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31–546 PDF 2007

A REVIEW OF THE FEDERAL

HOME LOAN BANK SYSTEM

HEARING

BEFORE THE

SUBCOMMITTEE ON 

CAPITAL MARKETS, INSURANCE, AND 

GOVERNMENT SPONSORED ENTERPRISES

OF THE

COMMITTEE ON FINANCIAL SERVICES

U.S. HOUSE OF REPRESENTATIVES

ONE HUNDRED NINTH CONGRESS

SECOND SESSION

SEPTEMBER 7, 2006

Printed for the use of the Committee on Financial Services

Serial No. 109–117

(

(II)

HOUSE COMMITTEE ON FINANCIAL SERVICES 

MICHAEL G. OXLEY, Ohio, Chairman

JAMES A. LEACH, Iowa 

RICHARD H. BAKER, Louisiana 

DEBORAH PRYCE, Ohio 

SPENCER BACHUS, Alabama 

MICHAEL N. CASTLE, Delaware 

EDWARD R. ROYCE, California 

FRANK D. LUCAS, Oklahoma 

ROBERT W. NEY, Ohio 

SUE W. KELLY, New York, Vice Chair 

RON PAUL, Texas 

PAUL E. GILLMOR, Ohio 

JIM RYUN, Kansas 

STEVEN C. LATOURETTE, Ohio 

DONALD A. MANZULLO, Illinois 

WALTER B. JONES, JR., North Carolina 

JUDY BIGGERT, Illinois 

CHRISTOPHER SHAYS, Connecticut 

VITO FOSSELLA, New York 

GARY G. MILLER, California 

PATRICK J. TIBERI, Ohio 

MARK R. KENNEDY, Minnesota 

TOM FEENEY, Florida 

JEB HENSARLING, Texas 

SCOTT GARRETT, New Jersey 

GINNY BROWN-WAITE, Florida 

J. GRESHAM BARRETT, South Carolina 

KATHERINE HARRIS, Florida 

RICK RENZI, Arizona 

JIM GERLACH, Pennsylvania 

STEVAN PEARCE, New Mexico 

RANDY NEUGEBAUER, Texas 

TOM PRICE, Georgia 

MICHAEL G. FITZPATRICK, Pennsylvania 

GEOFF DAVIS, Kentucky 

PATRICK T. MCHENRY, North Carolina 

JOHN CAMPBELL, California 

BARNEY FRANK, Massachusetts 

PAUL E. KANJORSKI, Pennsylvania 

MAXINE WATERS, California 

CAROLYN B. MALONEY, New York 

LUIS V. GUTIERREZ, Illinois 

NYDIA M. VELA ́ ZQUEZ, New York 

MELVIN L. WATT, North Carolina 

GARY L. ACKERMAN, New York 

DARLENE HOOLEY, Oregon 

JULIA CARSON, Indiana 

BRAD SHERMAN, California 

GREGORY W. MEEKS, New York 

BARBARA LEE, California 

DENNIS MOORE, Kansas 

MICHAEL E. CAPUANO, Massachusetts 

HAROLD E. FORD, JR., Tennessee 

RUBE ́ N HINOJOSA, Texas 

JOSEPH CROWLEY, New York 

WM. LACY CLAY, Missouri 

STEVE ISRAEL, New York 

CAROLYN MCCARTHY, New York 

JOE BACA, California 

JIM MATHESON, Utah 

STEPHEN F. LYNCH, Massachusetts 

BRAD MILLER, North Carolina 

DAVID SCOTT, Georgia 

ARTUR DAVIS, Alabama 

AL GREEN, Texas 

EMANUEL CLEAVER, Missouri 

MELISSA L. BEAN, Illinois 

DEBBIE WASSERMAN SCHULTZ, Florida 

GWEN MOORE, Wisconsin, 

BERNARD SANDERS, Vermont

Robert U. Foster, III, Staff Director 

(III)

SUBCOMMITTEE ON CAPITAL MARKETS, INSURANCE, AND GOVERNMENT SPONSORED

ENTERPRISES

RICHARD H. BAKER, Louisiana, Chairman

JIM RYUN, Kansas, Vice Chair 

CHRISTOPHER SHAYS, Connecticut 

PAUL E. GILLMOR, Ohio 

SPENCER BACHUS, Alabama 

MICHAEL N. CASTLE, Delaware 

PETER T. KING, New York 

FRANK D. LUCAS, Oklahoma 

DONALD A. MANZULLO, Illinois 

EDWARD R. ROYCE, California 

SUE W. KELLY, New York 

ROBERT W. NEY, Ohio 

VITO FOSSELLA, New York, 

JUDY BIGGERT, Illinois 

GARY G. MILLER, California 

MARK R. KENNEDY, Minnesota 

PATRICK J. TIBERI, Ohio 

J. GRESHAM BARRETT, South Carolina 

GINNY BROWN-WAITE, Florida 

TOM FEENEY, Florida 

JIM GERLACH, Pennsylvania 

KATHERINE HARRIS, Florida 

JEB HENSARLING, Texas 

RICK RENZI, Arizona 

GEOFF DAVIS, Kentucky 

MICHAEL G. FITZPATRICK, Pennsylvania 

JOHN CAMPBELL, California 

MICHAEL G. OXLEY, Ohio 

PAUL E. KANJORSKI, Pennsylvania 

GARY L. ACKERMAN, New York 

DARLENE HOOLEY, Oregon 

BRAD SHERMAN, California 

GREGORY W. MEEKS, New York 

DENNIS MOORE, Kansas 

MICHAEL E. CAPUANO, Massachusetts 

HAROLD E. FORD, JR., Tennessee 

RUBE ́ N HINOJOSA, Texas 

JOSEPH CROWLEY, New York 

STEVE ISRAEL, New York 

WM. LACY CLAY, Missouri 

CAROLYN MCCARTHY, New York 

JOE BACA, California 

JIM MATHESON, Utah 

STEPHEN F. LYNCH, Massachusetts 

BRAD MILLER, North Carolina 

DAVID SCOTT, Georgia 

NYDIA M. VELA ́ ZQUEZ, New York 

MELVIN L. WATT, North Carolina 

ARTUR DAVIS, Alabama 

MELISSA L. BEAN, Illinois 

DEBBIE WASSERMAN SCHULTZ, Florida 

BARNEY FRANK, Massachusetts 

(V)

C O N T E N T S 

Page 

Hearing held on: 

September 7, 2006 ............................................................................................ 1

Appendix: 

September 7, 2006 ............................................................................................ 25

WITNESSES 

THURSDAY, SEPTEMBER 7, 2006

Rosenfeld, Ronald A., Chairman, Federal Housing Finance Board ..................... 12

APPENDIX 

Prepared statements: 

Oxley, Hon. Michael G. .................................................................................... 26

Baca, Hon. Joe .................................................................................................. 28

Clay, Hon. Wm. Lacy ....................................................................................... 29

Hinojosa, Hon. Ruben ....................................................................................... 31

Kanjorski, Hon. Paul E. ................................................................................... 32

Royce, Hon. Ed .................................................................................................. 34

Rosenfeld, Ronald A. ........................................................................................ 36

ADDITIONAL MATERIAL SUBMITTED FOR THE RECORD

Hon. Barney Frank: 

Letter to the Federal Housing Finance Board ............................................... 56

Standard & Poors study: FHFB Proposed Retained Earnings Regulation 

Poses Challenges for FHLBs ........................................................................ 58

(1)

A REVIEW OF THE FEDERAL 

HOME LOAN BANK SYSTEM 

Thursday, September 7, 2006

U.S. HOUSE OF REPRESENTATIVES, SUBCOMMITTEE ON CAPITAL MARKETS, INSURANCE, AND GOVERNMENT SPONSORED ENTERPRISES

COMMITTEE ON FINANCIAL SERVICES, Washington, D.C. 

The subcommittee met, pursuant to notice, at 10:03 a.m., in Rayburn House Office Building, Hon. Richard H. Baker [chairman of 

the subcommittee] presiding. 

Present: Representatives Baker, Castle, Manzullo, Royce, Kelly, 

Biggert, Tiberi, Hensarling, Davis of Kentucky, Campbell, Kanjorski, Hooley, Moore of Kansas, Hinojosa, Clay, Baca, and Scott. 

Ex officio: Representatives Oxley and Frank. 

