U.S. GOVERNMENT PRINTING OFFICE

WASHINGTON : 

For sale by the Superintendent of Documents, U.S. Government Printing Office

Internet: bookstore.gpo.gov Phone: toll free (866) 512–1800; DC area (202) 512–1800

Fax: (202) 512–2250 Mail: Stop SSOP, Washington, DC 20402–0001

95–603 PDF 2004

S. HRG. 108–581

NOMINATIONS OF: MARK C. BRICKELL,

ALICIA R. CASTANEDA AND THOMAS J. CURRY

HEARING

BEFORE THE

COMMITTEE ON

BANKING, HOUSING, AND URBAN AFFAIRS

UNITED STATES SENATE

ONE HUNDRED EIGHTH CONGRESS

FIRST SESSION

ON

NOMINATIONS OF:

MARK C. BRICKELL, OF NEW YORK, TO BE DIRECTOR OF

OFFICE OF FEDERAL HOUSING ENTERPRISE OVERSIGHT

ALICIA R. CASTANEDA, OF THE DISTRICT OF COLUMBIA

TO BE A MEMBER OF THE BOARD OF DIRECTORS OF

FEDERAL HOUSING FINANCE BOARD

THOMAS J. CURRY, OF MASSACHUSETTS, TO BE A MEMBER OF

THE BOARD OF DIRECTORS, FEDERAL DEPOSIT INSURANCE CORPORATION

JULY 22, 2003

Printed for the use of the Committee on Banking, Housing, and Urban Affairs

(

COMMITTEE ON BANKING, HOUSING, AND URBAN AFFAIRS

RICHARD C. SHELBY, Alabama, Chairman

ROBERT F. BENNETT, Utah

WAYNE ALLARD, Colorado

MICHAEL B. ENZI, Wyoming

CHUCK HAGEL, Nebraska

RICK SANTORUM, Pennsylvania

JIM BUNNING, Kentucky

MIKE CRAPO, Idaho

JOHN E. SUNUNU, New Hampshire

ELIZABETH DOLE, North Carolina

LINCOLN D. CHAFEE, Rhode Island

PAUL S. SARBANES, Maryland

CHRISTOPHER J. DODD, Connecticut

TIM JOHNSON, South Dakota

JACK REED, Rhode Island

CHARLES E. SCHUMER, New York

EVAN BAYH, Indiana

ZELL MILLER, Georgia

THOMAS R. CARPER, Delaware

DEBBIE STABENOW, Michigan

JON S. CORZINE, New Jersey

KATHLEEN L. CASEY, Staff Director and Counsel

STEVEN B. HARRIS, Democratic Staff Director and Chief Counsel

PEGGY R. KUHN, Senior Financial Economist

MARK A. CALABRIA, Senior Professional Staff

MARTIN J. GRUENBERG, Democratic Senior Counsel

JONATHAN MILLER, Democratic Professional Staff

JOSEPH R. KOLINSKI, Chief Clerk and Computer Systems Administrator

GEORGE E. WHITTLE, Editor

(II)

CONTENTS

TUESDAY, JULY 22, 2003

Page

Opening statement of Chairman Shelby ................................................................ 1

Opening statements, comments, or prepared statements of:

Senator Sarbanes .............................................................................................. 3

Senator Reed ..................................................................................................... 4

NOMINEES

Mark C. Brickell, to New York, to be Director, Office of Federal Housing

Enterprise Oversight ........................................................................................... 5

Biographical sketch of nominee ....................................................................... 32

Responses to written questions of:

Senator Corzine ......................................................................................... 58

Senator Reed .............................................................................................. 65

Senator Sarbanes ...................................................................................... 71

Alicia R. Castaneda, of the District of Columbia, to be a Member of the

Board of Directors, Federal Housing Finance Board ........................................ 25

Biographical sketch of nominee ....................................................................... 38

Response to written questions of Senator Carper .......................................... 72

Thomas J. Curry, of Massachusetts, to be a Member of the Board of

Directors, Federal Deposit Insurance Corporation ............................................ 26

Biograhpical sketch of nominee ....................................................................... 46

ADDITIONAL MATERIAL SUPPLIED FOR THE RECORD

Letter to Chairman Shelby from William J. Donovan, Senior Vice President,

National Association of Federal Credit Unions ................................................. 73

(III)

(1)

NOMINATIONS OF:

MARK C. BRICKELL, OF NEW YORK

TO BE DIRECTOR, OFFICE OF FEDERAL

HOUSING ENTERPRISE OVERSIGHT

ALICIA R. CASTANEDA, OF THE

DISTRICT OF COLUMBIA

TO BE A MEMBER OF

THE BOARD OF DIRECTORS

FEDERAL HOUSING FINANCE BOARD

THOMAS J. CURRY, OF MASSACHUTTES

TO BE A MEMBER OF

THE BOARD OF DIRECTORS

FEDERAL DEPOSIT INSURANCE CORPORATION

TUESDAY, JULY 22, 2003

U.S. SENATE,

COMMITTEE ON BANKING, HOUSING, AND URBAN AFFAIRS,

Washington, DC.

The Committee met at 2:02 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 Committee will come to order.

We have three nominations this afternoon. I appreciate the willingness of the nominees to appear before the Committee today.

Today’s nominees, if confirmed, will play a very vital role in overseeing the safety and soundness of our Nation’s financial institutions. As the institutions regulated by the Office of Federal Housing Enterprise Oversight, the Federal Housing Finance Board, and

the Federal Deposit Insurance Corporation provide liquidity to our

Nation’s mortgage and business credit needs, strong oversight of

their soundness, I believe, is essential.

Two of today’s nominees would oversee the regulation of the

housing-related Government Sponsored Enterprises: Fannie Mae,

Freddie Mac, and the Federal Home Loan Bank System. These are

large enterprises. Collectively, Fannie Mae and Freddie Mac carry

$1.6 trillion in assets on their balance sheets and have outstanding

debt of almost $1.5 trillion. The Federal Home Loan Banks are not

2

far behind, with combined assets of over $780 billion and outstanding advances to member institutions of $495 billion.

I support the role played by all the housing GSE’s. Home Loan

Bank advances are a vital resource for financial institutions nationwide. The secondary mortgage market liquidity provided by Fannie

Mae and Freddie Mac, also serves as an important source of funds

for our Nation’s mortgage market. By enhancing liquidity, the Enterprises make possible the lending activity that is critical to economic growth and to expanding homeownership.

Due to the importance of the housing GSEs’ mission and the size

of their assets, I believe that better disclosure of pertinent financial

information, essentially greater transparency, is important for the

protection of taxpayers and investors.

Last Thursday, this Committee examined OFHEO’s oversight of

Fannie Mae and Freddie Mac and their accounting practices. I remain troubled by what appear to be lapses of monitoring at

OFHEO. I also remain concerned that appropriate accounting procedures have not been performed by one of the institutions which

OFHEO oversees. I believe the integrity of financial data is vital

to measuring safety and soundness.

Also of great importance is the safety and soundness of our banking system. The Federal Deposit Insurance Corporation has served

a vital role in assuring depositors that their money, often their life

savings, is safe. This assurance has prevented the banking crises

that characterized the first 150 years of our country’s existence. It

is of the utmost importance to maintain the public’s confidence in

the safety of our financial institutions.

While the current Federal Deposit Insurance System provides a

high level of confidence to the individual depositor, I believe the

system presently lacks flexibility and contains inefficiencies which

could lead to costly problems in the long run. Reducing these inefficiencies ranks high on this Committee’s agenda.

I again want to thank all of the witnesses for appearing before

the Committee today. Our first panel is Mr. Mark C. Brickell, nominated by the President to be Director of the Office of Federal

Housing Enterprise Oversight. Most recently, Mr. Brickell served

as the CEO and Director of Blackbird Holdings, where he oversaw

the company’s development of its swaps and interest rate derivatives trading system. Over the course of 15 years, Mr. Brickell also

served in various positions with JP Morgan and Company.

Our second panel this afternoon is Ms. Alicia Castaneda, nominated to be a Member of the Board of Directors of the Federal

Housing Finance Board and Mr. Thomas J. Curry, nominated to be

a Member of the Board of Directors of the Federal Deposit Insurance Corporation.

Ms. Castaneda has over the course of almost two decades worked

her way up the ranks at Bank of America. Having started as a

clerk at the Bank of America’s International Desk, she has risen

to the position of Market Executive in the International Private

Banking Division and previously as Senior Vice President in the

Treasury Division. During this time, Bank of America has grown

to become the world’s second largest bank.

Mr. Curry currently serves as Commissioner of Banks for the

Massachusetts Division of Banks. Previously, he served as First

3

Deputy Commissioner of Banks and as Acting Commissioner of

Banks. Earlier in his career, Mr. Curry served as assistant general

counsel for the Massachusetts Division of Banks and as an attorney with the Massachusetts Secretary of State.

Senator SARBANES.

STATEMENT OF SENATOR PAUL S. SARBANES

Senator SARBANES. Thank you very much, Mr. Chairman. I am

pleased in joining you in welcoming these nominees before the

Committee this afternoon. Since we will address both Tom Curry

and Alicia Castaneda subsequently in a panel, I will reserve my

comments with respect to their nominations until that time.

Mr. Chairman, last week you convened an important hearing to

review the regulatory response to the accounting problems at

Freddie Mac. That hearing underscored the importance of the role

of the Office of Federal Housing Enterprise Oversight—OFHEO—

and its Director in supervising the so-called Government Sponsored

Enterprises, Fannie Mae, and Freddie Mac.

Today’s hearing with our lead-off nominee, Mr. Mark Brickell,

who has been nominated to be the Director of the Office of Federal

Housing Enterprise Oversight, goes to the point of how effectively

will the housing GSE’s be supervised.

In 1992, we passed the Federal Housing Enterprises Financial

Safety and Soundness Act. In that Act, the Congress found that

Fannie Mae and Freddie Mac have an important public mission to

provide housing and to help sustain the Nation’s economy. And I

take it from what was said at last week’s hearing that we continue

to consider Fannie Mae and Freddie Mac to be vital in serving

these functions.

The Act states:

An entity regulating such enterprises should have the authority to establish capital standards, require financial disclosure, prescribe adequate standards for books

and records and other internal controls, conduct examinations when necessary, and

enforce compliance with the standards and rules that it establishes.

This is clearly a critical role whose importance has only been

heightened by recent events. The Director of OFHEO requires a

person of exceptional independence, judgment, and commitment to

OFHEO’s regulatory mission.

Mr. Brickell, who has been nominated for this position, is knowledgeable with regard to financial matters. He worked for 25 years

at JP Morgan and has been the CEO of Blackbird Holdings, Inc.,

since leaving Morgan in 2001.

