the example of my parents
and for the support of my wife. No one can undertake a
challenge like this without a great support system, and I
certainly have that.
Thank you again for holding this hearing this morning. I
know how busy the Committee is, and I appreciate the
opportunity to meet with you this morning and answer any
questions you may have. I am humbled to sit here before you
this morning as the President's nominee to be the Assistant
Secretary of the Treasury for Terrorist Financing. I would like
to thank the President for nominating me and for the support of
Secretary Snow and Under Secretary Levey. I also greatly
appreciate Senator Hatch for his support and for his
introduction here this morning.
It is a great honor to be asked to serve our country. It is
also a great responsibility and one that I take very seriously.
Should the Senate confirm me, I will give my absolute best to
be an effective Assistant Secretary and to help the Treasury
Department, our colleagues across the Government, as well as
our international partners, target and disrupt illicit
financial networks, to build effective systems to prevent the
abuse of financial institutions, and to isolate and punish
those who threaten our national security.
I will bring to this position a variety of professional
experiences that, I believe, will enable me to be an effective
addition to the Department of the Treasury. I am fortunate to
be nominated to join a very strong team. If I am confirmed, I
am committed to further developing and strengthening the Office
of Terrorism and Financial Intelligence or TFI. As the
Committee is aware, the concept behind TFI and one I strongly
support is to marshal Treasury's unique authorities, financial
intelligence, analysis, and international relationships to
attack the financial underpinnings of national security
threats. If confirmed, I will dedicate myself to developing the
Treasury's ability to play the strategic role by providing
policy development and coordination to support TFI initiatives,
and building partnerships and coalitions to expand the
implementation of sound financial practices and the impact of
targeted financial sanctions internationally.
To develop effective policy requires that we continue to
grow our expertise across industries and financial disciplines,
as well as regionally across the world, to expand policies that
address the wide variety of financial means that can be
utilized by illicit financial networks.
Partnerships must be fostered and maintained both
domestically and internationally. I am committed to building
the strongest possible cooperating relationships with our
colleagues across the U.S. Government. These threats cannot be
addressed by one agency alone. If confirmed, I will build on
the strong relationships that currently exist between Treasury
and its partners at Justice, FBI, State, Defense, DHS, CIA, and
the rest of the intelligence community. Our goal must be to
think and act as a single government to achieve a shared set of
goals.
It is also essential that we internationalize the impact of
sound financial systems and targeted financial sanctions. This
requires strong bilateral and multilateral relationships. If
confirmed, I will continue Treasury's efforts in conjunction
with the State Department and other Federal agencies, to
promote accepted international standards for sound financial
practices and to increase partner capacity and cooperation
through organizations like the United Nations, the Financial
Action Task Force, FATF, and the Egmont Group. The activities
of illicit financial networks do not stop at our borders, and
thus we must proactively seek to internationalize our efforts.
Thank you again for holding this hearing, and I would be
pleased to answer any questions you have.
Chairman Shelby. Thank you, Mr. O'Brien.
I will pose the first question to you just for the record.
Under Secretary Stuart Levey recently said, ``Saudi donors may
still be a significant source of terrorist financing, including
for the insurgency in Iraq.'' There are also credible reports
of open fundraising for the insurgency being conducted in
Western Europe. More troubling still are the thoughts of the
U.S. CENTCOM General Abizaid, who has publicly stated that
money for the insurgency has likely come from our very own
country.
One, it is no secret that there are weaknesses in the
financial defenses of Saudi Arabia. We know that, and you do,
too, but what are the state of those in Europe and more
importantly here in the United States? Two, if this money is
making its way from all of these shores to the inside of Iraq,
does it follow that plenty of money may be reaching other
groups in other places as well? And three, as one of the
officials, Mr. O'Brien, in the chain of command, then, for
ensuring oversight of the Nation's banks for compliance with
the Bank Secrecy Act and USA PATRIOT Act, in your view, how
important are these laws to our overall strategy of combating
money laundering and terror financing?