Chairman BAKER. I would like to call the hearing to order. The 

committee meets today to review the status of the Federal Home 

Loan Banks, and their regulatory regime, and the Federal Housing 

Finance Board, including the latest significant developments within 

the Federal Home Loan Bank system. 

I am pleased that Chairman Ronald Rosenfeld is our single witness for today’s hearing. The bank system was established in 1932 

to provide liquidity to savings and loan associations which were the 

primary home mortgage lenders in that period. The Bank System 

today encompasses 12 regional Federal Home Loan Banks, patterned on the structure of the Federal Reserve System. Each is a 

member-owned cooperative. 

Like the other housing government-sponsored enterprises, 

Fannie Mae and Freddie Mac, Congress granted the Bank System 

special privileges as part of their governmental charter. Those 

privileges include exemption of the Banks’ corporate earnings from 

Federal, State, and local taxes, and the status of debt issues as 

government securities for the purpose of compliance with securities 

law. 

The Bank System has enjoyed significant growth, roughly to the 

same size as our competitors, Fannie Mae and Freddie Mac. As of 

June 30, 2006, the System’s assets were $1 trillion, of which $638 

billion were advances to members. The System has outstanding 

debt obligations of $940 billion. 

In recent years, Federal Home Loan Banks have established and 

participated in what is known as a mortgage purchase program, 

whereby credit and interest rate risk are shared between member 

institutions that originate the loan and the bank purchasing the 

loan. 

2

Accordingly, in light of the growth and programmatic changes, 

review of their regulatory requirements is not only appropriate, but 

necessary. This committee has engaged in significant review and 

oversight of Fannie Mae and Freddie Mac throughout the years, 

but we have not as frequently examined the structure or requirements of the Federal Home Loan Bank System. 

Today, we shall hear comment, I am certain, from members with 

regard to a rule now pending, as proposed by the chairman, some 

of whom will express concern about the proposal. I want to express 

my appreciation to the chairman for his principled hard work, and 

to his examination staff for the frequency of the examinations 

which they perform. 

I recognize that the purpose of this work is not simply to artificially constrain the Bank System, but to ensure that there are adequate protections in place for the taxpayer, who ultimately would 

be found responsible for failures of a significant nature within the 

system. 

However, I want to make clear that the pending rule revision 

and the actions taken are really interim steps, in that this committee has passed, and the House has passed, H.R. 1461, which 

provides for the creation of a unified housing regulator for Fannie 

Mae, Freddie Mac, and the Federal Home Loan Banks. I continue 

to be troubled that there are disparate rules governing the practices of each, not only capital requirements but business conduct as 

well. 

Some criticism has been leveled at H.R. 1461 for its failure to address the issue of portfolio constraint, and I wish to make clear on 

behalf of the committee one more time that the bill makes express 

provision that the new director created by the Act shall examine 

and report to the Congress on the appropriate constraints, and the 

methodology to impose such constraints, in order to effect the 

leveraging of portfolio for shareholder profit, as opposed to the compliance of charter requirements. 

Stated another way, when asking Secretary Snow just last year 

whether the portfolio should be constrained to a dollar certain, or 

did he have in mind a particular formula to which reduction would 

be applied, he suggested to the committee that there should not be 

a dollar certain reduction, nor did he have in mind a formula by 

which portfolios should be reduced. 

But rather, that should be the subject of study of professional 

staff, and recommendations to the Congress in order to assure that 

we did not royal the housing markets unnecessarily. That’s exactly 

what H.R. 1461 does. 

More importantly, whether there is a difference between House 

and Senate language over the regulatory details of GSE governance, I think it extraordinarily important that while we still have 

stability in the housing market, and while we still enjoy relatively 

flat interest rates, that the Senate at least act on a GSE proposal. 

Without doubt, there will be a conference committee. We have 

come too far, worked too hard, and have two proposals—each of 

which has their own validity—to let this legislative opportunity 

pass us by. And so, I would hope and urge that the Senate would 

act before our final adjournment, perhaps late November, early December, with the adoption of some form of GSE proposal. 

3

If we were able to do so, perhaps it would be of assistance to the 

current Federal Home Loan Bank regulators in the matter now 

pending. Knowing that the goals they are trying to reach, the patterns that they establish with their regulatory construct, would be 

of great benefit in going forward, with the creation of the new consolidated GSE regulator. So, I am appreciative of Chairman 

Rosenfeld’s bold leadership, and I commend him and his staff for 

his good work, and look forward to his statement at the appropriate time. 

Mr. Kanjorski? 

Mr. KANJORSKI. Mr. Chairman, we meet this morning to once 

again examine the Federal Home Loan Bank System. As you already know, I share your deep interest in these important financial 

institutions. After all, we worked closely together for several years 

to include language to improve the system during our lengthy deliberations over H.R. 10, the landmark law to modernize the financial services industry. 

Perhaps most importantly, our joint efforts in 1999 resulted in a 

much needed update of the capital structure in each of the Federal 

Home Loan Banks. Until we acted on these matters, these financial 

institutions had operated under antiquated subscription capital 

rules created 67 years earlier, in 1932. 

Specifically, the law now requires each Federal Home Loan Bank 

to submit a plan to the Federal Housing Finance Board for approval that is best suited for the condition and operation of the 

bank and the interests of its members. Since we completed our legislative work, all but one of the Federal Home Loan Banks have 

received approval from the Finance Board to put in place a revised 

capital structure. 

A regulatory proposal put forth earlier this year by the Finance 

Board, however, now threatens to slow the progress being made to 

implement these statutorily required capital reforms. Specifically, 

this proposal would impose inflexible minimum retained earnings 

levels at each bank. This proposal has generated an extensive policy debate. 

Ultimately, the Finance Board received 1,066 letters on its rulemaking plan. Less than one half of one percent of the commentators, as I understand, supported the regulatory change. Some of the 

key arguments raised against the plan include that it could result 

in a decision to engage in higher risk activities and that it could 

undermine the housing mission of the system. Standard & Poors 

has also observed that the proposal may ‘‘reduce the financial flexibility’’ of a bank to manage its capital positions and lessen the 

attractiveness of membership in the system. 

While I share these apprehensions, I am most concerned about 

the failure of the Finance Board to conform this regulatory proposal to the specific capital statutory requirements outlined in H.R. 

10. This plan would impose a uniform retained earnings requirement that every bank must adopt, regardless of its preferences. 

While the law mentions retained earnings as one source of capital, it does not mandate that a bank hold a specific minimum 

level. In fact, as I noted in my remarks on the conference report 

on H.R. 10, our goal was to create ‘‘a flexible capital structure.’’ 

4

In a recent letter sent to Chairman Oxley and Ranking Member 

Frank, today’s witness suggested the Finance Board’s proposed 

capital revisions ‘‘satisfies the intent’’ of H.R. 10. As an author of 

these provisions, I must take exception to this conclusion. Our intent in updating the capital structures used at each of the banks 

was not only to create a more permanent capital system, but also 

to provide maximum flexibility to each of the banks to develop 

their own capital structures to address their own special needs. 

Because the retained earnings proposal decreased such flexibility, it is inconsistent with the language of the law and the legislative history. In my Floor statement on H.R. 10, I also noted that 

I had worked to ensure that we ‘‘would not place small financial 

institutions at a competitive disadvantage.’’ This regulatory proposal, in my view, would undercut our hard work to achieve that 

important objective. 

A study of the Stanford Washington Research Group found that 

the proposal would disproportionately affect smaller publicly traded 

financial institutions. These entities would not only experience decreases in dividend income during the transition period, but unlike 

large financial institutions, they would also be unable to tap into 

our capital markets via other financing mechanisms. 

Beyond my strong reservations about this recent rulemaking proposal, I continue to be concerned about the failure of the Finance 

Board to follow the clear statutory mandate regarding the appointment of public interest directors. 

Section 7 of the Federal Home Loan Bank Act indicates that at 

least six directors on each bank board ‘‘shall be appointed’’ by the 

regulator. As you know, Mr. Chairman, I have a very strong interest in ensuring that the Federal Home Loan Banks benefit from an 

independent public voice on their boards. 

Inexplicably, at least 70 percent of the public interest director positions are currently vacant. If the Finance Board fails to act on 

these matters by the end of the year, there will be no public interest directors at any Federal Home Loan Bank, and 40 percent of 

all board positions will be vacant. 

These vacancies occur at a time when the system is addressing 

increasingly complex issues. They also create corporate governance 

problems, in terms of workload of the remaining elected directors, 

institutional memory of the board, and ensuring that the Federal 

Home Loan Bank adheres to the system’s mission to promote affordable housing and advance economic development. 

