Baker Lays Out Rationale Behind Bill To Enhance Oversight Of Fannie Mae, Freddie Mac
April 5, 2001
WASHINGTON -- U.S. Rep. Richard Baker, R-La., chairman of the House Subcommittee on Capital Markets, on Thursday held a news conference to answer questions and lay out the rationale behind legislation he introduced late Wednesday to enhance regulatory oversight of the housing-related government-sponsored enterprises (GSEs) Fannie Mae and Freddie Mac.
Central to the "Secondary Mortgage Market Enterprises Regulatory Improvement Act" (H.R. 1409) is the transfer of regulatory authority over Fannie Mae and Freddie Mac to the Federal Reserve Board. The bill would also bolster supervision by providing the Board with more bank-regulator-like enforcement powers consistent with the task of monitoring safety and soundness of the federally chartered mortgage finance agencies who are also two of the nation?s largest financial services companies.
According to recent reports Fannie?s and Freddie?s combined debt currently stands greater than $1 trillion and is estimated to surpass the level of outstanding publicly held Treasury debt, at more than $2.7 trillion, by as early as 2005. Because of the two companies? history as government-sponsored enterprises, there exists, as Fed Chairman Alan Greenspan has stated "a presumption by market traders that in the event of default the GSE?s liabilities, notwithstanding current law, would ? be guaranteed by the federal government."
While Baker has praised recent voluntary initiatives by Fannie and Freddie to enhance disclosure and risk management, he acknowledges that they did little to address the overarching reality of a market-perceived "implicit guarantee" whereby American taxpayers would still be expected to bear this massive obligation should the GSEs ever fail.
The main goal of Baker?s bill is continued amplification of transparency and market discipline through strengthened oversight of the two financial institutions, whose sophistication and explosive growth have, according to Baker, outstripped the current regulatory structure?s resources and lack of even bank-regulator-like supervision.
"These enforcement provisions were written pursuant to careful consideration of a study I requested by the non-partisan General Accounting Office (GAO) to determine the inconsistencies between bank regulation and current regulation of the GSEs," Baker said.
Noting some of the controversy his bill seems already to have sparked, Baker took a moment during the news conference to comment as well on the care he had given for a proper process leading up to its introduction.
"As courtesy requires, earlier this week I released to regulators, fellow lawmakers, and all affected and pertinent parties, particularly the GSEs themselves, a confidential draft of the proposal for their review and with the expectation and request for comment to my office only. Well, apparently my office has been the only location in Washington that has not received comment from the GSEs," Baker said.
"I have expressed my concerns to the GSEs about the manner in which this discussion has been initiated," said Baker. "In fact, I met with GSE representatives yesterday, in my office, and indicated my willingness to work in a professional manner to establish the needed regulatory oversight."
"The GSEs, however, will not write the legislation," he added. "Rather, if they have them, I hope that they may suggest ? and I?ll be happy to consider ? reasonable and appropriate alternatives to the outline contained in H.R. 1409."
To punctuate the openness of the bill?s "vetting" process, Baker cited improvements in the legislation, based on feedback from Democrat members of the House Financial Services committee, relating to HUD?s retention of all authority with regard to the GSE?s affordable housing goals.
On the other hand, Baker did offer a good-natured rebuke to one Democratic lawmaker who has already characterized Baker?s bill as a "solution in search of a problem." Besides the fact that the current regulator OFHEO?s risk-based capital rule is not yet approved, much less implemented, some nine years after Congress mandated the standard, Baker mentioned some other "non-problem" for which Congress "probably shouldn?t search for a solution." For instance, it?s not a problem that
- GSEs dominate the home mortgage market and have over 70 percent of the conventional, conforming market and are predicted to have almost one-half of all home mortgages in America by the end of 2003;
- GSE debt and mortgage-backed securities already nearly total privately held marketable Treasury debt;
- Bank holdings of GSE debt represent over one-third of total bank capital, while over 40 percent of commercial banks and savings banks have invested 100 percent or more of their capital in GSE securities;
- Some 70 central banks hold about $100 billion in GSE debt;
- Fannie and Freddie are more highly leveraged than the biggest bank and securities firms in this country and more than Long-Term Capital Management was one month before its collapse and bailout.
"I will engage in a hearing process, possibly to begin in May, and I will continue the effort until we have resolution," Baker declared before fielding questions from the press. "Now the process begins again with construction of the regulator. It will not move recklessly nor without a constructive exchange of ideas among members of Congress?. [But] I believe that I have demonstrated an ability to stay the course, that I believe in the public policy benefits of this effort, and I will stay on the job until there is establishment of a regulatory office to protect the taxpayers of this nation," Baker concluded.
- Rep. Baker's full comments on key general and specific elements of the bill
- Section-by-section summary of H.R. 1409
- Complete text of the legislation (pdf file requires Acrobat Reader)
Source: Rep. Baker