Serious questions, however, have been raised as to whether he

is the right person for this position at this time. This morning’s

Washington Post has a strongly worded editorial with respect to

this nomination, and, Mr. Chairman, I would like to take a moment to quote from it.

Chairman SHELBY. Go right ahead.

Senator SARBANES. I am quoting from a Washington Post editorial this morning.

The nominee, Mark C. Brickell, a former Managing Director at JP Morgan Securities, has a long track record of opposing Government regulation of financial services

and leaving most of the work to market forces. In particular, Mr. Brickell . . . led

lobbying efforts to prevent regulation of derivatives, the arcane financial instruments that are critical to the risk management operations of Fannie Mae and

4

Freddie Mac. Questionable accounting for derivatives is at the heart of the recent

troubles at Freddie Mac. Mr. Brickell also weighed in on the side of Fannie Mae

and Freddie Mac when they argued that they should be able to set up their own

tests—rather than one devised by OFHEO—for whether they had adequate capital

on hand, a change that OFHEO said would diminish its ‘regulatory independence

and rigor.’

Mr. Chairman, as we review this nomination, it is important to

scrutinize Mr. Brickell’s record closely as we address the question

of who should be directing OFHEO and carrying out its importance

regulatory mission.

Thank you, Mr. Chairman.

Chairman SHELBY. Senator Reed.

STATEMENT OF SENATOR JACK REED

Senator REED. Thank you very much, Mr. Chairman, for scheduling this hearing, and I want to thank Mr. Brickell. We had a

chance to chat before in my office.

As Senator Sarbanes has indicated, the position of Director of

OFHEO has recently taken on added importance. As we all know,

Fannie Mae and Freddie Mac have played an invaluable role in

creating a stable, liquid, and national mortgage market in our

country, and this has resulted in our country having one of the

highest homeownership rates in the world.

Strong, effective oversight of Fannie and Freddie is clearly important to their continued success, and as we heard at the hearing

last week from current OFHEO Director Armando Falcon, recent

events at Freddie Mac have driven this point home with some

force.

In addition to being financially sophisticated, I believe that the

Director of OFHEO needs to have an outlook and temperament

that will convince the Government Sponsored Enterprises, investors, and Congress that he would be a tough and rigorous regulator. What concerns me about the present nomination of Mr.

Brickell is that he has worked for over two decades to challenge the

very idea of Government regulation of financial markets in many,

many different ways.

First and foremost, Mr. Brickell, you have worked to oppose any

type of regulation of financial derivatives or any type of transparency requirements for derivatives dealing or trading. You have

also staunchly advocated rolling back regulations which have

helped the Federal Government regulate Fannie and Freddie. Let

me note a few examples.

You proposed to deregulate financial derivatives entirely and

allow sales of them to retail investors. You actually wrote a letter

to OFHEO in March 2000 arguing that the GSE’s should be able

to choose their own internal models for determining their riskbased capital requirements, which is essentially arguing that they

should be able to regulate themselves. Such an approach could only

have a multiplier effect on the consequence of any financial uncertainties or inappropriate assumptions, such as the ones that

Freddie Mac has recently encountered or the duration gap disclosures that Fannie Mae made last year.

In addition, the use of internal models would have given each institution the ability to reduce, at the margin, the stringency of the

risk-based capital standards.

5

Finally, you were in the forefront of the effort to oppose the Financial Accounting Standards Board from implementing Financial

Accounting Standards Board Statement 133 and strongly supported

legislation to undermine the independence of FASB with regard to

established accounting rules for banks.

These are not the types of actions that an individual takes if they

believe deeply in the role of Government regulators in the marketplace, who not only understand the primacy of the marketplace but

also the critical role of robust, vigorous regulation, not as an afterthought but as a primary responsibility.

Now, Mr. Brickell no one doubts your intellectual abilities for

this job or your great efforts over many years, but I am just not

sure that someone who has consistently opposed regulation, transparency, and oversight in the derivatives market should be director

of an agency that is designed to demand all of the above from the

GSE’s.

I look forward to this hearing. I must, with some regret, say that

I also feel compelled to attend the briefing by Ambassador Bremer

in a few moments. I was in Baghdad with the Ambassador about

2 weeks ago and left there with many more questions than were

answered then. I will look to review carefully the transcript because the questions I pose need answers.

Thank you.

Thank you, Mr. Chairman.

Chairman SHELBY. Mr. Brickell, will you stand and hold up your

right hand and be sworn.

Do you swear or affirm that the testimony that you are about to

give is the truth, the whole truth, and nothing but the truth, so

help you God?

Mr. BRICKELL. I do.

Chairman SHELBY. Do you agree to appear and testify before any

duly-constituted committee of the Senate?

Mr. BRICKELL. I do.

Chairman SHELBY. Thank you.

Your written statement, if any, will be made part of the record.

If you want to introduce your family now, you may do so.

STATEMENT OF MARK C. BRICKELL, OF NEW YORK

TO BE DIRECTOR

OFFICE OF FEDERAL HOUSING ENTERPRISE OVERSIGHT

Mr. BRICKELL. Thank you and Chairman Shelby, Ranking Member Sarbanes, and Members of the Committee. I am honored to appear before you today, and I thank you, Mr. Chairman, for holding

this hearing.

I appreciate the opportunity to introduce my family. I want to

thank my wife, Anita; my daughter, Amanda; and my daughter,

Missye; my son, Matt, for joining me here. Since it is July, no one

here is missing classes in school, but three-fourths of the members

of the group are employed in the labor force. Those among them

who are hourly workers are giving up a day’s pay to show their

support. I appreciate that sacrifice, and I appreciate the other sacrifices that the family will make if I am confirmed.

The President has nominated me to serve as the Director of the

Office of Federal Housing Enterprise Oversight. I admire President

6

Bush and his leadership of our country in the face of great challenges. It is a humbling thing to be called to public service, and

particularly so to be called by this President, for this position, at

this time. OFHEO has a brief history and challenges of its own,

and if you choose to affirm my nomination, I will be only the third

Director of the Office, and it is a responsibility which I take very

seriously.

An important part of the responsibilities of OFHEO Director is

to work with the Senate Banking Committee. I have had that privilege for more than a decade, working closely with Members of the

Committee and with their thoughtful and talented staff on issues

relating to banking and financial services activity. This Committee

plays an important role in establishing a firm foundation for the

Nation’s capital markets and, should I be confirmed, it will be an

honor to work with you in the years ahead.

Much capital raised in the American capital markets finances the

homes of American citizens. I believe that housing finance is important not only because it makes a large contribution to our Nation’s

economy, but also because homeownership strengthens the fabric of

our society. For many, indeed for most Americans, owning a home

is a way to grasp the first rung on the economic ladder. In families

like my own, when I was growing up, it was a way for my parents

to send their children to the best public schools that they could

find. I strongly support the fair housing policies, the Minority

Homeownership Initiative to add more than 5.5 million minority

homeowners by the end of the decade in this country, and the affordable housing goals of President Bush and Secretary Martinez.

I hope that I can help more families of moderate and low income

to share those benefits of homeownership by helping OFHEO to

carry out its regulatory mission. Those benefits were certainly important in my family and important to me personally.

OFHEO’s mission today is to ensure that Fannie Mae and

Freddie Mac operate safely and soundly. Congress created OFHEO

in 1992 in express recognition of the importance of the long-term

financial health of these Government Sponsored Enterprises. I understand the importance of that mission, and if I am confirmed, I

will vigorously enforce the rules and regulations of OFHEO to the

full extent of the authority which Congress entrusts in the Director

of OFHEO. I will also work closely with this Committee and all

Members of Congress to improve the statutory framework within

which OFHEO operates.

I believe that my career experience will help me achieve those

goals. I have spent 25 years working at JP Morgan. I have spent

the last 2 years as Chief Executive of Blackbird Holdings, Inc. It

has been an opportunity to learn a great deal about the financial

markets, financial technology, and risk management practices at

leading financial institutions. If you choose to affirm my nomination, I will use that experience and dedicate every ounce of my energy and judgment to pursuing the important challenges facing

OFHEO and our housing finance system at this important time.

Thank you, and I look forward to answering your questions.

Chairman SHELBY. Thank you, Mr. Brickell.

You heard Senator Sarbanes’ comments and some of his concerns

about the need for a strong and effective regulator of Fannie Mae

7

and Freddie Mac, and I think his view is pretty widely shared by

a lot of us on this Committee. Mr. Brickell, what makes you the

right person at this right time for this job? We respect that you

have been appointed by the President of the United States for this

job. We respect your education and your background and your experience and your success.

Mr. BRICKELL. Well, Mr. Chairman, I have spent more than 25

years in the financial markets, and that has given me exposure to

complicated financial transactions like derivatives. It has given me

an understanding of risk management at large financial institutions. It has given me the chance to see not only the strengths but

also the weaknesses of financial markets and financial institutions.

And while other people on Wall Street would be able to say those

things, I think there is something else that I have, and I have enjoyed very much the opportunity to work over more than a decade

with policymakers here in Washington on regulatory issues. I

would hope that that experience, both in the markets and with policy discussions, would be helpful to OFHEO at this time.

Chairman SHELBY. My understanding is that OFHEO has never

taken a formal enforcement action against either Freddie Mac or

Fannie Mae during their existence. Do you believe that OFHEO

has used the full extent of its enforcement powers? Do you believe

that OFHEO needs additional enforcement powers? Have you

thought about that in any depth?

Mr. BRICKELL. Fannie Mae and Freddie Mac perform a vitally

important function for housing finance in this country. They bring

capital market benefits to housing finance. And in that way, they

give us the broadest, deepest, most successful housing markets in

the world. That means expanded home loan opportunities. That

means reduced costs for homeowners.

Part of the way that they are able to do that is because they are

regulated financial institutions. In my career in financial services,

every day that I have spent at my desk, every day that I have

worked has been spent at a regulated financial institution. I know

how important it is for depositors or lenders, investors in general,

to have confidence in the regulator who oversees a financial institution. And I think it is essential that OFHEO be strong, fair, rigorous in what it does, and be perceived to be those things.

If I am confirmed, I would look forward to conducting the operations of OFHEO in a way that give that confidence to investors

and working with the Committee to make sure that the framework

in which OFHEO operates enables them to do that.

Chairman SHELBY. Mr. Brickell, when a hedge is ineffective, derivatives could increase risk rather than minimize risk. Should

that hedging risk, whatever it might be, be factored into a GSE’s

risk-based capital level?

Mr. BRICKELL. A risk-based capital rule that achieves its objective will be a rule that ensures the institution is not too thinly capitalized to support the risks that it takes. So the capital rules have

to operate in a way that identify the real risks that the institution

is taking and ensure that the right amount of capital is there.