Before I close, Mr. Chairman, let me make a point to our witness. I seem to detect that there must be a signing statement written by the President when he signed H.R. 10—not this President, 

but the previous President—that exempted the President and this 

board from this law, because it seems to me the Finance Board is 

acting in direct contradiction of the law as enacted by the Congress. And I find that incredible, but rather consistent with this 

President’s intent. 

And I think it is very important that the Finance Board explain 

to this committee why you think that the action of Congress should 

be absolutely ignored, and that 40 percent of the members of the 

boards of directors of this huge institution involving billions of dollars, and with the support of the taxpayers’ money behind it, 

5

should go improperly governed. So, I look forward to hearing that 

answer. 

In closing, Mr. Chairman, I have deep reservations about the retained earnings rulemaking as proposed by the Finance Board. I 

also have great apprehension about the continued failure of the Finance Board to appoint public interest directors. I, therefore, hope 

our witness today will forthrightly inform us about what he is 

doing to resolve these problems. 

Chairman BAKER. I thank the gentleman for his statement. I 

now recognize Chairman Oxley. I don’t know with certainty whether the committee will meet again in this session on the matter of 

GSE governance. So, accordingly, I want to express my appreciation to the chairman for his long-standing work on the creation and 

adoption of H.R. 1461, the House-posed position on GSE governance. 

It is clear to me that we wouldn’t be where we are today—although we haven’t crossed the goal line—without your hard work 

and commitment to that purpose. So I thank the chairman for his 

good work, and recognize him for such time as he may consume. 

The CHAIRMAN. I thank Chairman Baker for those words, and 

would certainly echo his remarks regarding GSE reform. The package that we passed in this committee, and on the House Floor by 

a large bipartisan vote, is indicative of the hard work you have 

done over a number of years—in many cases, all by yourself—and 

it would be a shame to come this far, and not put that across the 

goal line and get a Presidential signature on it, in light of all of 

the revelations that have come out on the GSE’s. 

It truly provides an opportunity for the Congress to put its imprint on a very important piece of legislation that you have worked 

on for so long. So anything we can do to that end would be appreciated. 

Let me welcome Chairman Rosenfeld. It is good to have you with 

us, and thank you for the job that you are doing. We thought it was 

important to have you here to discuss some of the issues that were 

raised in the remarks by the gentleman from Pennsylvania, as well 

as the gentleman from Louisiana. 

The Federal Home Loan Bank System has been critical to the 

country in creating a liquid residential mortgage market. The Bank 

System also plays an important role in small business financing 

and the funding of affordable housing and community investment 

programs. 

From a Congressional standpoint, ensuring the safety and soundness and mission performance of the Federal Home Loan Banks 

has never been more important. I want to thank Chairman Baker 

for holding this hearing, and for his continued strong oversight of 

the housing GSE’s and their regulators. 

The Finance Board required the Federal Home Loan Banks to 

register their stock with the Securities and Exchange Commission, 

in the belief that greater public disclosures would be beneficial. I 

am interested in the status of that registration, the process, and related accounting reviews. Sound corporate governance is critical to 

the function of any enterprise, as we found out recently. 

In this regard, I am concerned that the Home Loan Banks do not 

have full boards of directors. I would like to know why there has 

6

been a delay in appointing public interest directors, and what reforms to this process, Chairman Rosenfeld, that you might support. 

Again, I echo the comments of the gentleman from Pennsylvania in 

that regard. 

The Finance Board has issued a proposed rule prescribing a minimum amount of retained earnings for each bank, and limiting the 

amount of excess stock that a bank can have. As Mr. Frank and 

I stated in a recent letter to you, Chairman Rosenfeld, the potential 

impact of this proposal is vitally important to the banks, to their 

members, and to the housing finance system. 

We are concerned that the proposed changes may go too far, and 

actually harm the bank system more than protect it. And I appreciated your response, that the Finance Board is taking an open 

minded and cautious approach to this rulemaking, and that any 

further actions will take into account the consequences for the 

banks and their members. I look forward to an exchange of views 

today on this important subject. And indeed, this is how the process works, in terms of our oversight responsibilities, as well as your 

responsibilities as chairman. 

To that end, clearly the inclusion of the Federal Home Loan 

Banks in the overall GSE legislation was timely and important, 

and I want to say to the Federal Home Loan Banks in general 

thanks for your cooperation in this. I know it wasn’t easy, but it 

clearly made eminently good sense to include the Federal Home 

Loan Banks under this legislation. 

Once we were able to work out the difficulties, which are always 

inherent in the legislative process, I think the Home Loan Banks 

are well positioned in this proposal. This is another reason, Mr. 

Chairman, why we need to get this bill across the goal line to the 

President’s signature this year, before we adjourn. And to that end, 

we again pledge our best efforts. With that, I yield back. 

Chairman BAKER. I thank the chairman. And recognizing Ranking Member Frank, I also want to express to him my appreciation 

for his courtesies in working with us and moving forward on H.R. 

1461, and express my hope that we are able to continue that good 

work, and get to conference before the year is out. And with that, 

I recognize the gentleman for such time as he may consume. 

Mr. FRANK. I appreciate the chairman’s good words, and I do 

want to—I think we work well together, and I hope we can continue and not give up on this. And I do want to say, in particular, 

I’m not used to being thanked for my courtesy, so I’m especially 

grateful for that. 

[Laughter] 

Chairman BAKER. It was particularly notable to me, so I wanted 

to make sure I did it. 

Mr. FRANK. That’s right. Okay. I think, with whatever intentions, Mr. Rosenfeld, you have made a great mistake. And I hope 

that we can hold off on this. 

The chairman and the ranking member of the subcommittee 

mentioned a very serious issue for many of this, the failure to appoint public members. Now, when I raised that issue, I was told 

by Assistant Secretary Henry in a letter that the reason for not appointing the public members was the pendency of the GSE bill. 

7

And he said, ‘‘Well, maybe it doesn’t make sense, given the GSE 

bill pending.’’ 

Well, that implies, it seems to me, a—the GSE bill creates a new 

structure for precisely, among other things, the subject you are 

dealing with. And I think a rush to judgement on this now, before 

we get the GSE bill, is a mistake. And when I am told that you 

can’t have members appointed by the Administration because the 

GSE bill is pending, but then if you were to go ahead with this, 

the contradiction would have to lead me to believe that something 

else was at stake. 

Now, one of the things I asked to put in the record here, Mr. 

Chairman, is a letter to the Housing Finance Board under the public comments section, July 11, 2006, from a very large coalition of 

groups concerned with housing. From advocacy groups to builders 

to public officials, it includes, for example: The American Association of Homes and Services for the Aging; The National Low Income Housing Coalition; The National Association of Local Housing 

Finance Agencies; Habitat for Humanity; and The National Indian 

Housing Council. And they asked the board to shelf this, because 

of the negative impact it would have, as proposed, on housing. And 

I ask that this be put in the record. 

I also ask, Mr. Chairman, that we put in the record your 

quotations from the Standard & Poors study on this in July. A 

heading of one subsection, ‘‘The new regulation poses inherent conflicts with the core business of a Federal Home Loan Bank,’’ that’s 

from Standard & Poors. And Standard & Poors’ conclusion is, 

‘‘Should this proposed regulation be adopted as it is currently written, Standard & Poors will have to monitor any negative impacts 

to the liquidity profile of the individual bank’s core business growth 

dynamics and membership trends.’’ It’s a very negative analysis of 

this. 

Obviously, we want to protect safety and soundness. We are, in 

fact, hoping to get a bill passed that will enhance the ability of the 

regulators to do this. But this does not appear to be justified by 

any factual basis for concern. And it is very likely to have negative 

effects on membership, and particularly on the affordable housing 

program. 

Now, the affordable housing program is about 20 years old. The 

affordable housing program is one of the few programs we now 

have that helps build housing. It has been very well run. I think 

it is the model for what we ought to be doing with Fannie Mae and 

Freddie Mac. Everyone concerned about it sees a very strong likelihood of a negative impact in the affordable housing program from 

this program. 

Now, I appreciate the fact that you tried to put some more flexibility into that, and you were responsive to concerns I made, and 

I thank you for that, for the question of not being so geographically 

bound. I appreciate that. But helping it become more flexible, if it 

is diminished overall, is a mistake. 