Mr. O'Brien. Thank you for that question, Senator.
I think the Congress gave us some incredible tools when it
passed the USA PATRIOT Act, and I think the expansion of the
Bank Secrecy Act, the new authorities it gave us under Section
311 as well as the information sharing provisions of the USA
PATRIOT Act provide not only Treasury but also the U.S.
Government with very significant tools to fight the threats
that you described.
Certainly, I think there is continued vibrance in the
utility of the information that we get under the Bank Secrecy
Act. We are continually striving to do better analysis and make
better use of that information. As you mentioned, the threats
that exist within the network of illicit financial networks are
international. There are vulnerabilities in really every
country in the world. We see potential financing can really
come from anywhere, and the means by which they can affect this
support are vast.
I think that underscores the need to internationalize our
efforts and make sure that, certainly, the requirements through
the United Nations and others to designate and be able to
freeze and isolate terrorist funds across the world, our
partners need to have the capacity to do that, and I think we
have to work very diligently with our partners in Europe as
well in Saudi Arabia, the Gulf states, and elsewhere to make
sure that is a reality.
Chairman Shelby. I want to go into a different area, Mr.
Henry.
This Committee, the Banking Committee, reported out a bill
to reform the regulatory system for the housing-related GSE's,
that is, Fannie, Freddie, and the Federal Home Loan Banks. One
point of contention in that bill is the new regulator's ability
to review the GSEs' asset portfolios. Do you believe such
authority for the new regulator is a critical component for a
reform bill? Have you put any thought in this?
Mr. Henry. Thank you for that question. First of all, let
me say that I am very much aware of the continuing dialogue and
the important continuing dialogue of GSE reform, and I have
followed this very closely from the private sector.
Chairman Shelby. Are you concerned about the systemic risk
that Alan Greenspan keeps talking about?
Mr. Henry. I think this is an essential element of reform,
and when I think about the reform bill, I think certainly, the
size of the retained portfolios of Fannie and Freddie are a
point of concern and something for us to focus on and other key
elements such as supporting the resiliency of the housing
market and making absolutely sure that good and affordable
credit is available to every consumer. I think those are the
important elements of reform.
Chairman Shelby. Given your financial market experience,
you have spent your life here, do you believe that the capital
markets could absorb the flow of mortgage-backed securities
should Fannie and Freddie not be able to hold them in their
portfolio other than what they need to work with, to the extent
that they do now?
Mr. Henry. My instinct is yes, and again, not having
studied this in great depth at the Treasury----
Chairman Shelby. Sure.
Mr. Henry. --and I very much look forward to that, but I
would point out that the market for credit is somewhere between
$7 trillion and $8 trillion, and the retained portfolios
combined of Fannie and Freddie approximate $1.4 trillion. So my
instinct is that there is plenty of capacity in the private
market to absorb those kinds of credits.
Chairman Shelby. Mr. Henry, bank capital requirements are
one of the important means used to protect the financial
integrity of the banking sector. Currently, our banking
regulators are working toward finalizing a new capital accord
for the largest, most sophisticated banks. The Basel II plan,
as it is known, will involve a significant departure from the
current capital rules, Basel I that we are doing.
What role do you see for the Department of the Treasury to
see that the plan is thoroughly vetted and properly
implemented? Because it has been more than a subject of debate
among our regulators among others.
Mr. Henry. Yes, I have watched from a distance the very
important and crucial discussions of Basel II. I think
historically, the Treasury has acted as an interested observer
in this process, and the Treasury should be a very interested
observer in this process.
The importance of capital standards cannot be overstated.
The markets, from my position in the private sector, the banks
in the last 10 to 20 years have increased in size and
complexity, and so, I think there is increasing need to stay
focused on proper capital standards in the context of larger
and more complex balance sheets.
Chairman Shelby. Solvency, in other words.
Mr. Henry. Yes, solvency. And right back to safety and
soundness, which is at the core of the mission of the
regulators for these industries.