Chairman SHELBY. Fannie Mae and Freddie Mac enter into a

large volume of derivative trades. The number of counterparties

with which they trade, however, is quite small. The inability of any

8

of these counterparties to meet their side of the trade could be a

significant cost to either Fannie Mae or Freddie Mac.

Could you explain to the Committee how derivative dealers monitor counterparty risk to a purchaser of derivatives?

Mr. BRICKELL. Sure. I am glad to do that, Senator. And I should

say as I do that these are general comments about derivatives activity in general.

Chairman SHELBY. Sure. We know.

Mr. BRICKELL. Not specific to these two Government Sponsored

Enterprises.

Chairman SHELBY. That was a general question.

Mr. BRICKELL. The contracts we are talking about, these risk

management contracts, last for many years, and an interest rate

swap could be 5, 10, or 20 years in length. So the participants in

swap activity have cared deeply about the credit quality of the

counterparty on the contract and the ability of their counterparty

to perform.

There are several different ways that participants in these swap

contracts can manage the risks that they are taking. One is by understanding carefully the business and the character of the firms

they are doing business with, and limiting their counterparty relationships to well-capitalized, sometimes well-regulated firms.

In cases where one sees a limited number of counterparties, it

may very well be because the party in question has chosen to enter

into contracts with others that he knows well and trusts and whose

credit he can judge.

Another thing that firms can do is to accept collateral or post collateral with those with whom they trade, and these techniques

have been not only effective in keeping credit losses in derivatives

activity below the level of credit losses in other banking activities,

but also in giving a level of disciple to the swap business that is

unusual and a very healthy thing.

Chairman SHELBY. Senator Sarbanes.

Senator SARBANES. Thank you very much, Mr. Chairman.

Mr. Brickell, I first want to ask you a bit about the capital rules

for the GSE’s. OFHEO’s lead responsibility is to establish capital

standards for Fannie Mae and Freddie Mac. OFHEO’s risk-based

capital test just went into effect last year. In March 2000, you sent

a comment letter on OFHEO’s proposed risk-based capital rule in

your capacity as Managing Director of JP Morgan. The thrust of

your letter, as I understand it, was to recommend that OFHEO follow an internal models approach with respect to establishing the

capital test, in other words, allowing Fannie and Freddie to use

their own models. OFHEO responded to your comment letter by

stating that allowing Fannie and Freddie to use their own models

to calculate their own capital requirements could result in a weaker and inconsistently applied standard. Models that the Enterprises develop themselves would inevitably differ in their details,

which could result in significant variations and make it difficult to

apply the stress test consistently.

OFHEO went on and said that developing its own model is in the

interest of regulatory independence and rigor and gives OFHEO

greater flexibility and the ability to independently test alternative

risk scenarios which ensures the integrity of the test.

9

What is your view of this OFHEO response, or the broader question, your view of the internal model approach based on models developed by the GSE’s thank-you-very-much as being preferable to

the approach adopted by OFHEO?

Mr. BRICKELL. I am glad you asked that question. There has

been a robust discussion among financial regulators and participants in the financial services businesses over the last two decades

about how to construct the most useful, healthiest capital rules. It

is a discussion that has gone on within this country where we have

different kinds of institutions regulated by different regulators and

a discussion that Americans have had with financial services regulators from other countries, in forums like the Basel Committee. So

it is not surprising that different regulators would have different

views about what capital approach is best.

JP Morgan was one of about 20 financial services firms that submitted comment letters in response to OFHEO’s request for comment about their proposed capital rule. And the letter that you cite

is one that I signed for JP Morgan. I was actually the second signature on that letter. The first signer was Tim Ryan, who served as

the Director of the Office of Thrift Supervision at the height of the

S&L crisis. I think that anyone who knows Mr. Ryan’s record

would say that he was a fair but a very firm regulator.

Senator SARBANES. And by osmosis, does that carry over to you

since you were the second signature on the letter?

Mr. BRICKELL. You have the right conclusion, although that is

not the only reason you would reach it.

[Laughter.]

I, too, would strive to be a fair and firm regulator.

We sent that letter because we thought it would be helpful to

OFHEO to know our perspective on the framework of capital regulation that was being developed by the banking supervisors at the

same time. And what we did in our letter was described, the framework of capital rules being developed under the Basel scheme, and

being employed by the U.S. banking regulators. That system of regulation uses the internal models approach it is called. It requires

the banks to develop their own models, models that meet certain

standards, models that accurately capture, as we discussed a while

ago, the risks of the firm and identified the amount of capital that

is needed for the firm.

We encouraged, in our letter, OFHEO to take a flexible approach

like the approach the banking regulators take, rather than take an

inflexible approach. I think it is worth saying that a rigid regime

for capital is not necessarily a tough regime. Rigid rules give financial services firms an opportunity for regulatory arbitrage.

When the rules are spelled out with great precision, creative, innovative financial minds, and I am proud to have worked with

many, will sometimes find ways to achieve regulatory arbitrage,

and when they do the purpose of the capital rules is thwarted.

The approach we talked about in that letter, we believe, is more

demanding not only of the financial institution, but also more demanding of the regulator because the regulator would have to satisfy himself that the models being used by the financial institution

achieve the purpose of the capital regulation and do not lead to

leakage of capital through regulatory arbitrage.

10

I think it was something worse considering, and OFHEO has not

adopted it. Indeed, OFHEO is constrained, in some ways, by the

statute, which hard wires into law many of the parameters of the

capital rule. One thing that the Committee may wish to consider,

as it talks about ways to strengthen OFHEO, is to give OFHEO the

ability to tailor its capital rules as closely as possible to the risks

being taken by Fannie Mae and Freddie Mac.

Senator SARBANES. I take it from that answer that you continue

to hold to the position that was expressed in your March 2000 letter, even though you are now being considered to become the Director of OFHEO, which has not followed the internal models path; is

that correct?

Mr. BRICKELL. What I am saying is that the proposal, the information that we presented in the comment letter is information that

was worthy of consideration by OFHEO. It is a system of capital

regulation which is used by regulators who are, I believe with good

reason, well-respected: The banking supervisors in this country, the

Federal Reserve, the Comptroller of the Currency, the FDIC. They

operate under this framework.

I am not able to say whether this framework or the way they do

it is tougher, weaker, or whether they are perceived as stronger or

softer than OFHEO itself, but I think that it is important for the

Director of OFHEO, it is important for OFHEO to be well aware

of the approaches to regulation that are being taken by other wellrespected U.S. financial services regulators and to interact with

them, give them good ideas and take good ideas from them. I think

that is a healthy process, and I would hope to learn from those

other financial services regulators and take their best ideas and

bring them to bear at OFHEO on Fannie and Freddie.

Senator SARBANES. So you are entertaining the prospect of

changing the OFHEO rule with respect to the capital standards?

Mr. BRICKELL. We are talking here about an innovative area of

American finance and one in which advances have come at a very

rapid rate. The banking supervisors are constantly revising and improving the capital rules that they use for the banks. And I believe

that OFHEO should constantly review and upgrade, strengthen the

capital rule that it uses for Fannie and Freddie. If it does not do

that, it will inevitably fall behind the quality of regulation done by

the banking authorities.

Senator SARBANES. So you are entertaining allowing the Fannie

and Freddie to set their own model for their capital standards; is

that correct?

Mr. BRICKELL. If I am confirmed as the Director of OFHEO, I

will have access to a great deal more information than I have had

as a co-author of a comment letter on capital regulation, and I do

not think it is prudent to prejudge or anticipate what I would decide when I learn more about Fannie and Freddie, how they operate, and the benefits of operating under the OFHEO framework.

What I do think is important is to show you that I would enter

this job with an open mind, with a willingness to look for ways to

strengthen OFHEO’s regulation of Fannie and Freddie because it

is essential, in my opinion, and I hope in the opinion of the Committee that these two large, world-class financial institutions have

a world-class financial regulator with adequate resources and with

11

the statutory ability to be just as rigorous in its approach as the

banking supervisors are.

Senator SARBANES. I see my time for this round has run out, and

I will come back and revisit some other issues with you. I only note

again that the Post editorial this morning was pretty strong on this

very issue about whether these GSE’s should be allowed to set

their own tests, and you are now opening up the prospect that that

is what they would be allowed to do. And the Post goes on to say,

‘‘The Banking Committee needs to assess whether he—’’ meaning

Mr. Brickle ‘‘—has the right attitude. Regulators with a preset

point of view and a disdain for tough enforcement have already

done much damage during this Administration.’’

Mr. Chairman, I presume there are going to be further rounds.

Chairman SHELBY. There will be more rounds.

Senator Carper.

Senator CARPER. Thank you, Mr. Chairman.

Mr. Brickell, good to see you again. Thank you for visiting with

me last week.

Mr. BRICKELL. Thank you, Senator.

Senator CARPER. Let me just ask, and I apologize if any of these

questions have been asked before. If they have been, just let me

know, and I will move on to another question.

Let me just ask, what is your view, if you will, of the risk-based

capital rule finally put into effect by OFHEO, would you still prefer

the internal model approach that is being used in developing the

Basel II Accord?

Mr. BRICKELL. We have, in fact, talked a little bit about that, but

I would like to summarize what we have said, particularly so that

my view is clear.

OFHEO has a tightly drawn statute under which it imposed its

capital rule on Fannie Mae and Freddie Mac. It is a statute which

hard-wires into the law itself many of the parameters that would

be used to calculate the required capital for the two institutions.

And our comment letter talked about the benefits for the regulator

and for the capital strength of the regulated institution of having

enough flexibility to do what the banking supervisors do.

This is an area of financial theory and practice which is evolving

very rapidly. We continue to learn new things each year about how

to make better estimates of the risks being taken and of the capital

required for financial institutions. I think it is important for

OFHEO to be able to continuously upgrade the capital rules that

it uses in its oversight of Fannie Mae and Freddie Mac in order to

ensure that it doesn’t fall behind the quality of regulation used by

other American regulators, and the banking regulators in particular. They have spent a great deal of time on capital rules. They

use the approach we described in the letter, and I think it has been

beneficial to the banking system.

Senator CARPER. Do you believe the U.S. banking system is, at

the current time, overcapitalized, undercapitalized, appropriately

capitalized? Where are we?

Mr. BRICKELL. Well, that is a big question.

Senator CARPER. Actually, it is a pretty small one. The answers

are bigger than the question.

Mr. BRICKELL. It would require a very big answer.

12

Senator CARPER. I only have 5 minutes.

Mr. BRICKELL. I will keep it short. I do believe this; there has

been a tremendous amount of energy and effort dedicated to coming up with excellent capital rules by the banking supervisors in

this country, and there are several of them, of course, and banking

supervisors in other countries.

They have worked together in Basel to come up with the Basel

Framework for Capital Regulation, and there has been a cross-fertilization of what the supervisors are learning from the regulators

in other countries and what the people in the banking institutions

are doing to improve their internal management of risks.