So, if there is a need for some increased capital here, let’s have 

a better justification. And I am afraid this is an across-the-board 

approach that will have negative consequences. I think, insufficiently, it reduces the incentive for them to differentiate between 

8

activities that have different degrees of risk. It tends to lump 

things together, so that is reduced. 

And the overall issue to me is that it is a proposal to cure a problem the existence of which hasn’t been documented. And it’s a cure 

that will damage many of the ongoing activities here. 

I know we have had problems with Fannie Mae and Freddie 

Mac, and we are trying to resolve them. And we did agree to also 

include more authority over the Home Loan Banks. But this appears to be motivated, in part, by a kind of general skepticism of 

the enterprise, unjustified by any reality that we have seen. 

And, yes, we want to be safe. But not to the point where we do 

things not dictated by any, I think, reasonable fear that will diminish the very important function. Look, we are in a situation now 

where the last thing this country needs from the macro-economic 

standpoint as well as the micro standpoint, is further damage to 

the housing industry. Everybody now acknowledges that the housing industry, which had carried the economy to some extent, is now 

becoming a potential source of trouble. 

To promulgate a rule that would cause all kinds of concerns 

about the viability of the housing industry at this time is about the 

last thing we ought to be doing. And I would hope that the board 

would withdraw this. We are certainly available to talk. If there is 

a need for more specifics, let’s look at it. 

At the very least, the rationale that says we can’t appoint public 

board members until the GSE bill’s fate is decided certainly applies 

heavily to this. And I would hope we would have, accordingly, the 

Board act that way. Thank you, Mr. Chairman. 

Chairman BAKER. I thank the gentleman for his statement. Mr. 

Royce? 

Mr. ROYCE. Thank you, Chairman Baker. I want to thank you for 

holding this hearing, and I would also like to thank Chairman 

Rosenfeld for his appearance, and his testimony here before us 

today. 

Over the past 6 years, under Chairman Mike Oxley’s leadership, 

this committee has held a number of very important oversight 

hearings, and this is no exception here today. As one of the largest 

financial institutions in the United States, and frankly, as one of 

the largest borrowers in the world, the Federal Home Loan Bank 

System plays a very significant role in the U.S. housing finance 

market. 

And I have particular questions about some recent regulatory actions taken by the Federal Housing Finance Board. And more specifically, I am interested in learning more about the Finance 

Board’s thinking and its rationale behind the recent subordinated 

debt offering at the Federal Home Loan Bank of Chicago, and also 

the proposed rule to increase retained earnings at the 12 banks. 

I am concerned about recent Finance Board action that has allowed the Federal Home Loan Bank of Chicago to use subordinated 

debt in determining compliance with its regulatory minimum capital requirement. It is my understanding that this waiver was 

granted so that $1 billion in subordinated debt offering could enable the Federal Home Loan Bank Chicago to redeem stock of withdrawing members, which has the effect of substituting equity capital with debt capital. 

9

I am interested to know if this regulatory forbearance is not only 

unnecessary, but also if perhaps it is inconsistent with the statutory minimum capital requirements this committee passed in title 

six of Gramm Leach Bliley. 

Additionally, I think this committee and the public needs to 

learn more about how this subordinated debt offering could affect 

the joint and several obligations of the Federal Home Loan Bank 

System, as a whole. 

As to the retained earnings proposed rule, while I understand 

the intent behind the Finance Board’s desire to increase the retained earnings at each of the 12 banks, it is not evident how the 

Finance Board arrived at some of the proposed rule’s specific requirements. 

For example, the rule would require each Home Loan Bank to 

hold retained earnings of at least 1 percent of non-advance assets. 

However, it is not clear to me how or why the Finance Board arrived at the 1 percent figure. Perhaps the 1 percent number is a 

good target, but I think it would be helpful for the committee to 

have an understanding as to why the Finance Board believes each 

bank should be required to have that specific mix of regulatory capital. 

Mr. Chairman, I would like to thank Chairman Rosenfeld for his 

willingness to engage the committee today. And I yield back. 

Chairman BAKER. I thank the gentleman. Ms. Hooley? 

Ms. HOOLEY. Thank you, Mr. Baker, for holding this hearing, 

and for all that you have done on GSE reform. And I thank the 

chairman and Ranking Member Kanjorski for holding the hearing 

today. 

Like my colleagues, I have some concern about the proposed retained earnings rule for the Federal Home Loan Bank System, both 

in terms of the rule, and in the process. My primary concern is regarding the necessity of the rule. When the board just recently approved capital plans for the 12 Federal Home Loan Banks, if these 

capital plans were not sufficient to protect the soundness of the 

Federal Home Loan Bank System, it seems to me they should not 

have been approved by the Finance Board. 

As the board stated in its proposal, the system is well capitalized, and the risk of insolvency for any Federal Home Loan Bank 

is remote. So my question—is the rule necessary? 

Furthermore, the Finance Board did not use an advance notice 

of proposed rulemaking, and instead, issued the proposed rule 

without feedback from the various stakeholders of the Federal 

Home Loan Bank System. As a result, the Finance Board received 

over 1,000 comments in response to the proposed rule, almost all 

of which were strongly opposed. 

When there are so many concerns about the impact of the rule—

and it is clear that this is not an immediate pressing issue—it 

seems to me that an advance notice of a proposed rulemaking is 

a better way to address the issue, which would allow for an increased dialogue amongst the board, the Federal Home Loan 

Banks, their member institutions, and interested members of the 

public, all of which should have, I think, a voice in the process. 

Finally, I have concerns about the possible impact of this proposed rule, not only on the Federal Home Loan Banks, but the 

10

member institutions and the communities they serve. Under this 

rule, the Federal Home Loan Banks will have to increase retained 

earnings by over $3 million over the next 18 to 36 months, and 

that is just an average amongst the banks. 

In the case of the Seattle Home Loan Bank, it may take as much 

as 10 years for them to reach the required retained earning minimum. Because of the requirement to dividends, when a Federal 

Home Loan Bank does not have the required retained earnings, the 

member institutions will suffer from the loss of income. 

Larger member institutions may even seek out alternatives, and 

reduce their use of the Federal Home Loan Bank, all together. As 

the Federal Home Loan Banks face a reduction in earnings, it will 

also lead to reductions in the funds available for the affordable 

housing program. 

In light of the concerns with the proposed rule, both in terms of 

its likely effect on both the Federal Home Loan Banks themselves 

and their member institutions, I think this is an issue that certainly merits further consideration. And we should ensure that all 

the concerns of the stakeholders have been reasonably addressed 

before moving forward with the rule, so I just want to have more 

people involved in the process. 

Thank you very much for being here today, and thank you, Mr. 

Chairman. 

Chairman BAKER. I thank the gentlelady. Mr. Hensarling? No 

statement? Mr. Castle? Ms. Biggert? In that regard, Mr. Moore? 

Mr. Hinojosa? 

Mr. HINOJOSA. Thank you, Mr. Chairman. Chairman Baker and 

Ranking Member Kanjorski, I want to express my sincere appreciation for you holding this hearing to review the status of the Federal 

Home Loan Banks, and the activities of the Federal Housing Finance Board today. 

I have a long statement, and I would ask unanimous consent 

that it be included in the hearing today. 

Chairman BAKER. Without objection. And by earlier request of 

Mr. Frank for inclusion of his additional documents, that is also included without objection. 

Mr. HINOJOSA. Thank you. 

Chairman BAKER. Mr. Tiberi? 

Mr. TIBERI. Thank you, Mr. Chairman. I will submit a statement 

for the record, but just want to thank you for holding this hearing 

today, and express my concern about the proposed rule, and the 

impact it would have across the country to the different regions, 

and hope that this is the first of more hearings, Mr. Chairman, on 

this proposal. Thank you. 

Chairman BAKER. I thank the gentleman for his statement. Mr. 

Scott? 

Mr. SCOTT. Yes, thank you, Mr. Chairman. I appreciate this opportunity. I have some very serious concerns about the proposed 

rule. The Federal Home Loan Bank in Atlanta, and all the 12 others across this country, are doing a tremendous job, particularly in 

providing affordable housing funds. 

Now, I think it is very important that we understand an important aspect that—as background. The members generally own capital stock in the banks, in proportion to the amount of their busiVerDate 0ct 09 2002 13:44 Mar 20, 2007 Jkt 031546 PO 00000 Frm 00016 Fmt 6633 Sfmt 6633 K:\DOCS\31546.TXT HFIN PsN: TERRIE
11

ness. Bank stock is not publicly traded. Members buy and sell it 

at a fixed par value of $100 per share. And the member stock provides the capital needed to operate the banks in a safe and sound 

manner. 