So, I will watch this closely, I do promise you that, and I
will watch for unintended consequences, and I will watch to
make sure our banks can remain competitive and that there is
proper views given to all ratios that have historically been
discussed in Basel. I would like to understand how they are
going to come out on that, the leverage ratio, risk-based
capital standards, et cetera, but I can assure you I will be
attuned and focused to that.
Chairman Shelby. You will be deeply involved in it.
Mr. Henry. Yes, sir.
Chairman Shelby. I want to turn now to terrorist risk
insurance, TRIA.
In the near future, the Committee here will take up
legislation that addresses the Terrorism Risk Insurance
Program, which we call TRIA. I am very concerned that we must
strike the right balance between public and private
responsibilities as we move forward; that is to say the
program, I believe, must address unmet needs without creating
disincentives for the market in areas where the private sector
can play a role.
The Treasury report issued earlier this year, and I
understand you have not been there, has been a guide for our
consideration of this law. What are the elements you believe,
if you have looked at all, should we remain focused on as we
continue our work in this area?
Mr. Henry. I am glad you asked that, and as I said in my
opening statement, I understand that TRIA will be an important
part of my portfolio, and I am ready to go at that. TRIA was a
crucial piece of legislation in the wake of September 11. I
come from New York. We felt that very closely, and at issue
there, certainly, was the economic dislocation and the ability
for developers and others to create financing in the absence of
insurance for terrorism risk.
So a crucial piece of legislation. I actually, in
preparation for this hearing, read a summary of the Treasury
report. I noted some interesting elements of that report. I
noted one, that there has been increased availability of
insurance. I noticed that there has been increased take-up of
insurance. I noticed that there was not a causality, as
determined, pointed out in that report by----
Chairman Shelby. Do you think the market is beginning to
respond to a need there?
Mr. Henry. Yes, and I would say yes, and I would note that
responding to a need in the context of increasing deductibles,
insurance company deductibles through the period that TRIA has
been in existence, I would also point out that the Treasury
report did, it did raise some uncertainties: How will rating
agencies react if there were no TRIA? I do not know the answer
to that but certainly worth understanding, and other
uncertainties were raised in that report. So, I will certainly
stay engaged in this discussion, and I understand it is an
important one.
Chairman Shelby. Thank you.
Mr. O'Brien, I want to get back to you. If confirmed, and
you will be, both of you, I pray you will be soon, when can
this Committee anticipate seeing the final regulation on
correspondent banks pursuant to Section 312 of the USA PATRIOT
Act? This Committee was promised this regulation many times in
the past only to see it languish somewhere in the bureaucracy.
This is an important regulation to finalize, because there
are a number of financial institutions that are exempt from
coverage at this time: Casinos, MSB's, investment, and
insurance companies just to name a few. Have you focused on
that? I know you will be but----
Mr. O'Brien. I certainly will be focused on that should I
be confirmed, and I understand the Committee's frustration in
that regard. It has certainly been too long for that regulation
to come out, and I will certainly do everything I can to speed
that process along.
Chairman Shelby. Mr. O'Brien, currency transaction
reporting, I know we are dealing in complicated things, but
this is your job and will be your portfolio.
As an official at the Department of Justice and as a former
Counsel to the Director of the FBI, you are familiar with the
currency transaction reports and the stories coming from the
financial industry in the press and elsewhere that these
filings may be, ``clogging the works.'' Today, CTR's are filed
at the $10,000 level, and there are also exemptions pertaining
to when they are not filed.
As legislators up here, Senator Sarbanes and I and our
colleagues, we acknowledge that national security is foremost
in our minds when confronting the money laundering and
terrorist financing problems of today. But we also try to find
workable solutions when imposing burdens on private enterprise
to meet those national security concerns, a balance there.
In light of your experience at Justice, which is vast, do
you find these reports relevant and useful to the
investigations of financial crimes, particularly those
pertaining to money laundering and the financing of terror?