What is done internally is feeding the regulators. What the regulators in the United States learn from overseas is feeding back in

the form of capital requirements for the U.S. firms. So, I think that

capital regulation in this country is in better shape than it is ever

been.

Senator CARPER. Maybe one more.

Do you think that the Basel II Accord will lower the level of capital in the U.S. banking system? And this kind of goes back to the

last question, but would that be a desirable objective? Is your preference for the internal model approach for establishing capital

standards for GSE’s based on a view that the internal model approach would result in a lower level of capital?

Mr. BRICKELL. It is certainly not. As I have just described to Senator Sarbanes, in response to his question, the approach outlined

in the comment letter is the approach used by the banking authorities in the United States because it is more rigorous in their view

than the more rigid, capital rule employed by OFHEO.

So, I do not believe that Basel II will weaken capital regulation,

and I certainly believe that it is important for the regulator of

Fannie and Freddie to use a capital rule which is strong, every bit

as good as the rules used by the banking authorities and one which

will give confidence to investors.

Senator CARPER. Good enough. Thanks.

Mr. Chairman, as you know, we have Ambassador Bremer, who

is addressing us up in a classified briefing. I am going to slip up

there. I thank you for being here, and thank you for your willingness to serve.

Mr. BRICKELL. Than you, Senator.

Chairman SHELBY. Mr. Brickell, since its publication, Financial

Accounting Standard 133 has generated a great deal of interest

among practitioners and regulators. Do you believe that the Financial Accounting Standards Board came to the appropriate conclusions with FAS 133?

Mr. BRICKELL. I remember the discussions about FAS 133, and

they went on for many years, and they were vigorous discussions.

There were hundreds of letters sent——

Chairman SHELBY. A lot of comment.

Mr. BRICKELL. —on that rule. Many of them were signed by the

chief executives of the companies who would be affected, and there

were concerns expressed even by regulators. I remember Fed

Chairman Greenspan expressing his concern about the rule at one

point in the process.

13

I worked for institutions that participated in that comment process, and I worked hard to make sure that when FAS 133 was

adopted, it would make it easier for investors and the readers of

financial statements to understand the business activities of the reporting companies.

Now, FAS 133 is part of generally accepted accounting principles.

It is GAAP.

Chairman SHELBY. And central to a recent controversy, right?

Mr. BRICKELL. Indeed, it is, and it is not an option. It is not an

alternative. There is not room to interpret it in different ways.

Chairman SHELBY. It is a must now; is it not?

Mr. BRICKELL. It is GAAP, and it has to be used. Fannie and

Freddie are required, by law, to report their results according to

GAAP. They have to abide by FAS 133, and if I am confirmed as

Director of OFHEO, I will make sure that they do comply, not only

with that one accounting rule, but also with all of the GAAP.

Chairman SHELBY. In a copy of today’s Wall Street Journal, Professor Stephen Ryan is an Accounting Professor at New York University, stated that on a fair-value basis, both Freddie Mac and

Fannie Mae are undercapitalized.

Do you believe this to be an accurate statement or are you not

on the inside of all of the information yet; whatever, should fairvalue accounting be incorporated, Mr. Brickell, into Freddie Mac

and Fannie Mae’s risk-based capital standard?

Mr. BRICKELL. I haven’t read the article, and I am not familiar

with the professor or his views. We certainly want to make sure

that investors, academics, observers of Fannie and Freddie, have

confidence in their level of capital, and as Director of OFHEO, if

I were fortunate enough to be confirmed, I would want to make

sure that we understood why it is that some people have doubts

of that kind and that we did whatever we thought was necessary

to address those doubts.

I do not think it is good for these Government Sponsored Enterprises to leave investors in doubt about their capitalization. I think

the marketplace has to be confident that they have the right

amount of capital, that they are being regulated in a firm, but fair,

way, and I would look forward to doing that if I were confirmed.

Chairman SHELBY. I know a little of your background in the private sector, but if you are confirmed as the Director of OFHEO,

your position will be totally different from what it was in the marketplace; is that correct?

Mr. BRICKELL. Absolutely.

Chairman SHELBY. And your obligation and responsibilities as

Director, among other things, would be to make sure, to the best

of your ability and your staff’s ability, that Freddie Mac and

Fannie Mae are run well, run the right way; in other words, they

would be in a position, you would be coming from the private sector, free market, into a job as a regulator to make sure that these

companies, these GSE’s are run right.

And, hopefully, if they ever got in trouble—I hope they will not—

that the taxpayer would not wind up bailing them out. You see my

concerns; do you not?

Mr. BRICKELL. I do, indeed. I not only see those concerns, but I

also share those concerns.

14

Chairman SHELBY. You would have to be a hands-on regulator

in your position, assuming that you are confirmed and sworn in as

the Director. It would be your paramount responsibility, as Director, to be a hands-on regulator, to know what they are doing that

could affect their financial well-being or ultimately, as a lot of people think, maybe the taxpayers’ well-being, considering how large

they are, how important they are, and that they are GSE’s, notwithstanding all of the disavowing they are not Government entities. You understand what is out there.

Mr. BRICKELL. I do, Senator. When I was asked by the President

to consider accepting this appointment, I thought hard about

whether this was something that I could usefully do, and I believe

that what I have learned in the financial markets, and what I have

learned about public policy will be helpful to OFHEO in carrying

out its mission of ensuring that Fannie Mae and Freddie Mac are

run in a safe and sound way.

And to go a step beyond that, I have tried to pursue all of the

assignments I have been given in my career with a great deal of

energy. I do not think anyone who’s been working with me or

worked on the other side would accuse me of passivity or a lack of

energy.

Chairman SHELBY. I do not believe anybody has ever thought

that about you.

[Laughter.]

We do not want to think that about you later; in a different position, as a regulator, because you do bring to the table, let us face

it, you know what derivatives are. You probably created many of

them, if not, you have used them, and you know what they are.

They are hedges against risk, are they not, in a sense? They are

passing on a risk. Maybe some people call it a little insurance in

the marketplace, if used properly; is that correct?

Mr. BRICKELL. Yes, Mr. Chairman. You use these contracts to

shift risk. Most people, most of the time, use them to get rid of the

risks they do not want.

Chairman SHELBY. Pass it on.

Mr. BRICKELL. And take on some other risk that they do, and you

have to do it carefully, you have to understand what you are doing.

Chairman SHELBY. And you have to pay a premium to do that,

do you not?

Mr. BRICKELL. If you are getting rid of a risk and not taking one

back in return, then you have to pay somebody else a premium,

just as you say with an insurance contract.

Chairman SHELBY. But from your background, it seems to me

that you would perfectly understand, once you got into the particulars of the kind of models that Fannie Mae was using or Freddie

Mac was using to hedge this risk; would you not?

Mr. BRICKELL. I think I would be well-equipped.

Chairman SHELBY. And I hope you would be getting into that.

Mr. BRICKELL. I want to do that. I understand that is the job,

the nature of the job is to ensure these entities are run safely and

soundly, to make sure we have the best capital models we can and

to think more broadly about the risks these institutions face.

Chairman SHELBY. What do you think are the key elements, at

least as you conceive them, of a strong and effective regulator? In

15

other words, what kind of leadership would you bring to OFHEO

should you be confirmed?

Mr. BRICKELL. I think, Mr. Chairman, that for the regulator to

be strong and be effective, it has to have the right statutory authority, it has to have the right powers, it has to have adequate

resources and the assurance of those resources, it has to be able

to attract people of stature to help the entity carry out its mission,

and it needs to be led by people who are open-minded and who are

fair, but who are willing to be firm, strong, and rigorous in the pursuit of the Agency’s mission.

And I think that I was called to this task, in part, because I

would carry out this role in exactly that way.

Chairman SHELBY. Senator Sarbanes.

Senator SARBANES. I want to follow up on the Chairman’s question. I then have a couple of lines of questioning I want to ask you.

Is it your view that you cannot be in an effective regulator of

these GSE’s without substantial statutory change? You are constantly making reference to the statutory arrangements. I think

you are the first person—the current Director is seeking some statutory changes, but they are not of great extent. Is it your position

that you need significant statutory changes in order to be an effective regulator?

Mr. BRICKELL. No, sir, it is not. I am aware the current Director

has recommended several possible statutory enhancements, he

calls them.

Senator SARBANES. He is primarily seeking self-funding, but we

have not had anyone yet who has, in effect, said, well, we have not

really been able to do the job because of the statute under which

we are operating.

Mr. BRICKELL. And I certainly am not of that view. I understand

that there are recommendations from the existing Director for statutory changes and that there are also discussions underway here

in the Senate and in other parts of Capitol Hill, and I am aware

of those and happy to participate in them, but I think the time to

do that is when I have the knowledge that would come as the Director of OFHEO.

Senator SARBANES. The Dow Jones Newswire this week carried

a story, and I just want to read to you a paragraph from it and

then ask a question on the basis of that.

A former bank lobbyist nominated the regulate Freddie Mac fought an accounting rule that, in part, caused the company to restate earnings by as much as $4.5 billion. Mark C. Brickell, former lobbyist for JP Morgan and Chase and Company, led

an effort and helped draft legislation in 1998 to delay and gut a derivatives accounting rule known as Financial Accounting Standard No. 133.

‘‘He fought against the introduction of FAS 133, which was an attempt to make

derivatives more transparent,’’ said Randall Dodd, Director of the Derivatives Study

Center and former regulator at the Commodities and Future Trading Commission.

The battle over the accounting rule is significant, since Fannie Mae and Freddie

Mac both are among the largest users of interest rate derivatives, holding a combined notional balance of $1.3 trillion as of June 30, 2002.

Now, listening to your responses, first of all, is that an accurate

statement of the position you took with respect to FAS 133 back

then at the time?

Mr. BRICKELL. I thought it was important that FAS 133 be written in a way that it would increase the understanding of the business activities of the affected firms by investors and creditors, and

16

I, along with—I was one of the people at JP Morgan, and there

were many there who formulated the firm’s comment on that rule,

and there were hundreds of other institutions and regulators as

well who made comments about it.

I think it was the focus of a great deal of attention because it

was going to affect so many enterprises, and that is true, of course,

because so many of these firms use these risk-management contracts to manage risk.

Senator SARBANES. Well, that may be, but you were amongst

those that were opposed to it; is that not the case?

Mr. BRICKELL. I was among those who recommended changes

that could, in my view, have improved the rule. There were many

people who thought there ways to improve it, and indeed FASB’s

comment process solicits the views of those who think that there

are ways to make the rule better.

Senator SARBANES. As I understand your answer here today,

your position now is in support of FAS 133; is that correct?