Now, as I understand it, your proposal, Mr. Chairman, asserts 

that banks could incur losses, and that any loss in excess of a 

bank’s retained earnings would require members to mark down 

their bank stock below par value. Thus, in order to protect the par 

value of member stock, the board has proposed requiring the banks 

to keep retained earnings equal $50 million plus 1 percent of total 

assets minus advances, correct? 

The banks would have to cut dividend payments in half, until 

they met the new retained earnings requirement. Such a rule, Mr. 

Chairman, would make doing business with banks much less attractive to member institutions, and would dramatically reduce 

bank profits and dramatically reduce the affordable housing funding, which is vitally, vitally important. 

Now, my concerns are thus; the need for the proposed rule definitely has not been established. The premise that the par value of 

bank stock must be protected at all costs is incorrect. In accordance 

with current accounting policy only, ‘‘other than temporary impairment’’ would require a write-down of member stock. 

There has never been such an event in the entire history of the 

Federal Home Loan Banking System, and the Board has not predicted one. And in proposing to change the capital rules for the 

bank, your Finance Board itself acknowledged that all the banks 

are well capitalized and they face no threat of insolvency. And even 

if additional capital in the form of retained earnings is appropriate 

for some banks, the proposed formula is overly simplistic, and does 

not take into consideration the specific risk and risk management 

policies and policies of each bank. 

The proposed formula creates a retained earnings to target that 

seems excessive in relation to the risk to the par value of capital 

stock for most banks. And the proposed retained earnings rules formula creates incentives for the banks to take on more risk and reduce liquidity. 

This proposed rule has the potential to create instability within 

the system by causing some members to leave the system, or at 

least reduce their use of advances significantly. If that happens, as 

I said, bank profits and the affordable housing funding would decline dramatically. 

The proposed rule is not consistent with bank capital requirements as established in Gramm-Leach-Bliley. The appropriate way 

to address capital concerns is not this way, perhaps to modify bank 

capital plans. There is no justification for this proposed regulation. 

Even if it were demonstrated that there are problems that need 

to be addressed—and you all haven’t even demonstrated that—but 

even so, there are far more effective ways to do that without driving down the available housing funding. 

This proposed regulation has serious adverse consequences for 

the banks, their members, and the system of their respective communities. I would hope we reject this. I hope we would withdraw 

this. I think it is bad policy for our banking system, and would 

hurt the affordable housing funding dramatically. 

12

I look forward to your comments on this, and I have some very, 

very significant questions I would like to address to you at that 

time. 

Chairman BAKER. I thank the gentleman. If there are no further 

opening statements at this time, I would like to recognize the Honorable Ronald A. Rosenfeld, Chairman of the Federal Housing Finance Board, welcome you here to the committee, and express my 

appreciation for your hard work and diligence in establishing a new 

regulatory regime. Please proceed as you see fit. 

STATEMENT OF RONALD A. ROSENFELD, CHAIRMAN, 

FEDERAL HOUSING FINANCE BOARD 

Mr. ROSENFELD. Thank you, Chairman Baker, Ranking Member 

Kanjorski, and distinguished members of the subcommittee. I appreciate the opportunity to testify on the Federal Housing Finance 

Board and the Federal Home Loan Bank System by testimony, reports on the condition and performance of the banks, the operations of the Finance Board, the status of two supervisory actions, 

and two key regulatory initiatives. 

I want first, however, to stress the need for reform of the regulation and supervision of the housing GSE’s. Fannie Mae, Freddie 

Mac, and the 12 home loan banks are large, complex entities. They 

are important to the Nation’s housing market and play a vital role 

in the financial markets. They should be overseen by a single, 

strong, and independent regulator that has a full arsenal of supervisory and enforcement tools. The combined assets of the 12 banks exceed $1 trillion. If the 

Federal Home Loan Bank System was a bank holding company, it 

would be the fourth largest bank holding company in the country. 

Advancers are the largest asset class, consisting of 62 percent of 

assets. The top 10 holders of advances account for 33 percent of the 

total system advances. 

Mortgage purchases are even more heavily concentrated than advances. Mortgage loans purchased from members constitute 10 percent of assets. Almost 70 percent of the mortgages in the system 

were purchased from 10 members. The total capital of the banks 

is $45.5 billion, or 4.4 percent of assets. Of that total, retained 

earnings are $3 billion. 

In the first 6 months of 2006, the banks’ net income was $1.25 

billion. The banks have grown in size, sophistication, and risk in 

recent years. Many of the banks were not equipped to deal with 

those changes. They did not embrace and implement appropriate 

governance and risk management tools. 

Two examples are the Seattle and Chicago banks. The Seattle 

and Chicago banks continue to operate under written agreements. 

While the particulars of each case are different, both had a high 

level of excess stock, and both were intent on growing their mortgage portfolios. The Chicago bank grew its mortgage portfolio by 

relying on excess stock. The Chicago bank’s mortgage portfolio 

grew to 60 percent of assets and excess stock constituted approximately 60 percent of its capital stock. 

When the Chicago bank’s earnings declined and dividends were 

reduced, as one might expect, member requests that the bank repurchase excess stock accelerated. To conserve its capital, the bank 

13

halted its repurchase of stock. In response, members holding over 

a quarter of a billion dollars in stock elected to withdraw from the 

bank. That process began a 6-month statutory redemption clock. 

We then had to act decisively and quickly. 

There were no easy options. The Chicago bank, unlike Seattle 

and the other 10 banks, had not yet converted to the GrammLeach-Bliley capital structure. After reviewing a number of alternatives, we permitted the Chicago bank to issue subordinated debt. 

The bank issued $1 billion in 10-year subordinated debt, which is 

used to retire a like amount of excess stock that was redeemable 

with 6 months notice. 

That solution provided the Chicago bank’s new management 

team time to work through and resolve the bank’s financial issues. 

We have learned from our supervisory experiences. We have also 

increased the supervisory staff, and upgraded our risk modeling 

technology. We now have the resources to better monitor risk, and 

the wherewithal to take early and resolute action where problems 

emerge. 

We have also taken a number of important regulatory actions. 

One of these is our rule requiring the banks to register with the 

SEC. All banks are now SEC registrants. Investors, other home 

loan banks, and the public now have a full and fair view of the financial condition and performance of each of the banks. 

A second regulatory action is our proposed rule on retained earnings and excess stock. In April of this year, the Finance Board 

issued for public comment a proposed rule to strengthen the capital 

composition of the banks. We are analyzing the 1,066 comments we 

received, and are taking an open minded and cautious approach to 

the final rule. 

We will be guided by some fundamental principles. Specifically, 

we will do nothing to impede the good business judgement of the 

banks. We will not materially alter the value of membership in a 

bank, we will respect the lawful actions that banks have previously 

taken. 

Speaking only for myself, some commentators made valid points, 

and there is room for movement on several important issues. I 

want to be clear. I will never be apologetic about capital. While the 

capital level of the banks exceeds the 4 percent statutory minimum, the composition of the bank’s capital needs to be strengthened. That’s the purpose of our proposed rule. 

Some comments state that that proposed rule is contrary to the 

statutory intent of Gramm-Leach-Bliley, and that we have exceeded our regulatory authority. We strongly disagree. The intent of 

Gramm-Leach-Bliley was to stabilize and strengthen the capital of 

the banks. Our proposal does exactly that. The rulemaking is fully 

consistent with our regulatory authority, and is an exercise of our 

regulatory duty. It is our duty to ensure the financial safety and 

soundness of the banks, a duty entrusted to us by this Congress. 

Chairman Baker, Ranking Member Kanjorski, and the members 

of the subcommittee, thank you for the opportunity to report on the 

condition of the Bank System and the Federal Housing Finance 

Board. I would be pleased to respond to any questions. 

[The prepared statement of Chairman Rosenfeld can be found on 

page 36 of the appendix.] 

14

Chairman BAKER. Thank you, Mr. Chairman. I appreciate the 

manner in which you have approached this regulatory proposal, 

and certainly can understand how a GSE regulatory concept and 

controversy could be associated with one another. 

You could, in some instances, erase the name, ‘‘Federal Home 

Loan Bank,’’ and put the words ‘‘Fannie Mae’’ and ‘‘Freddie Mac’’ 

in, and play back a few years ago, and it would not be too dissimilar. 