Mr. O'Brien. Yes, I do, Senator. And I think there is ample
public testimony from the FBI and others that demonstrate the
utility of these reports.
These types of financial reports are also a very important
source of intelligence. Financial intelligence is somewhat
unique in that it is something that can be verified, and I
think it is an important element in our overall analytic
picture. I certainly understand the concerns that can be raised
through the banking community about the burden of regulation.
I think the U.S. Government needs to do a better job of
explaining why this is important and how we use these things,
because I think most financial institutions are good citizens,
and I think if they understand the utility of these things, I
think they want to be cooperative. And certainly, there are
mechanisms like the Bank Secrecy Act Advisory Committee that
provide a forum for us to have these discussions with the
community, and I think it is important to always try to strike
that right balance.
Chairman Shelby. Do the current exemptions allow sufficient
latitude on the part of banks and other financial institutions
interested in decreasing the number of CTR's they are otherwise
required to file?
Mr. O'Brien. In my current position, I have not had
extensive interaction with the private sector community to hear
their concerns directly. I think that is something that I
would, if confirmed, want to reach out and hear from them
directly and understand their concerns before I formulate an
opinion as to whether the exemptions were appropriate.
Chairman Shelby. How would you deal with overcompliance?
You know, banks, they are nervous, I would be, for failure to
comply, and a lot of them are overcomplying. And it creates a
big paper nightmare sometimes.
Mr. O'Brien. Yes, and I understand that there is also a
concern about, you know, potential criminal liability and so
forth, and I know the Treasury Department, in conjunction with
the Justice Department, has kind of worked on that issue, and
Under Secretary Levey has had some discussions, and I think we
have some updated guidance for enhanced approvals at the
Department of Justice for such prosecutions that hopefully
alleviate some unnecessary concern.
But defensive filing is a significant issue that we will
have to continue to work on.
Chairman Shelby. When your predecessor was here for his
confirmation hearing, he noted that the main concern with CTR
filing was that it became rote to file the CTR, an attitude
that has led to increasing numbers filed. I alluded to that a
moment ago, without taking full advantage of the exceptions to
the rule.
He emphasized that one of his primary duties, in fact, his
number one assignment, was to get the financial industry to
understand the existing lawful exceptions to filing CTR's that
now are not being taken advantage of. Is this mainly a problem
of information, of education, or is it the fact they are
nervous about maybe not doing enough? Does more work need to be
done in this area?
Mr. O'Brien. Certainly, there is a large education
component to it, and I think before changes are made to
regulations and so forth, we should really examine closely
whether current exemptions are sufficient.
Chairman Shelby. Mr. Henry, I have one last question for
you at the moment. Federal deposit insurance is another measure
that has a proven history for protecting the financial
stability of the banking system, confidence in the banking
system. I am currently working, we are with many of our
colleagues here, on legislation to provide greater flexibility,
risk sensitivity, and ensure that all beneficiaries are
required to pay for what they receive. Do you believe this is
the appropriate focus to achieve positive reforms? You know, we
are working with the Treasury and the White House.
Mr. Henry. I know, and I have followed these discussions,
yes, indeed, and if confirmed, I understand this would be on my
plate.
Chairman Shelby. It would.
Mr. Henry. I understand the value of----
Chairman Shelby. You will be coming up here a lot.
Mr. Henry. I would welcome it.
Chairman Shelby. Okay.
Mr. Henry. I understand most certainly the importance of
the safety net provided by the insurance system, and it is
vital, and it has served this country well for a very long time
indeed.
There are many elements to reform. I listened closely to
your question, and I think you hit on the key elements of
reform, in my humble opinion. The FDIC is an insurance entity,
and to allow the FDIC to act like an insurance entity, to have
flexibility around its reserves for premiums to reflect the
underlying risk of organizations that are paying into the
system that organizations pay into the system perhaps that have
not historically; I would like to understand that a little bit
better, but most certainly, I think those are within essential
elements of reform here.