Mr. BRICKELL. If I am confirmed as Director of OFHEO, I do not

have any choice about that, and I would pursue it eagerly as part

of the OFHEO mission. FAS 133 is the law of the land.

Senator SARBANES. Do you think it is an appropriate law of the

land?

Mr. BRICKELL. I do not get to think about it. My job is to make

sure that it is used. Fannie Mae, Freddie Mac do not have a choice

about this. They have to comply with GAAP, they have to comply

with FAS 133, and I, as Director——

Senator SARBANES. You are their regulator. Do you think that

this is an appropriate standard that they are being held to?

Mr. BRICKELL. Yes, I think it is appropriate.

Senator SARBANES. Why do you think it is appropriate now,

when you did not think it was appropriate then?

Mr. BRICKELL. It is the right standard because it has been adopted by the FASB and made a part of GAAP. When FASB has rules

under consideration——

Senator SARBANES. Is there a substantive argument as to why it

is the right standard now?

Mr. BRICKELL. I do not get to the substantive argument, Senator.

Senator SARBANES. We had another nominee before this Committee who wanted to take that position. Actually, she never got

confirmed.

[Laughter.]

Which was that somehow the regulator does not express or have

a view on what is the appropriate regulatory framework, that

somehow the regulatory framework is simply handed to you from

somewhere else, and your only job is to implement it.

Most regulators do not come in with that attitude. They recognize that they have an important role in shaping the framework

within which the institutions that they are going to be regulating

are going to function. So it becomes important to probe and understand what your position is on the substance of these matters.

Mr. BRICKELL. I do not know the case to which you are referring

and whether the framework of regulation that was under discussion in that case was the framework administered by the agency

that the person would have joined.

17

I certainly am willing to consider improvements to the statutory

framework and to the regulations implemented by OFHEO in the

proper time and place and in consultation of course with the Members of this Committee who would take the lead on any statutory

change.

But I am focusing here and responding to your question with respect to FAS 133, and there is a time and place for companies and

regulators to make their comments about the accounting rule and

those comments have been made. Now, the rule has been adopted.

It is the law of the land, and it is OFHEO’s job to ensure that

Fannie Mae and Freddie Mac conform with GAAP, and that is

what I would do as Director of OFHEO.

Senator SARBANES. But you do not think it is a very good rule,

I take it, from that answer. I mean, you will obviously have to implement it as the regulator, but you do not think it is a good rule;

is that correct?

Mr. BRICKELL. Sir, in fairness, I do not think it is open to question by the Director of OFHEO. I think it is a great rule because

it is GAAP, and it is the rule that Fannie and Freddie are required

to use.

Senator SARBANES. Do you believe Federal financial regulations

should prohibit fraud in the OTC derivatives market?

Mr. BRICKELL. I am opposed to fraud.

Senator SARBANES. I would certainly hope so. I think we should

stipulate that that should be a basic requirement.

[Laughter.]

Mr. BRICKELL. If that were the only hurdle, it would be a low

hurdle to clear, but as a banker, by profession, for the first 25

years of my career at a bank that I was very proud to be part of,

financial fraud hurts noone more than the bankers. So, even as a

matter of self-interest, fraud is something I am opposed to, and it

is illegal to defraud people in the financial markets. It is illegal

under the law to defraud anyone, and it should be.

I have done some thinking about that, some research. I have

talked with people in Washington about that issue, and it should

be illegal to defraud people using derivatives contracts just as it is

to defraud people with other kinds of financial transactions or nonfinancial transactions. It should be illegal, and it is, and I am glad

that it is.

Senator SARBANES. I think I am going to have to ask you the

question again and focus you on specifically what is being asked

because fraud may be illegal under other Federal or State statutes,

which would leave someone engaged and open to prosecution.

My question was do you believe Federal financial regulations,

which of course you will be involved in promulgating, should prohibit fraud in the OTC derivatives market?

Mr. BRICKELL. If it is already illegal, it is not clear to me that

what we would gain by making it more illegal, if you will. Now, I

do not believe that this is only a matter of State law, although

much of the work that is done to prosecute fraud is done at the

State level. I believe that there are antifraud authorities held by

the SEC and by the Commodity Futures Trading Commission that

could be brought to bear in certain cases, and indeed have been

18

brought to bear in some cases, where the kinds of contracts that

you are talking about were used.

In addition, I know, from experience in the banking industry,

that the banking authorities, as a matter of financial regulatory

authority, will prosecute fraudulent activity if it is ever committed

by bankers.

I believe that fraud is illegal in many different ways at the State

and at the Federal level, that there are regulatory authorities that

can be used against it, and I am glad that is the case. I think it

gives investors confidence and ensures that contracts are more likely to be enforced.

Senator SARBANES. Do you believe Federal financial regulations

should prohibit manipulation in the OTC derivatives market?

Mr. BRICKELL. I am thinking back to try to recall what the extent of Federal authority is in this area today, but it is my understanding that there is already a great deal of Federal authority to

combat manipulation, and it is not limited to the financial services

markets. You have the authority of the Justice Department.

You have, in addition, within the financial arena, certain

antimanipulation powers that reside at the Security Exchange

Commission, that can be brought to bear with certain kinds of contracts, securities in particular. And, finally, the Commodity Futures Trading Commission has always, well, I can remember many

times their making the case that the antifraud authority of the

Commodity Futures Trading Commission is extensive and would

encompass many of the markets, if not all of the markets that you

are talking about.

Senator SARBANES. Did you oppose the Commodity Futures Trading Commission’s retention of the antifraud and antimanipulation

authority in its 1992 rulemaking, exempting swaps for most of its

regulatory requirements.

Mr. BRICKELL. 1992, sir?

Senator SARBANES. Rulemaking, yes. Did you oppose the retention by the CFTC of antifraud and antimanipulation authority

when it had the rulemaking exempting swaps from most of its regulatory requirements, but it retained antifraud and antimanipulation authority?

Mr. BRICKELL. Well, that question would take me back a long

way. And if you do not mind, I think it deserves a well-considered

answer, and I would like to respond to you in writing, if I could

do that.

Senator SARBANES. I think that would be helpful, and I think you

are entitled to go back and examine the record carefully. There will

be other questions that Members I know who were not able to be

here because of this arising in a conflicting time have that they

wish to submit, Mr. Chairman, to Mr. Brickell. So, obviously, the

record will be kept open, I take it, for that purpose.

Chairman SHELBY. That is right.

Senator SARBANES. Mr. Chairman, I know we have other witnesses. I have a few more questions I would like to ask, and then

I have a number of questions I will submit to Mr. Brickell for his

response.

I want to run through how you envision the role of OFHEO.

There have been proposals put forward to change the regulatory

19

structure of OFHEO: To move it to the Treasury, establish it as an

independent regulator, include the Federal Home Loan Banks and

its responsibilities. What are your views on those proposals?

Mr. BRICKELL. Senator, I am aware, first of all, of several proposals that are under consideration. I know that a bill has been introduced in the House by Congressman Baker, who has taken a

leading role there on these issues, and I think that the location of

OFHEO matters, and the proposal that he is making is certainly

worthy of consideration, but what is even more important, in my

view, and I think it goes to the heart of your question, is that

OFHEO must have the authority, the powers that are commensurate with the other financial regulators if it is going to be perceived

as being in the top echelon.

Fannie and Freddie are in the top rank of American financial institutions. I guess if you lined them up against the banking institutions, they would be the second and fourth-largest institutions in

the country.

Senator SARBANES. But those are the only two you have to regulate. I am aware of your constant reference to other regulators, but

they have a multiplicity of institutions. The Director of OFHEO

has only two major enterprises to follow closely.

Mr. BRICKELL. I appreciate that, Senator.

If I were confirmed, my primary mission would be to ensure that

OFHEO gives rigorous, firm, fair, oversight to Fannie Mae and

Freddie Mac, so that they are run safely and soundly wherever

Congress decides that OFHEO should be.

Of course, I would look forward to conferring with the Committee, working with the Committee, if you wanted to consider

changes in the OFHEO framework, at the appropriate time.

Senator SARBANES. Do you believe there is a role for Fannie and

Freddie to continue to play as GSE’s or has the secondary mortgage evolved to the point where Government Sponsored Enterprises are no longer needed?

Mr. BRICKELL. We have in this country the best housing finance

markets in the world, and the housing sector is, today, providing

one of the brightest spots in the American economy. I think I would

try to adhere to a principle that I have heard regulators put forward before, which is, first, do no harm. I do not think it is appropriate to propose any significant change in the structure of housing

finance without a better understanding of the institutions and how

safe and sound they are.

But I certainly appreciate the importance of the role that Fannie

and Freddie play today and the way in which they bring the benefits of capital markets, financing costs and efficiencies to what was,

before they came into existence, a more localized, less-sophisticated

form of housing finance.

Senator SARBANES. In your letter on the OFHEO capital regulation, you suggested that overcapitalization, overly stringent capital

requirements, could be equally dangerous to capital requirements,

the undercapitalization. What is your view on that?

Mr. BRICKELL. Are we thinking there of the letter on the capital

rule?

Senator SARBANES. Yes.

20

Mr. BRICKELL. The point that Mr. Ryan and I were making was

one that I think regulators bear in mind and need to bear in mind.

When you are making capital rules, you need to get the answer exactly right. If the rule is too loose and requires too little capital,

investors might be perceive a risk that the company was undercapitalized, and that is no good.

Senator SARBANES. What company are you talking about now?

Mr. BRICKELL. Any company that is subject to a capital requirement. I am not speaking about any firm in particular. I am saying,

in general, when you are administering a capital rule, you should

be sure that you are requiring the right amount of capital from

whatever firm is subject to that rule.

Senator SARBANES. And if you fall short, upon whom does that

burden then come to rest? If you fall short in your capitalization

and you confront a stressful situation, and you cannot handle it, on

whom does the burden then fall?

Mr. BRICKELL. Senator, to answer that question, we would have

to know what kind of institution we were talking about.

Senator SARBANES. With respect to Fannie Mae and Freddie

Mac, upon whom would it fall?

Mr. BRICKELL. As the Chairman has indicated, as I understood

it, there is some ambiguity about that question. The securities

issued by Fannie Mae and Freddie Mac bear a disclaimer that

states, in black and white, that they do not represent obligations

of anyone but Fannie Mae and Freddie Mac.

In that case, for institutions, let’s not talk about those specific institutions, but in general, for institutions that are not beneficiaries

of Federal support, if a firm were too thinly capitalized and it were

to fail, the burden would fall, of course, on the shareholders, and

then, second, on the debtholders of the Enterprise.