However, there is one element of the proposal that I found particularly interesting, if not troublesome. And that is, with regard—

if I am understanding it properly—with regard to the holding of 

cash to require reserving, if you had $100, to reserve against that 

$100 in your account, is there a particular structural regulatory 

reason why reserving against cash on hand, which I thought would 

be a bit onerous? 

On the other side of the coin, however, not stated in most of the 

talking points distributed by the opponents of the matter, but expressed to me by intermediaries, and just—I find on these GSE 

things, you might as well just get it all out on the public domain—

that some are suggesting there are other reasons, other than just 

capital adequacy, for the proposal of the current rule. 

Some have suggested this is just a first step for some sort of consolidation proposal. Others are more direct, in calling it just an attack on their profitability through the mortgage purchase program. 

If you could, just outline your policy reasons for the proposals 

construct. I think in your opening statement you referenced the necessity for adequate capital to hedge against any identifiable risk. 

But that ought to—we ought to dismiss these other accusations 

outright, or discuss the legitimizing reasons for the manner in 

which you’re approaching this. And please proceed as you desire on 

those. 

Mr. ROSENFELD. Chairman Baker, you have given me a smorgasbord of possibilities, in terms of responding to the—to elements 

of the proposal. Let me attempt to deal with them as I recall them 

being raised. 

With regard to the commonality of the same retained earnings 

for all types of assets, other than advances. That is an area that 

we have received a great many comments on, and something that 

we are carefully considering. 

In the course of receiving comments, we have been apprised of 

some things relating to that concept, which is—certainly provides 

the benefit of simplicity. But it also has the potential of perhaps 

adversely affecting prudent business judgement. And therefore, it 

is something that we need to look at very carefully, as to whether 

we ought not apply some degree of risk weighting to various types 

of assets. And that is clearly one of the things that has been raised. 

While I am on areas that have been commented upon extensively, the other areas, though, one is the area of stock dividends. 

A number of people have said, ‘‘Well, if you’re going to limit excess 

stock, why limit how you get there? I mean, just stick with one objective, and that ought to be enough.’’ And besides, some of the 

banks rely heavily on excess stock—pardon me, on stock dividends. 

The third area that has received a great deal of comment and 

has been referenced by a number of your committee members is 

15

this issue about until they reach a required level of retained earnings, dividends can be no more than 50 percent of income. 

Again, that is an area that—where the comments have been extraordinarily helpful, because a number of commentators have suggested that as long as there is no particularly urgent issue in the 

system today, it need not be so difficult, and the banks ought to 

have more time to get there, which raises an absolutely remarkable 

point, and that is there are 12 Home Loan Banks in the system. 

Eight or nine of the banks, in terms of the retained earnings requirement, are at or very close—within a stone’s throw—of being 

there. 

So, this notion of how Draconian it is, is simply nonsense. Eight 

or nine of the banks are there, or will be there very shortly, without doing anything. In addition to which, the other Draconian allegation that was made towards this limit on excess stock, 8 of the 

12 banks are there now. And one or two are very much on their 

way. 

So, the impact—this enormously broad opposition throughout the 

country and all the banks simply doesn’t exist. It is absolutely nonsense. And let me point out to you that on the issue, for example, 

the issue of excess stock, which is one of the pillars of the proposal—we’ve got 400-some letters, comments, on that issue—81 

percent of the letters came from the Cincinnati Bank. 

And throughout the entire comment period, what has happened 

is that the vast majority in virtually every single category has come 

out of the Cincinnati Bank. That’s not to suggest the comments 

from the other banks are not important; they are very important. 

And quite frankly, they are very helpful. I just wanted to convey 

to you the fact that this is—that there is not this enormous outpouring of opposition throughout the country. It largely emanates 

from a campaign by the Cincinnati Bank. And we respect that, 

there is nothing wrong with that. 

With regard to the issue that we have in the ulterior motives, I 

have heard a couple of them alleged. Number one, is this our way 

at getting at the mortgage programs? The answer is absolutely not. 

If we decide to take some action with regard to the mortgage program, believe me, Mr. Chairman, we will take it directly. We will 

never go through the back door, we don’t need to. That’s not the 

way to regulate. 

Number two, the issue of consolidation, which has been raised 

frequently. The answer to that is we have stated publicly that we 

have—we are not promoting the consolidation of banks. We have 

said if two or more banks decide they want to merge, we will be 

cooperative and help them do it. 

Quite frankly, in my mind, I don’t quite understand why you 

need six banks between Pittsburgh and Topeka. But if that’s what 

the members want, and that’s what the members are willing to pay 

for, and they run those institutions in a safe and sound fashion, 

that is their prerogative. It is not our call to change, and we have 

no intentions of changing. 

And quite frankly, Mr. Chairman, my memory at my age is—I 

can’t remember some of the other issues, but if you could help me 

out— 

16

Chairman BAKER. No, you have done an excellent job. One, your 

intention is to provide safety and soundness, providing a capital 

basis which you believe is justifiable. You don’t have ulterior motives in mind that you are attempting to achieve. You perhaps will 

consider further adjustments to the pending rule, and you will not 

move and give adequate time for people to make further comment 

as warranted. Is that summarized properly? 

Mr. ROSENFELD. Yes, sir. 

Chairman BAKER. Thank you very much. Mr. Kanjorski? 

Mr. KANJORSKI. Mr. Rosenfeld, in an article this morning, in one 

of the banker’s publications, they refer to the fact that Washington 

Mutual is—in regard to the ruling, because of the cost to them of 

the retained earning role, it would cost them $210 million. They 

are going overseas to finance. 

Now in my prior life as an attorney, I represented co-ops, and I 

very often found that members of co-ops are very astute in figuring 

out the effect of the co-ops’ policies upon their particular earnings. 

And this is a strong indication that they are voting with their feet. 

They have other alternatives; they can go overseas. So I don’t know 

whether it is—for safety and soundness—it is smarter to drive a 

customer, the largest customers to the banks of the System, to go 

overseas and do their financing. 

And that is why I think it’s important that—and I can understand why we want to get safety and soundness, there isn’t any 

question of that. But the implementation of these rules, or the inflexibilities of the rules, may cause unintended consequences of actions just like this. 

I don’t want to dwell on that because I think the chairman’s 

questions and your response served a lot of those purposes. 

I really want to find out about something that is—it’s sort of offensive, because I was under the impression when we have met in 

the past, that you were going to be a hands-on regulator. You were 

going to get out into the field, and find out what is happening. 

Have you gone and met with the boards of directors of the various 

banks, and— 

Mr. ROSENFELD. I have not gone to the banks. I have met with 

them, met them here in Washington. 

Mr. KANJORSKI. Are they telling you something different than I 

am hearing, that they are being literally choked by not having adequate membership on— 

Mr. ROSENFELD. Oh, quite the contrary, Mr. Kanjorski. I have 

had very little comment from the banks. As a matter of fact, with 

the exception of some issues with regard—a couple of banks have 

mentioned a problem with staffing committees on the bank board. 

But beyond that, there has been very little—surprisingly little—

commentary from the banks. 

Mr. KANJORSKI. Do you know what some of the banks are doing, 

as a result— 

Mr. ROSENFELD. Well, I know what the Pittsburgh bank has 

done, and that is they have gone out and where one might have 

hoped that they had certain talent that was in the form of public 

interest directors with certain skill sets, since they don’t have that, 

they have gone out and hired consultants, which is an interesting 

approach. 

17

Mr. KANJORSKI. And they’re the same people who would have 

been serving on the Board— 

Mr. ROSENFELD. Not necessarily. The people—the most well 

qualified don’t necessarily get on the Board. 

Mr. KANJORSKI. Well, then, is your hesitancy in making these appointments that you think the Administration is not offering competency in the appointment of these directors? 

Mr. ROSENFELD. No, no, no. I am responding to the difference between the expertise of a consultant— 

Mr. KANJORSKI. I understand. But— 

Mr. ROSENFELD. And— 

Mr. KANJORSKI. Mr. Rosenfeld, I have extraordinary contacts 

with all of these banks across the country, and I visit with them 

on a regular basis. 

Now, either they are not talking to you the way they are talking 

to me, but I have to tell you that, internally, for governance purposes, they are hurting. And their institutional memory is suffering. I think that the majority of the members at the end of this 

year will have less than 3 years’ experience on the board. 