Chairman Shelby. Senator Sarbanes, thank you very much for
your indulgence.
STATEMENT OF SENATOR PAUL S. SARBANES
Senator Sarbanes. Surely.
Mr. Chairman, I am not going to be able to stay long,
because I have a conflicting engagement. But first of all, I
want to welcome the two nominees. I want to note that the two
assistant secretaryships that we are considering this morning
play a very important role in ensuring our Nation's
preparedness against acts of terrorism and even natural
disasters as they may affect our financial infrastructure.
In fact, most people know that the Assistant Secretary for
Financial Institutions has the responsibility for developing,
analyzing, and coordinating the Department's policy on
legislative and regulatory issues affecting financial
institutions. That is quite a wide jurisdiction, obviously, and
is also responsible for policy developments for financial
privacy and consumer protection and for the safety and
efficiency of our financial systems and our capital markets.
So it is quite a big charge, but it is not as well-known
that the Assistant Secretary for Financial Institutions also
oversees the Office of Critical Infrastructure Protection and
Compliance, which coordinates the Treasury Department's
development and implementation of policies regarding the
protection of the critical infrastructure of the financial
services sector, which is something we obviously in recent
times have had to give increasing attention to.
We understand from your predecessor in that office that he
spent about a third of his time working on that dimension of
his responsibilities, even though it is not as highly visible a
charge. And I want to ask you about that in a moment.
Of course, the Assistant Secretary for Terrorist Financing
is one of three senior officials in the Treasury's Office of
Terrorism and Financial Intelligence which is responsible for
administering the Nation's economic sanctions and anti-money
laundering programs. Now, the Chairman has had a very keen
interest in this as did I previously, and there have been a
series of hearings over the last 4 years in this Committee. I
commend those hearings to you if you have not had a chance to
look at them on the importance of financial information in
dealing with the threat of terrorism and proliferation of
weapons of mass destruction.
The movement through the financial system of the proceeds
of white collar corruption and fraud is an equally serious
problem for the Treasury. The President said last week Katrina
exposed serious problems in our response capability at all
levels of government. The focus, of course, is primarily the
Department of Homeland Security, obviously. But both of you
have important responsibilities with respect to our response
capability in the financial services sector, and of course, if
the financial services sector cannot work, it is very difficult
to get the economy to work almost by definition.
So Mr. Chairman, I want to thank you for moving as quickly
as you have on the hearing for these nominees.
Chairman Shelby. Thank you.
Senator Sarbanes. I think it is important that we get those
positions filled, and I look forward to working with you to
accomplish that objective.
Chairman Shelby. Thank you.
Senator Sarbanes. Mr. Henry, let me ask you: Do you have
any plans for ensuring there will be no serious problem within
our Nation's critical financial service infrastructure in times
of emergency? How large does that challenge loom as you
consider the responsibilities of this position?
Mr. Henry. Thank you for that question, and I think the
events of Hurricane Katrina certainly put a spotlight on the
importance of preparedness across many institutions, including
financial institutions.
I have also learned of the importance of the Office of
Critical Infrastructure Protection, of the amount of time that
if I were fortunate enough to be confirmed that I will be
spending upon those issues. And I will offer the following
observations. One is that I will be completely committed to
that. Second, I recognize that in that office, there are a
number of what appear to me at this point to be very valuable
tools and resources to assist the assistant secretary in our
preparedness. These run from public sector committees such as
the Financial and Banking Infrastructure and Information
Committee, which I understand was heavily engaged before and
after Katrina, and this is an important resource for
understanding vulnerabilities, understanding risks, and
understanding business continuity plans, disaster recovery, how
to approach the importance of easing, if required, certain
regulations in the wake of a disaster and focusing on such
important issues, especially in Katrina, as understanding when
a community may go to a cash economy and what is important to
deliver in circumstances like that.
So, I understand the resources that are available. I
welcome the challenge, and I recognize its crucial importance
in our financial institutions and financial services
businesses.