Senator SARBANES. Well, now when you made this statement,

you said, ‘‘The 1990’s taught bankers and their regulators the importance of getting capital rules right.’’ I am now quoting your letter. ‘‘At the beginning of the decade, policymakers were primarily

concerned with ensuring that capital levels were not too low. Few

imagined that capital requirements could be too high. But over the

course of the decade, we realized that such a perspective is essentially a short-run view.’’ And then you go on, ‘‘Over the long run,

overly stringent capital requirements could be equally dangerous.’’

But if we undercapitalize, particularly in the bank context, eventually it may fall on the taxpayers, may it not?

Mr. BRICKELL. In a context where you are talking about enterprises that do receive the benefit of Federal support, it is possible

that the burden would fall, in the event of their failure, on taxpayers or any reserves that have been set aside.

Senator SARBANES. If you look at the issue of what capital you

are going to require these two GSE’s, to what extent would you

have in your mind that the burden, if they fail, may fall upon the

taxpayer?

Mr. BRICKELL. I think it would be prudent to bear that possibility in mind, but I am not sure that it should affect the conduct

of the Director because even though there is ambiguity on the point

about where the burden falls, there is no ambiguity about the responsibility of the Director of OFHEO to ensure that Fannie Mae

21

and Freddie Mac are run in a safe and sound way. In other words,

no matter where the burden would fall if they were to fail, it is up

to OFHEO to do everything it can to ensure that does not happen.

Senator SARBANES. Mr. Chairman, you have been very generous.

Chairman SHELBY. These are important questions.

Senator SARBANES. I have a number of additional questions that

I wish to ask Mr. Brickell, but I understand we have other nominees so I will request them in writing.

Chairman SHELBY. Absolutely. That will be done, and other

Members, as you said, for the record. And, Mr. Brickell, if you

could, when these questions will come in fairly soon, if you can answer them promptly, it would move the process perhaps.

I have another question. FAS, Financial Accounting Standard,

133—see if I am summing this up right. You did not create the rule

because that was not your job, and when you were in the comment

period, you were writing, you and Mr. Ryan, of your concerns about

the possible rule as they were taking comments in the formulation

period; is that correct, the comment period?

Mr. BRICKELL. It is true with respect both to the letter on FAS

133——

Chairman SHELBY. Right.

Mr. BRICKELL. —and the capital rule.

Chairman SHELBY. But regardless of your views then or even

now regarding the rule, the rule is the rule, and that is what you

were saying, and that is the law in the accounting field, right?

Mr. BRICKELL. Yes, Mr. Chairman.

Chairman SHELBY. And you are saying, as I understand it, that

if you are confirmed and you are sworn into this job, which you

would be after you are confirmed, you would swear to uphold the

law, right?

Mr. BRICKELL. That is true, Mr. Chairman.

Chairman SHELBY. And carry out your responsibilities and obligations just like some of us might disagree with the law, may vote

against the law, might fight hard the creation of a statute, but at

the end of the day, we might be the same ones to carry out the law

regardless or irrespective. Is that what you were saying?

Mr. BRICKELL. It is, Mr. Chairman.

Chairman SHELBY. I am asking you, but you were saying it better than I would.

Mr. BRICKELL. I agree wholeheartedly with the way you have described it. The Director of OFHEO has certain statutory obligations, and I would carry those out, and one of them is to ensure

that Fannie Mae and Freddie Mae comply with GAAP. I have made

my comments, my firm has made its comments, that is the law of

the land today, and that is the accounting principle, the accounting

rule that Fannie Mae and Freddie Mac would comply with.

Chairman SHELBY. And if you were the Director of OFHEO, how

involved and how energized would you be, considering what is at

risk out there—$1.7 trillion or whatever?

Mr. BRICKELL. That is a whole lot of money and a whole lot of

risk, and I think the people who do business—

Chairman SHELBY. You could not be an absent regulator on a situation like that.

22

Mr. BRICKELL. It is only two companies, but they are so large,

and they are so important in housing finance and in our economy,

that I think it is essential that they have top-quality regulation

that would be rigorous, and I would pursue that with all of my energy.

Chairman SHELBY. Let me see if I understand the other you were

saying. Senator Sarbanes posed the question of there have been

some recommendations by some of the Congressmen, some of the

Senators, some of the people down the street that we move statutorily, we change the regulator to the Treasury or whatever we do

or if we do nothing, but what you are saying, as I understood it

a minute ago, that whatever it is, if those proposals come up, you

would abide by them, right? You would have to.

Mr. BRICKELL. Yes, Mr. Chairman.

Chairman SHELBY. We will have questions for the record. It will

be left open for other Members who have gone to hear Ambassador

Bremer’s comments on Iraq.

Senator SARBANES. Mr. Chairman, could I just put a couple of

questions to Mr. Brickell?

Chairman SHELBY. Yes, sir.

Senator SARBANES. The Wall Street Journal reported this morning that you helped advise Freddie Mac on some of its derivative

hedging. Would you describe the length and nature of this relationship.

Mr. BRICKELL. I am not sure what it is that they would be referring to. Is there a source given for the information or can we try

to identify what they are talking about?

Senator SARBANES. It is mentioned in their article. They do not

give a source. So you do not know what they are referring to?

Mr. BRICKELL. I do not. I would be happy to work with you on

it, if we get better information.

Senator SARBANES. Obviously, we need to explore that matter.

In an answer to one of the questions on your questionnaire to,

‘‘list any lobbying activity during the past 10 years in which you

have engaged for the purpose of directly or indirectly influencing

the passage, defeat, or modification of any legislation at the national level of Government or affecting the administration or execution of national law or public policy,’’ you said in your answer:

While serving on the board of the International Swaps and Derivatives Association, and thereafter in my capacity as an officer of JP Morgan and Blackbird Holdings, I have participated in discussions in Washington concerning the development

and implementation of the regulatory framework for swaps and other privately negotiated derivatives transactions.

In fact, when you were nominated for this position, in one of the

articles, it was said that ‘‘Derivatives lobbyist nominated to regulatory position.’’ Is it not fair to say that you were the lead lobbyist

on derivatives issues over a fairly sustained period of time here in

Washington?

Mr. BRICKELL. As I indicated earlier in the hearing, I started

working in the derivatives business back in 1986. These were new

products, and they got the attention of people in Washington and

in other cities, as I indicated in the questionnaire. I have been to

Washington and to those places many, many times, probably too

many times to count in the period since 1988.

23

And we have worked on regulatory proposals to make sure that

derivatives were well-regulated, we worked with the banking authorities and other agencies on that. We have worked with legislators, particularly with this Committee, on netting legislation, on

modifications to the Commodity Exchange Act. We have worked on

other legislation.

I have been here many, many times to talk about financial services, and in almost every single case, those meetings were related

to derivatives, to swaps, and other privately negotiated derivatives

contracts.

Senator SARBANES. So you would not quarrel with the headline

that declares, ‘‘Derivatives lobbyist in line to head Fannie and

Freddie regulator.’’ I mean, given the activities you are engaged

with, that would be an apt description, would it not?

Mr. BRICKELL. I do not like to quarrel with anybody, even with

the reporter who wrote those words, but I think it would be perhaps an incomplete description of what I have accomplished in my

28 years in financial services.

Senator SARBANES. Thank you, Mr. Chairman.

Chairman SHELBY. As I recall at this point, and we do not have

all of the information regarding Freddie Mac yet, and we had a

hearing on this last week, but I do not recall the problem at this

point, at least our knowledge of it, being the use of derivatives. It

was accounting, at least up to now, and how they account for

things under FAS 133, but I do not know what you know, and I

do not know if we know enough at this point, Mr. Brickell, but I

would point that out.

And although you may have lobbied, and I assume you did, and

you have a right to lobby for a position on derivatives or anything

else, I think one of the spokesmen, and I certainly would not want

to call him a lobbyist, but one of the powerful spokesmen would be

Chairman Greenspan, sitting right here at this same table on

many occasions, saying basically that derivatives have a place in

our financial institutions, and properly used are a positive thing.

We appreciate your appearance here today, and as I have said,

we will have additional questions from Senator Sarbanes and any

others perhaps myself. And you have some other information you

are going to get back to him anyway.

Thank you.

Mr. BRICKELL. Thank you very much.

Chairman SHELBY. I now want to call up the second panel, Mrs.

Alicia Castaneda of the District of Columbia, nominated to be a

Member of the Board of Directors, Federal Housing Finance Board;

and Mr. Thomas J. Curry of Massachusetts, nominated by the

President to be a Member of the Board of Directors, Federal Deposit Insurance Corporation.

If I could get you both to raise your right hands and be sworn.

Do you swear or affirm that the testimony that you are about to

give is the truth, the whole truth, and nothing but the truth, so

help you God?

Mr. CURRY. I do.

Ms. CASTANEDA. I do.

Chairman SHELBY. Do you agree to appear and testify before any

duly-constituted committee of the Senate?

24

Mr. CURRY. I do.

Ms. CASTANEDA. I do.

Chairman SHELBY. Thank you. Please have a seat.

I am going to submit my written statement for the record. I alluded to your nominations earlier and how important they were.

And I am going to submit your written statements for the record

because we have already been here a while and we want to move

the hearing on.

Chairman SHELBY. Senator Sarbanes.

Senator SARBANES. Mr. Chairman, I appreciate that. I wanted to

just say that I am pleased to welcome these witnesses: Thomas

Curry, who has been nominated to be on the Board of Directors of

the Federal Deposit Insurance Corporation, and Alicia Castaneda,

who has been nominated to be a Member of the Federal Housing

Finance Board.

Tom Curry has been Commissioner of Banks in the State of Massachusetts. He graduate cum laude from Manhattan College, his

J.D. degree from New England School of Law. He has spent his entire professional career working for the State of Massachusetts, as

an Attorney in the Office of the Massachusetts State Secretary and

then with the Massachusetts Division of Banks, where he has risen

steadily through the ranks of that office, from the General Counsel’s Office to Deputy Commissioner, Acting Commissioner, and

now Commissioner. He is a Member of the Board of Directors of

the Conference of State Bank Supervisors and was Chairman of the

Board of all of the State bank supervisors in 2000 and 2001. He

was recommended to the President by Senator Daschle. The way

the statute is written, you have to have some balanced membership

on the FDIC.

Chairman SHELBY. I am sure he is a good Democrat.

Senator SARBANES. Well, no, actually he is not. I think he is an

Independent.

Chairman SHELBY. Okay.

Senator SARBANES. I know Senator Daschle conducted an extensive search in order to make his recommendation to fill this office.

It was required by the statue that the spot be filled by someone

with State bank supervisory experience, and inquiries around the

country indicated that Tom Curry was probably the most highly respected State Banking Commissioner in the country. We are

pleased he is willing to take on this assignment. I think he is an

excellent choice for the board. I intend to support his nomination.