Mr. ROSENFELD. I respect that, Mr. Kanjorski. I understand what 

you are saying, and I respect it. But please, let me comment on one 

thing you said earlier, with regard to Washington Mutual. 

Mr. KANJORSKI. Yes. 

Mr. ROSENFELD. Interestingly enough, I would suggest that the 

proper interpretation of their action is just the converse of what 

you are suggesting. And the reason that—well, I am sure one of the 

very significant reasons that WAMU is seeking to withdraw, or at 

least do less business, with the Home Loan Bank System is their 

experience in Seattle. 

Seattle is a terrible situation for WAMU, because they are getting—they have a big presence, and they are getting zero dividends. The reason they are getting zero dividends is because we 

did not have in place the rules that we are now trying to put in 

place. WAMU would have a totally different experience with the 

Home Loan Bank System, had Seattle not succumbed to the problems that they— 

Mr. KANJORSKI. Well, aren’t they a member of another bank, the 

San Francisco— 

Mr. ROSENFELD. They are a member of the San Francisco— 

Mr. KANJORSKI. Why don’t they go to the San Francisco bank? 

Mr. ROSENFELD. I think the San Francisco bank, to my knowledge, they have not had a bad experience there. And I don’t think 

you can contribute—with an organization as big and sophisticated 

as WAMU is, or Wells Fargo, or Bank of America, they have all 

sorts of reasons for how they fund their needs. 

And we certainly can’t blame a decision to go overboard or go to 

the private sector, or whatever, on the— 

Mr. KANJORSKI. Okay. I accept that, and we will have to look at 

that maybe in a future hearing. We can call Washington in to explain why they made these judgements. But I am seeing a lot of 

business here move overseas that could be in the American market. 

But getting back to the directors, what does the Congress of the 

United States have to do? The present law says it is your responsibility to make these appointments. You have refused to do so. 

18

I have to ask the question, are you an independent regulator, as 

you have defined it, totally at arm’s length with the industry, and 

totally independent of all other influence, or are you failing to carry 

out these appointments by some statement or conversation with 

the White House, whose policy is not to make these appointments? 

Are you failing to carry out your function as a regulator independently, because of something this White House is telling you to do? 

Mr. ROSENFELD. I believe that we are an independent regulator. 

I also believe that it is inappropriate for a regulator to appoint the 

regulated. 

Mr. KANJORSKI. Oh, you disagree with the law, then? 

Mr. ROSENFELD. I think a regulator should not appoint the regulated. I am aware there is a statute. I believe, however— 

Mr. KANJORSKI. Mr. Rosenfeld, you mean the regulator now is 

going to pass and interpret the laws governing these banks, or is 

the Congress— 

Mr. ROSENFELD. I think the statutes are such, the latitude, in 

terms of time, as to when to appoint, while the issue of GSE reform—which has been referred to numerous times today— 

Mr. KANJORSKI. Mr. Rosenfeld, 21⁄2 years, not one independent 

director to any of the banks has been appointed by your office or 

your predecessor. Is that correct? 

Mr. ROSENFELD. That is true. I believe the real answer is to have 

GSE reform. 

Mr. FRANK. Will the gentleman yield? 

Mr. KANJORSKI. I will yield, Mr. Frank. 

Mr. FRANK. Again, Mr. Rosenfeld, it is—first of all, the suggestion that consultants can make up for boards of directors, and that 

it is somewhat interchangeable— 

Mr. ROSENFELD. I’m sorry? 

Mr. FRANK. I hope you don’t really think, really mean to say, 

that you can solve a problem of not having an appropriate board 

of directors by hiring consultants. 

Mr. ROSENFELD. I didn’t— 

Mr. FRANK. Yes, you said, ‘‘Well, they lost the expertise.’’ 

But secondly, this assertion that you can’t appoint directors because GSE legislation is pending, but you can promulgate the most 

far reaching change in the capital structure when that’s also the 

subject of GSE legislation, that’s the least logical argument I have 

ever heard here. 

Chairman BAKER. If I might interject here, gentlemen, just for 

the moment—Mr. Kanjorski, we are down to a little over 3 minutes 

on the pending vote. We are going to recess and come back to continue. So if I may ask the indulgence of the chairman, the committee will stand in recess for about 15 minutes. 

[Recess] 

Chairman BAKER. I would like to reconvene our hearing on capital markets. When we were last meeting, I believe it was Mr. Kanjorski who had been previously recognized. So I would now go to 

the Republican side, and recognize Ms. Kelly for any comment or 

question she may have. 

Mrs. KELLY. Thank you very much, Mr. Chairman. In its proposed rule concerning deposit insurance assessments that was published on July 24th, the FDIC specifically requested comments on 

19

whether the Federal Home Loan Bank advances should be included 

in the definition of ‘‘volatile liabilities’’ for risk differentiation purposes for smaller institutions with less than $10 billion in assets. 

Frankly, I don’t see a need for charging higher premiums for prudently managed and sufficiently capitalized institutions, simply because they use the Federal Home Loan Bank advances. Advances 

are not volatile liabilities. Of the sources available to community 

banks, Home Loan Bank advances are the only ones which have 

been around for nearly 75 years, and which have been—and which 

are purchased on a pre-defined and predictable term by fully regulated member lenders. 

Obviously, this is a matter that should be on the radar screen 

of the FHFB. And in this regard, I would like to know if the FHFB 

considers advances to be volatile liabilities. You can probably just 

answer that yes or no. 

Mr. ROSENFELD. No. 

Mrs. KELLY. Okay. 

Mr. ROSENFELD. Absolutely not. I think it is a mistake to use the 

term ‘‘advances’’ and ‘‘volatility’’ in the same sentence. 

Mrs. KELLY. Okay. In addition, is FHFB planning to take a position on the Federal Home Loan Bank issue raised in the FDIC’s 

proposal, and notify the FDIC of its views? 

Mr. ROSENFELD. I am sure that, to the extent that we are an involved participant, we will appropriately make our position known. 

Mrs. KELLY. All right. Thank you, Mr. Chairman, he has answered my question. I yield back. 

Chairman BAKER. I thank the gentlelady. Mr. Clay? 

Mr. CLAY. Thank you, Mr. Chairman. And thank you for being 

here. 

The affordable housing programs of the FHL Banks has been a tremendous success, with over $2 billion in grants for affordable 

housing since 1990. These AHP grants by FHL Banks provide capital so that member institutions and community sponsors can arrange for the development and construction of affordable housing. 

At a time when more families need affordable housing, it is troubling that the Finance Board has issued a proposal whose effect on 

FHL Bank System, you acknowledge in your July letter to Congressmen Oxley and Frank, is uncertain. Since the AHP program 

depends directly on FHL Bank earnings, this is even more troubling. 

What analysis has the Finance Board done on the potential impact of the proposal on the AHP program? 

Mr. ROSENFELD. I am delighted you asked that question, because 

a number of commentators and a number of congresspersons here 

have made the statement that somehow or another these proposals 

adversely affect AHP. I would submit to you that that’s simply 

wrong. 

First of all, in both the case of the retained earnings provisions, 

as well as the excess earning—excess stock provisions, roughly 

three-quarters of all the banks simply aren’t affected at all. So I 

think you can eliminate them from the issue of whether anything 

negative would occur in their AHP program. 

I would also suggest that AHP contributions are based upon 

earnings. To the extent that you increase retained earnings, that 

20

does not affect your income. If it did anything, it would increase 

the income, not decrease the income. I can think of perhaps one 

bank, maybe two, where the excess stock provisions would have a 

bearing in possibly reducing AHP payments. 

But I would point out to you the worst thing that has happened 

to AHP, which is a wonderful program, and we all acknowledge it, 

has been Seattle and Chicago. That’s where AHP has gotten hurt. 

I wouldn’t want to be the person that called on Seattle to get their 

contribution to AHP. It’s not a pretty number. 

And what we are trying to do is to make sure that those kinds 

of things that reduce the earnings of banks and adversely affect 

AHP simply don’t occur again. That’s what this is all about. 

Mr. CLAY. Let me follow up on that vein. What alternative funding source may be available for affordable housing, if FHL Bank 

earnings decline, as a result of the proposal? 

Mr. ROSENFELD. Well, first of all, the answer to increasing AHP 

profitability is to increase the business and increase the earnings. 

For example, there are some pending new business activities in 

the area of working with insurance companies, which could be the 

source of additional income. I think Mr. Kanjorski is familiar with 

a proposal to have the FHLB be able to credit enhance industrial 

bonds, which could be a new source of revenue appropriately—if it 

were appropriately underwritten. 