Senator Sarbanes. I want to follow-up on the Chairman's
question with respect to Basel II, which you said you had
followed closely, but I think there is a considerable concern
in the Congress that it is moving very much in the direction of
lowering capital standards. In fact, there are some studies
that indicate that the new Basel Accords could result in
lowering capital by almost 50 percent for some large banks.
It is not just watching it, but I think there is some
concern that it may be moving in a direction that you will not
have as much capital backup, and therefore, you will have an
impact on safety and soundness. Do you have a view on that
particular question?
Mr. Henry. Most certainly. I, just to restate, the
importance of having accurate, risk-based capital standards are
absolutely crucial to our financial institutions, especially as
they increase in complexity and especially as they become
counterparties in droves to such things as derivatives and the
like. So having accurate risk-based capital standards are
crucial.
I would, certainly to the extent that there were
quantitative impact studies that suggested that capital
standards would be lowered, that they would be widely
dispersed, that our U.S. banks would be at a disadvantage
competing, and I would like to understand as I suggested to
Chairman Shelby how the historical leverage ratio, which has
served a useful purpose historically, how that would be
factored in.
But most certainly, I would want to understand carefully if
these standards resulted in decreased capital.
Senator Sarbanes. There is some concern that a limited
number of banks, primarily the large ones, will participate in
this, that it will create a competitive disadvantage for the
next tier of U.S. banks in their competition with the tier that
utilizes the Basel II Accords. What is your view of that
problem?
Mr. Henry. I certainly believe it is an issue to stay
abreast of and to understand, and I understand that the
Treasury in the whole ongoing discussions around Basel have
been a keenly interested observer.
I think as it regards all of our banks, whether they are
community banks, local financial institutions, money services
businesses, credit unions serving such a vital purpose at the
community level on up to larger banks, they certainly should
have the ability to compete.
I think that is at the core of our regulatory structure is
providing for safety and soundness but at the same time
providing enough flexibility to compete and innovate and do
great things for our consumers. So, I would certainly stay
attuned to this if I were confirmed.
Senator Sarbanes. The community development financial
institutions are under your jurisdiction. They have been quite
important in helping to develop economic opportunity in their
areas; in fact, it is estimated that they leverage about $20 in
private investment for every dollar of Federal expenditure. And
they vehicle been particularly important in helping to meet the
needs of low-income people.
Regrettably, the Administration did not ask for CDFI fund
money in the budget. The Congress has provided it or appears to
be about to provide it as we move through the appropriations
process. It seems pretty clear to me that we need responsible
community-based financial service providers in low-income
areas. Hurricane Katrina only underscores this need.
Do you have a view on sustaining or even expanding the CDFI
fund as we move ahead?
Mr. Henry. Thank you for that question. Not being in the
Treasury or in our Government while the Strengthening America's
Communities Initiative was formulated and CDFI's roll in that,
this is difficult for me to discuss the merits of CDFI in
isolation.
I think certainly, the goals of Strengthening America's
Communities, streamlining things so there are inefficiencies
that are taken out of the system, these strike me as good
things. As an investor, it is not lost on me the leverage that
that particular fund can impart upon a dollar. So, I would say
suffice to say for me it is difficult for me to discuss CDFI
and the merits of that in isolation apart from the broader SACI
initiatives.
Senator Sarbanes. Well, I commend that to you, because it
seems to me there is a clear role that needs to be played, and
I think the experience in the Gulf States only underscores
that.
Warren Buffett has warned that derivatives can lead to
corporate meltdown and create a daisy chain risk. What do you
think about that?
Mr. Henry. There are a number of people and institutions
that are focused on the potential risks and understanding what
risks derivatives might impose upon our system.
Senator Sarbanes. Are you one of them?