Ms. Castaneda is, of course, being considered for the Federal

Housing Finance Board. That is very important. That Home Loan

Bank system is growing like topsy, if I may so observe. Over the

last 5 years, the system’s assets have more than doubled. They are

one of the world’s largest issuers of debt. At the end of 2002, debt

outstanding totaled $673 billion, a $52 billion increase over the

previous year. It is just growing exponentially, and so there are

very important challenges there.

Ms. Castaneda brings with her a wealth of banking experience.

She began her banking career 27 years ago as an International

Clerk with American Security Bank here in Washington. Shortly

thereafter, she was selected for the bank’s executive development

program. She was the first woman in the history of American SecuVerDate 11-MAY-2000 11:03 Sep 01, 2004 Jkt 000000 PO 00000 Frm 00028 Fmt 6633 Sfmt 6633 95603.TXT SBANK4 PsN: SBANK4
25

rity Bank to be promoted to Senior Vice President, a position in

which she had responsibility for all of the bank’s funding programs

as well as balance sheet liquidity, liability pricing, and interest

rate risk management. She currently holds the position of Market

Executive for Bank of America’s International Private Banking Division. I am confident that her extensive knowledge of day-to-day

banking practices will prove useful on the Finance Board, and I intend to support her nomination as well.

Chairman SHELBY. Thank you, Senator Sarbanes.

Ms. Castaneda, you go first, if you will just sum up briefly your

statement.

STATEMENT OF ALICIA R. CASTANEDA

OF THE DISTRICT OF COLUMBIA

TO BE A MEMBER OF THE BOARD OF DIRECTORS

FEDERAL HOUSING FINANCE BOARD

Ms. CASTANEDA. Thank you, Mr. Chairman.

Good afternoon, Mr. Chairman, Senator Sarbanes, and other distinguished Members of the Committee. Thank you for the opportunity to appear before you today. I am honored that President

George W. Bush has nominated me to be a Director of the Federal

Housing Finance Board, and I am very pleased to appear before

you at this confirmation hearing.

Before I begin my statement, I would like to take this opportunity to introduce my husband, companion, and best friend for

over 33 years, Rolando Castaneda. I am profoundly grateful to him

for having played such an influential role in my decision to immigrate to the United States from Colombia in 1970. Almost 33 years

ago, I came to this land of freedom, security, and unlimited opportunities as a 22-year-old young professional immigrant with a limited knowledge of the English language and almost without any

money. My gratitude to this great country is beyond words. Not

only was I given the opportunity to get a job at a bank, but also

in time to become the first female ever promoted there to Senior

Vice President. Nowhere else in the world can immigrants enjoy

such opportunities.

And that brings me to the subject of housing and the Federal

Housing Finance Board. All of us need somewhere to live. And

many of us either own homes or aspire to do so. In fact, it is at

the core of the American Dream.

The Federal Home Loan Bank System makes it easier for small

banks to lend money to hard-working Americans for mortgages. In

the early days of banking, banks could only lend out what they had

on bank in deposits. Later, they acquired the ability to borrow from

other sources to make loans to others. The 8,045 members can now,

through the Federal Home Loan Banks, take advantage of pooling

their requests for funds to achieve lower rates, which get passed

on directly to the consumer.

Today, about 68 percent of American households own homes. But

the rate for minorities is far lower, with fewer than half of Hispanics and African-American households owning homes. It is the

goal of President Bush’s Administration and that of the Federal

Housing Finance Board to raise these levels. Projects are under

26

way to assist more of our countrymen, minorities, and new immigrants in particular, to realize the security of homeownership.

In current literature about the U.S. economy, we see the housing

sector described as a beacon of strength, a rising tide lifting other

economic boats. Thus, our vibrant housing market must be preserved and must continue to thrive.

Should I have the honor of being confirmed, I will work to

strengthen and improve the flexible and secured financial system

that America has and to make it possible for more Americans, especially minorities, to take full advantage of this system.

Twenty-seven years in commercial banking have prepared me to

accept this challenge. My experience in the bank’s Treasury Division, in particular, involved managing liquidity. Ensuring liquidity

for the benefit of the homebuying public is the very reason Federal

Home Loan Banks exist. In addition, I will bring to the job my

leadership and management skills, a healthy respect for the trust

placed in me, and a strong advocacy for fairness and common

sense.

In conclusion, I want to acknowledge my family and my strong

belief in personal accountability as the foundations of my own

value system. I am a hard-working and God-fearing person who

strives to give back the many blessings that have come my way in

this great country.

Mr. Chairman, Senator Sarbanes, and other distinguished Members of the Committee, I respectfully ask for your favorable consideration of my nomination. If confirmed, I will be the first female

and Hispanic Director of the full-time Federal Housing Finance

Board, and I will be the only banker to serve in the current Board.

I consider this nomination a great honor and privilege and a wonderful opportunity to begin my first tour of public service to my beloved adopted country. And, finally, if confirmed, I promise to work

closely with this Committee and with Congress to ensure the safety

and soundness of the Federal Home Loan Bank System and the

fulfillment of the system’s housing finance and affordable housing

missions.

I will be delighted to respond to your questions.

Chairman SHELBY. Mr. Curry.

STATEMENT OF THOMAS J. CURRY, OF MASSACHUSETTS

TO BE A MEMBER OF THE BOARD OF DIRECTORS

FEDERAL DEPOSIT INSURANCE CORPORATION

Mr. CURRY. Thank you, Chairman Shelby, Ranking Member Sarbanes, and Members of the Committee. It is a personal privilege to

appear before the Committee today. I am very honored to have

been nominated by President Bush to be a Member of the Board

of Directors of the Federal Deposit Insurance Corporation.

If I may, I would like to take this opportunity to briefly summarize my professional qualifications and to express my commitment

to the FDIC’s important mission as the Nation’s Federal deposit insurer, if I were confirmed as a Board member.

It has been my privilege to serve the Commonwealth of Massachusetts for over 17 years in several senior financial regulatory positions. I have also had the honor of serving five Governors as the

Commonwealth’s Commissioner of Banks for a span of approxiVerDate 11-MAY-2000 11:03 Sep 01, 2004 Jkt 000000 PO 00000 Frm 00030 Fmt 6633 Sfmt 6633 95603.TXT SBANK4 PsN: SBANK4
27

mately 10 years. On a national level, as Senator Sarbanes mentioned, I was elected by my State regulator colleagues to be their

past Chairman in the year 2000. I also have served as a Member

of the State Liaison Committee of the Federal Financial Institutions Examination Council. On a very technical level, my State official status satisfies the FDIC Act’s specific requirement that one

FDIC Board Member possess State bank regulatory experience.

My public service career coincided with an extraordinary period

of tremendous economic, technological, and competitive changes

within both the Massachusetts banking industry and the larger national financial services sector. The regulatory experience that I

gained during this period has provided me with invaluable perspective that I hope will serve me well if I am confirmed as an FDIC

Board Member.

For example, my firsthand experience grappling with the effects

of the New England banking crisis of the late 1980’s and early

1990’s had a profound impact upon me and our communities in

Massachusetts and underscored the vital importance of the FDIC’s

deposit insurance guarantee in maintaining public confidence in

our financial system, particularly in times of stress. It also reinforced the fundamental importance of a safe and sound banking industry to our economy. The New England regional experience demonstrates how economic recovery, or prosperity in general, requires

a healthy, independently regulated banking system that has both

the financial capacity and confidence to extend credit to individuals

and businesses.

Unprecedented levels of industry consolidation, intense competition, and technological change also have marked the last decade.

As a State bank regulator, I confront many of the same supervisory

and policy issues faced by the FDIC and the other Federal regulators. I believe we share a common goal of fostering sound financial practices, competition, and product innovation in the banking

industry while at the same time ensuring wider access to credit

and financial services to individuals, businesses, and communities.

As Bank Commissioner, I have been fortunate to be able to help

develop and implement Massachusetts’ regulatory and legislative

responses to these trends from both a financial supervision and a

consumer protection standpoint. My hope is that if I am confirmed,

my experience as a State bank regulator will assist the full FDIC

Board in developing the most sound and effective Federal supervisory policies.

In conclusion, I believe my 21-year public service career has

given me the necessary financial safety and soundness and public

protection regulatory experience and judgment to capably serve as

a member of the FDIC Board of Directors, if confirmed.

Chairman Shelby, Ranking Member Sarbanes, and Members of

the Committee, thank you again for allowing me this opportunity

to appear before you, and I am glad to answer any questions from

the Committee.

Chairman SHELBY. Thank you.

The Federal Home Loan Bank System has undergone, as you

well know, a tremendous amount of change since its birth in 1933.

With the decline of the thrift industry, membership in the system

was expanded beyond savings and loans. With this expansion of

28

membership has come an expansion of responsibilities. What do

you see as the future direction for the Federal Home Bank System?

Where are we going in the future? Where do they need to go? What

is their challenge?

Ms. CASTANEDA. I think we have a lot of challenges in front of

us. One of the greatest challenges is how are we going to address

all the different programs that the Federal Home Loan Banks are

trying to get into. The multidistrict issue also will be a tremendous

challenge that as a Member of the Board I will have to address,

if I have the honor of being confirmed.

Chairman SHELBY. You mentioned in your testimony the Board’s

commitment to expanding homeownership, which Senator Sarbanes

and I certainly share. Can you share with the Committee, tell us

some of the Board’s activities and some of your own in regard to

your ideas of expanding homeownership, especially in the AfricanAmerican community, the Hispanic community, because those are

the two that are trailing behind in America, as you know, and I

know that this Administration is committed to that. And we are

committed to it because we believe that homeownership is a center

point and generally a person’s first wealth in America.

Ms. CASTANEDA. You are right, Senator. As I mentioned in my

opening statement, the affordable housing programs are a critical

issue in this country. I know the Administration, the Federal Housing Finance Board, and the Federal Home Banks are committed to

make more funds available for the purchase of mortgages. For the year 2003, the goal is $200 million. Since inception in the 1990’s, they have allocated $1.7 billion. But, again, we have to

work harder to increase the percentage of housing available, especially for minorities, as I said, Hispanics and African-Americans.

Chairman SHELBY. Absolutely.

Mr. Curry, while supervisory responsibility for financial institutions is dispersed across the Federal banking regulators, the Federal Deposit Insurance Corporation has sole responsibility for the

insurance funds. Because of the potential taxpayer liability, I myself believe that the Federal Deposit Insurance Corporation has a

very serious responsibility here. The very nature of the system, I

think, requires the FDIC to work with other regulators that we

have up here—and when Senator Sarbanes chaired the Committee,

he did the same thing—to carry out your responsibilities.

Can you just quickly provide the Committee your views regarding the importance of successful cooperation between the FDIC and

the other regulators?

Mr. CURRY. I think, Chairman Shelby, that regulatory cooperation is really essential to our system and ultimately to the Federal

Deposit Insurance Fund.