There is—quite frankly, the Home Loan Banks have an enormous opportunity. What they need to do, as any good business 

does, is through the use of ingenuity and technology working together, create better products, do a better job, in terms of growing 

their businesses. 

I would point out to you that it takes a Des Moines bank—the 

Des Moines bank has had a number of problems in their mortgage 

portfolio. They had 90 percent of their mortgages that they bought 

coming from 1 customer. What prudent businessperson would ever 

allow 90 percent of their portfolio of anything—certainly anything 

significant—to come from 1 customer? 

Now, I would also point out that Des Moines has 1,190 other 

banks in the system, in their membership. Boy, I will tell you, if 

I ran Des Moines, I would be out trying to figure out what I could 

sell to those other 1,190 banks. That’s how you grow earnings. It’s 

a business. 

Mr. CLAY. So, the banks should be innovative and look at new 

business ventures? 

Mr. ROSENFELD. Absolutely. That is what I am—that’s American 

business. That is why we are where we are. Innovation is critical. 

Mr. CLAY. I thank the witness for his response, and thank you, 

Mr. Chairman. I yield back. 

Chairman BAKER. I thank the gentleman. Mr. Campbell, did you 

have—Mr. Scott? 

Mr. SCOTT. Thank you very much, Mr. Chairman. Let me visit 

this issue of the affordable housing program. And your response to 

Congressman Clay’s question somewhat intrigued me, when you 

just cavalierly passed that off. Let me tell you how I understand 

the impact that your ruling will have on drying up affordable housing funds. 

21

First of all, as your rule would do, FHL Banks would be forced 

to retain earnings, no matter what their individual business plans 

or risk profiles look like, over $2 billion will be retained. And that 

$2 billion will be $2 billion that will not be distributed through 

FHL Banks’ member institutions to the borrowing public. 

And in addition, as the FHL Bank adjusts their business operations to take into account that some of their larger members will 

leave because the FHL Bank membership is no longer financially 

attractive—I am not saying you are intentionally trying to dry up 

that fund. This is unintended consequences. If your membership 

leaves, and is no longer financially attractive to the Home Loan 

Banks, then the cost of the FHL Bank advances to remaining members will increase, and members will, in turn, pass on those increased costs to working class families who are seeking home mortgages. 

Now, if the FHL Bank members leave—and, indeed, they will, as 

you have mentioned two or three of them, but there will be more 

than that—another potential adverse effect of the rule that would 

drive affordable housing money is that the earnings of the FHL 

Banks will decrease, thereby decreasing the amount of funds available for FHL Banks’ affordable housing programs. 

Each year, the FHL Banks contribute 10 percent of their earnings as seed capital to the affordable housing program, which sponsors the local community groups, and backed financially by FHL 

members. 

Of course, as we pointed out, since 1990 the FHL Banks have provided over $2 billion in affordable housing funds. This public/

private partnership is vital to providing decent housing opportunities for working class families. And your rule, the Finance Board 

rule, will—and let’s be generous here, and say ‘‘inadvertently’’—but 

it will, nonetheless, restrict the ability of the FHL Banks to meet 

their affordable housing funding responsibilities. 

To show you how serious this is, this is an article in today’s 

paper. Here is what it says, ‘‘African Americans not closing the gap 

in home ownership rates.’’ The report blames two things: discrimination and lack of affordable housing funds. 

Now, it is clear, as I have pointed out, how this would work. And 

I don’t understand why you all have not taken that into consideration, that members will leave, drying up the amount of money 

that is there. And even when you put the pressure on, it will be 

downward pressure with this $2 billion that won’t be available public monies, anyway. In two ways you are taking available funds out 

of the market place, out of play, that would help with the affordable housing fund. 

Mr. ROSENFELD. Mr. Scott, I share your obviously great interest 

in affordable housing. As you know—perhaps you don’t know—I 

spent most of my Federal service at HUD, and I really do share 

your concerns and your beliefs in the importance of that issue. 

But I would respectfully suggest that you are misinterpreting 

something. The amount of dividends that a bank pays to its members has nothing to do with its earnings. The contributions to AHP 

are made at the Federal Home Loan Bank level, which is—and 

that amount of contribution is determined by their income. Dividends to the members have nothing to do with it. 

22

And I would point out, as a practical matter—and this is not a 

reason to make the proposal, but as a practice matter—the more 

retained earnings you have, which are invested, the greater your 

income is. So the reality is that by having more retained earnings, 

that in and of itself increases income—and therefore, AHP contributions—rather than decreases them. 

The one comment—or, I shouldn’t say one—you made a comment 

about major banks leaving, and therefore that could adversely affect income, and therefore adversely affect AHP contributions. 

Theoretically, that is possible. But both in my written statement to 

the committee, and my oral statement, I tried to make it very clear 

that one of the things we will consider in doing the final rule is 

that we don’t materially change the value calculation for members, 

and we are very conscious of that. 

Again, I reiterate that 75 percent of the members are unaffected. 

So you are talking about perhaps two banks, two or three banks, 

where we have to be extremely cautious and careful that, however 

the final rule comes out, that we don’t materially adversely affect 

the value of membership. 

Mr. SCOTT. Seventy-five percent of the banks won’t be affected? 

One of those 25 percent affected might be my bank, the Federal 

Home Loan Bank of Atlanta. 

Mr. ROSENFELD. I don’t think so. 

Mr. SCOTT. And even if it is not, if one bank is impacted by this 

rule negatively, it should not be in place. 

Mr. ROSENFELD. If we had this rule in place 3 years ago, AHP 

would have substantially more money today than they have. 

Chairman BAKER. Mr. Scott— 

Mr. SCOTT. Yes, I want to ask another question. 

Chairman BAKER. If this can be your final, we will wrap up, Mr. 

Scott. 

Mr. SCOTT. Even if there are some Home Loan Banks with inadequate capital, your proposal doesn’t appear to adequately differentiate such home loan banks from others that have plenty of capital. 

I mean, why not? 

And how do you justify requiring the same capital for cash and 

cash equivalents as you require for mortgages and relatively high 

risk securities? And what analysis have you done to justify the proposal? 

And I do understand that you were asked to disclosure your 

analysis before, but you refused. Why? 

Mr. ROSENFELD. Well, I don’t recall the specific facts, but I can’t 

imagine I refused to disclose an analysis. I can tell you that the 

issue that you are alluding to, in terms of the potential risk waiting for different types of assets, I think, is an issue that has been 

raised by many people. 

I think the notion of 1 percent for all kinds of assets needs to 

be seriously revisited. We intend to do so. And I think there is a 

great deal of merit in the—as I mentioned with the commentators, 

I think there is a great deal of merit in your question. 

The answer is, I mean, the very simple answer is when you’re 

doing this sort of thing we start with a very simple principle. What 

we have come to understand, through the benefit of the comments, 

is that the simple principle may be a better principle if it’s someVerDate 0ct 09 2002 13:44 Mar 20, 2007 Jkt 031546 PO 00000 Frm 00028 Fmt 6633 Sfmt 6633 K:\DOCS\31546.TXT HFIN PsN: TERRIE
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what more complex. And we are very concerned that the principle, 

as proposed in the rule simply might lead to what could be poor 

business judgement on the part of bank management. 

And again, as I said in my testimony, that is something we clearly want to avoid. So, we are going to do whatever we can to get 

away from anything that would create poor business judgement on 

the part of management. 

Mr. SCOTT. Mr. Chairman, I am going to thank you for your indulgence on that, and the question, and I certainly want to submit 

this very important article, very timely, about the lack of affordable 

housing and its impact on working class folks, for the record. 

Chairman BAKER. Without objection, Mr. Scott. 

And we will keep the record open, so if members choose to submit additional written inquiries of the chairman, they certainly 

may do so. 

I want to express my appreciation to you, Mr. Chairman, for 

being available, for coming before the committee. It is clear that 

Members have a number of considerable concerns about the proposal, but I was pleased to hear your comment indicating that the 

rule is still subject to potential modification, that you will move 

ahead slowly, listening to those legitimate concerns that have been 

raised, and will continue to advise the committee as to the intended consequences of this rulemaking process. And for that, I am 

appreciative. 

And thank you for your courtesy in appearing here today. Our 

meeting stands adjourned. 

[Whereupon, at 11:40 a.m., the hearing was adjourned.] 

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A P P E N D I X

September 7, 2006

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