Mr. Henry. I am one who would like to understand better the
potential risks of derivatives. Just some quick observations,
if I might: These instruments have grown dramatically into the
multitrillions. There are issues in derivatives of how they are
traded and whether or not they are getting held up and clogged
up in trading, which is certainly not healthy. There are issues
of the implied leverage that derivatives impose upon the
system. One does not necessarily borrow when they are an owner
of a derivatives contract, but they certainly can have a lot of
outstanding exposure that is the equivalent of leverage.
I think it is important that there be disclosure of our
financial institutions of their exposures in this regard. I
think in my opening statement, I said how much I value
disclosure. This in particular is something that warrants some
attention, to make sure that these things are properly
disclosed, so investors have all the accurate information
possible at their fingertips.
I note that the IMF and the Federal Reserve are looking at
this. I believe that private groups such as the Corrigan Group
this past summer are suggesting measures. So there are a number
of intelligent people who believe that this is something to
certainly keep their eyes on. And if I could just say last, I
view part of Treasury's mission as one that looks holistically
at systemic risk and hopefully would be able to stay ahead of
real changes in important aspects in the financial community,
and I would hope to be a part of that as it regards derivatives
that continue to stay abreast of these important changes.
Senator Sarbanes. Well, of course, The New York Times has
this major story about Corrigan and his group's study, and I
think it should be right at the top of your priority list.
Let me ask you: The Treasury's Office of Financial
Education is under the jurisdiction of the Assistant Secretary
for Financial Institutions, and they are charged with providing
assistance to the President's Financial Literacy and Education
Commission. Secretary Snow is the Chairman of this Commission.
The Commission was tasked with producing a national
strategy to promote basic literacy and education. That strategy
was due on July 29 but has not yet been submitted. I understand
there are some differences amongst Commission members. When do
you think we might get that report and move this strategy
forward on literacy and financial education?
Mr. Henry. I am aware of this issue. I am aware of the
importance within the Office of Financial Institutions. I am
aware of what Title V of the FACT Act mandated. And so, I do
not know specifically when that will happen, although my
understanding is that they are working hard on it, that it will
come shortly, and that they are striving to achieve a
consensus.
And it is vital, a national strategy on financial
education, and financial education is a crucial component of
better informed citizens ultimately making better decisions and
ultimately helping society in general. So, I am attuned to
that, and if confirmed, I will certainly do my best to push
that along.
Senator Sarbanes. The agencies that make up your
Commission, I understand, have some good proposals, and the
Treasury has held them up, and I think you need to address that
situation.
Speaking of not meeting deadlines, Mr. O'Brien, let me ask
you a couple of questions. The USA PATRIOT Act was signed 4
years ago next month. Section 312, which deals with
correspondent accounts, was a major part of Title III of that
Act. Treasury was required to issue rules under Section 312. A
proposed rule was published in May 2002. Under Secretary Levey
in testimony here concurred in the importance of dealing with
this issue.
Despite repeated statements to this Committee that Treasury
recognizes the importance of this rule, it has not been
finalized. Here we are just shy of 4 years from passage of the
legislation. The failure is more surprising because the Federal
Reserve Board has issued at least two cease-and-desist orders
identifying correspondent banking failures of major
international banks, and Treasury itself, actually, has used
its authority to propose barring correspondent banking in the
United States for certain institutions.
Let me ask you: At what point do you think failure to issue
these rules would be regarded as a deliberate disregard of a
statutory requirement?
Mr. O'Brien. Well, certainly, I think the Treasury
Department appreciates the responsibility it has to issue these
regulations. They are too late. They are overdue. I understand
your frustration about that.
Not being at the Treasury at the moment, I do not know
precisely what the holdup has been as far as the issuance of
the final rule. I can tell you that I definitely hear you loud
and clear about the need to get this final regulation out. I
think the USA PATRIOT Act has given us many important tools,
and we owe it to the community to get the regulation out.
Senator Sarbanes. Do you think we can count on you to tell
your colleagues at Treasury if you get down there that the
Congress is really quite upset about this, and that they need
to hear you loud and clear as you transmit that message to
them?
Mr. O'Brien. I will certainly deliver that message.
Senator Sarbanes. Let me move on and ask you about
terrorist financing.
The GAO, in a report in November 2003, said, ``According to
the FBI's Terrorist Financing Operations Section, most if not
all terrorist cases involve a financial aspect known as funding
nexus, which is normally considered to be a component to the
overall negotiation.'' Then, the GAO went on to say the FBI
does not currently isolate terrorist financing cases from
substantive international terrorism cases, and its data
analysis programs do not designate the source of funding for
terrorist financing. In other words, the FBI is focused, as it
were, on a broader challenge.
This is part of that, but it gets encompassed within it. It
does not get pinpointed. Does Treasury have a database that
isolates sources of terrorist financing? Do you know?
Mr. O'Brien. I do not know about a single database.
Obviously, there is all the reporting that we get, the
suspicious activity reporting, the CTR's, et cetera. I know
FinCEN is working very hard on a new system, BSA Direct, to
help provide investigators and other users of the data much
better analytic tools to make use of the data that we do have.
Senator Sarbanes. If we do not have this focus currently in
how we are proceeding, do you think that we need to have such a
focus, to look at terrorist financing as its own phenomenon
against which specific efforts can then be directed?
Mr. O'Brien. And I am not familiar with the GAO report that
you mentioned. I do know that the JTTF's at the FBI each have a
terrorist financing person incorporated into the JTTF. The work
of TFOS, the Terrorist Financing Operations Section, I think
does try to incorporate the financial aspects of terrorist
networks or groups that are being investigated.
I think it is hard to separate sometimes the funding of an
operation from the investigation of the operation itself. I
think it is important as you suggest to make sure that we have
the appropriate focus, attention, and resources on the
financial dimensions of terrorist investigations, but I think
there is some benefit to incorporating that into the overall
investigation into a terrorist group or suspect or what have
you.
Senator Sarbanes. Yes, I do not have any problem with
incorporating it into the overall investigation, but I do have
a problem if the specifics of the terrorist financing are not
being reported out to Treasury and if Treasury does not have a
database. After all, you have a lot of the instruments to deal
with the terrorist financing problem. I do not know. Is the FBI
communicating all of that terrorist financing information to
appropriate elements of the Treasury Department?
Mr. O'Brien. It is my belief that it is. I think IRS and
other agencies are incorporated into the Joint Terrorism Task
Forces, and I might add that I think this is one thing that the
TFI structure at Treasury, I think, can really bring to the
table here.
There is, as you now know, a separate office, the Office of
Intelligence, that Assistant Secretary Janice Gardner is
leading very capably, and I think that enhanced analytic
capability hopefully will address to some degree the concerns
that you raise.
Senator Sarbanes. The Chairman and I have had some
discussions with Treasury about that very point, and it seems
to me you have a statute, and you have some authorities that
could be very helpful, but we are not sure how fully they are
being executed and implemented, and I hope you would place that
at the top of your priority list, because we think this is one
way of getting at the terrorism problem is to dry up its
financing, one very important way, and Treasury has a very big
role to play in that regard.
Mr. O'Brien. I certainly agree with that.
Senator Sarbanes. Thank you, Mr. Chairman.
Chairman Shelby. Mr. O'Brien, the 2004 intelligence reform
bill required a comprehensive study on the Nation's efforts to
combat terror financing. That report was due last week. Can we
here at the Committee anticipate seeing this report soon once
you get, especially once you get down there and get ensconced
where you----
Mr. O'Brien. I do not know the precise status of that
report, but I understand its importance and will do my best to
get it moving.
Chairman Shelby. Well, I thank both of you for your
appearance today. You are both eminently qualified, in my
judgment, for the positions the President has nominated you
for, and we will try to move these nominations expeditiously.
Thank you so much. The hearing is adjourned.
[Whereupon, at 11:07 a.m., the hearing was adjourned.]
[Biographical sketches of nominees supplied for the record
follow:]
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