Chairman SHELBY. Safety and soundness, right?

Mr. CURRY. That is right. And it is critical that regulatory agencies with different missions work together toward the goal of protecting that system and the Deposit Insurance Fund.

Chairman SHELBY. And running an efficient banking system for

the American people.

Mr. CURRY. Most definitely.

Chairman SHELBY. In 1996, Mr. Curry, the General Accounting

Office recommended including a representative from the Federal

29

Reserve System on the FDIC Board. Do you think—or have you

thought about it, had a chance to, do you think including the Fed

on the FDIC Board would increase interagency cooperation and ultimately enhance the effectiveness of banking regulation?

Mr. CURRY. I have not thought specifically about including an additional member on the FDIC Board, but, again, I can attest to the

critical importance of having cooperation. For example, the Conference of State Bank Supervisors has been working very closely—

the State supervisors—with both the Fed and with the FDIC to ensure that there are protocols and agreements to have the maximum

cooperation and coordination of activity, particularly on an interstate basis.

Chairman SHELBY. I do not know if you have had a chance to

flesh this out yourself, but do you have any views regarding the

present supervision of industrial loan corporations, or ILCs? Do you

believe, in other words, that the FDIC and the State banking regulators have the ability to provide adequate supervision of these entities? This is a big issue coming up.

Mr. CURRY. I have limited professional experience with ILC’s.

They are not authorized under Massachusetts law. Again, however,

the overriding goal of a supervisor, is to ensure that both the insured financial institution and any affiliates operate in accordance

with safe and sound practices.

Chairman SHELBY. Do you believe there is a need at the moment

to raise the coverage level of Federal Deposit Insurance?

Mr. CURRY. I understand that it is a significant issue before Congress and with the FDIC and the industry.

Chairman SHELBY. On one side.

Mr. CURRY. Yes. I have not yet formed an opinion. Massachusetts, again, is unique in that we do have an option of a private,

industry-sponsored insurance fund that does insure beyond the

Federal limit.

Chairman SHELBY. How does that work?

Mr. CURRY. Basically it is a mutual fund, established by Statechartered banks, of a particular type that insures funds or deposits

in excess of Federal FDIC limits.

Chairman SHELBY. Does it work?

Mr. CURRY. It has worked, and it worked through the New England banking crisis.

Chairman SHELBY. Oh. So it has been tested.

Mr. CURRY. It has been tested, and it was very significant in

maintaining confidence in our system as well.

Chairman SHELBY. I would be interested in anything you can

send me on that personally and maybe to the Committee to see

what you have.

Mr. CURRY. I would be more than happy to do that, Chairman

Shelby.

Chairman SHELBY. Senator Sarbanes.

Senator SARBANES. Thank you very much, Mr. Chiarman.

Ms. Castaneda, this Committee held a series of hearings on predatory lending practices in the mortgage industry, and we heard

from a number of hard-working Americans who had the equity

stripped out of their homes. In fact, one witness even lost her

home, a tragic story.

30

There has been a general growing recognition in a number of

States as well as among Federal regulators that we really have to

put an end to these practices. The Federal Reserve Board has

tightened its regulations. HUD has proposed a rule to address

mortgage broker abuses. The Office of Thrift Supervision has recognized the power of States to address certain predatory lending

practices, which a number of States are doing.

Several years ago, HUD, working with Fannie Mae and Freddie

Mac, developed a set of guidelines to help prevent these Government Sponsored Enterprises from buying the worst predatory

loans. And the Atlanta Home Loan Bank, within the Home Loan

Bank System, developed a policy to ensure that it is not supporting

loans with predatory characteristics.

The Finance Board recently put out a proposed regulation that,

among other things, requests comments on steps the Board could

take to help combat predatory lending. And I think those comments

are due back in early September.

Do you regard predatory lending as a problem that needs to be

addressed? And would you be open to trying to promote efforts as

a Member of the Board in order to address this issue?

Ms. CASTANEDA. I think predatory lending is unacceptable, sir.

My experience in banking has taught me that it should not exist,

and an agency like the Federal Home Loan Banks definitely should

not do that. I will definitely, if I have the honor of being confirmed

to the Federal Housing Finance Board, look into that and I will

make sure that predatory lending is not acceptable.

Senator SARBANES. Good. Thank you very much.

Mr. Curry, I want to follow up on something Chairman Shelby

asked of you. Are the State bank supervisors—and you were their

national head just a year ago, as I understand it—generally satisfied with the level of cooperation amongst the regulators? How do

they view their interaction with the Federal regulators?

Mr. CURRY. Overall, Senator Sarbanes, I would agree that it is

a positive relationship, but like any relationship, it requires a deep

commitment to make sure that it works. Occasionally, there are

differences of opinion, but I think the underlying goal is to have

the best possible supervisory policies and relationship and to have

a safe and sound system. Certainly there could be improvements,

but the basic foundation is there, I believe.

Senator SARBANES. Do you expect, when they perceive that it is

not working, that they are going to come knocking on your door?

Mr. CURRY. I hope not.

Senator SARBANES. Well, maybe they should. After all, you are

on there in part because of the statutory requirement that you

have State bank supervisory experience.

Mr. CURRY. Oh, I misunderstood.

Senator SARBANES. It gives you both a perspective, but it also

gives you the contacts with all of your former colleagues in terms

of strengthening our system.

Do you see any pressing, outstanding issues on safety and soundness facing the banking system today?

Mr. CURRY. I do not think there is any issue that is as significant

as those issues that we saw, for example, with the New England

banking crisis and the regional economic differences. What I think

31

is today we have an industry that is far better capitalized than it

was a decade ago. I think we have management that is tested in

terms of dealing with economic downside. And I think supervisors

themselves have adopted much more refined approaches to the supervision of financial institutions.

Senator SARBANES. Did you find the banks in Massachusetts

making heavy use of derivatives and similar arrangements?

Mr. CURRY. Not in the Massachusetts industry that I regulate,

which is predominantly a community banking industry.

Senator SARBANES. Thank you, Mr. Chairman.

Chairman SHELBY. I want to thank both of the nominees for appearing here today. You have been nominated by the President to

two very, very important jobs, and we appreciate your patience in

going through the first panel. So we will try to expedite your hearing, your markups, as soon as we can.

Thank you.

Ms. CASTANEDA. Thank you so much.

Senator SARBANES. Sometimes when the first panel takes a long

time, the second panel can be very short.

Ms. CASTANEDA. So that is better. Is that what you are trying to

tell me?

Chairman SHELBY. It is always better.

Senator SARBANES. It is probably better to suffer through hearing

the other panel than suffering through it as the panel yourself.

[Laughter.]

Ms. CASTANEDA. Senator Sarbanes, I will always remember your

wise words.

[Laughter.]

Chairman SHELBY. Those are not just flippant words. Senator

Sarbanes has been on this Committee a long time. He has chaired

the Committee. I am glad he is not chairing it right now, but who

knows in the future.

Thank you.

The hearing is adjourned.

[Whereupon, at 3:59 p.m., the hearing was adjourned.]

[Biographical sketches of nominees and response to written questions supplied for the record follow:]

32

33

34

35

36

37

38

39

40

41

42

43

44

45

46

47

48

49

50

51

52

53

54

55

56

57

58

RESPONSE TO WRITTEN QUESTIONS OF SENATOR CORZINE

FROM MARK C. BRICKELL

Capital Adequacy

Q.1. The Enterprises’ minimum capital requirement specified in

the statute is 2.5 percent of on-balance sheet assets and 0.45 percent of off-balance sheet assets. Is this adequate? Please explain.

A.1. I believe that it is important that the Enterprises are managed in a safe and sound manner, and are perceived to be sound.

If confirmed, I would fully enforce the existing capital standard

that has been mandated by statute. I have no reason, based on

what I now know, to believe that current capital levels are inappropriate. I would look forward to working with Congress as requested

to discuss any legislative proposals regarding the statutorily mandated minimum capital requirement, should I be confirmed and

after I have had the opportunity to more fully explore the effects

of the current capital requirements on the Enterprises.

Q.2. In explaining your preference for allowing internal models of

risk-based capital to the external model OFHEO has had in effect,

you imply that the internal model reflects the most advanced

thinking of U.S. and international regulators. In fact, isn’t it fair

to say that OFHEO is differently situated than the other regulators

because it has only 2 financial institutions it has to regulate, both

of which are in the same business? Indeed, the use of internal models in Basel II may simply be a less preferred compromise position

necessitated by the large number of institutions other regulators

must oversee. How do you respond? Given this specific fact,

OFHEO argues it is better able to maintain the ‘‘integrity’’ of the

rule, ensure its evenhanded impact, and ‘‘independence and rigor.’’

A.2. You make a good point, and I agree with you that OFHEO is

differently situated than other Federal financial regulators in that

it oversees fewer institutions. It is my understanding that the

banking supervisors use the internal models approach not because

they supervise more institutions, but because they believe that a

‘‘rigid’’ approach to capital rules is not necessarily a ‘‘tough’’ approach, and that the flexibility of the internal models approach

leads to greater precision in measuring capital needs than alternative approaches would. If I am confirmed as the Director of

OFHEO, I will approach this matter with an open mind and with

a willingness to look for ways to strengthen OFHEO’s regulation of

Fannie Mae and Freddie Mac because it is essential, in my opinion,

and I believe in the opinion of the Committee, that these two large,

world class financial institutions have a world class financial regulator with adequate resources and with the statutory authority to

be just as rigorous in its approach as the banking supervisors.

Q.3. You raise concerns numerous times in your testimony regarding the ‘‘hard-wired’’ nature of the capital standard. Please outline

and explain specific changes you would like to see made to the riskbased capital statute.

A.3. I have no specific changes in mind for the risk-based capital

requirements in the statute, although I support the Administration’s recent call for greater flexibility in monitoring and establishing capital standards for the Enterprises.

59

Q.4. Are the derivative counterparty ‘‘haircuts’’ used in OFHEO’s

risk-based capital rule appropriate? Did you make any comments

to OFHEO on this topic on your own behalf, or on behalf of JP

Morgan, ISDA, or any other group? If so, please provide those comments. Please explain your current views on this topic.

A.4. I do not recall having made comments about the capital requirements for derivatives in the capital rule and, while I do not

believe that it would be appropriate to prejudge any matter that

is within the purview of the duties of the Director of OFHEO, I am

willing to consider ways to strengthen OFHEO’s regulation of

Fannie Mae and Freddie Mac, including measures to ensure that

regulation of their derivatives activity encourages safe and sound

operation of the Enterprises.

FAS 133

Q.5. In response to a question regarding FAS 133 from Chairman

Shelby, you said that, ‘‘It is GAAP, and it has to be used.’’ However, the preference you have expressed in the past is that, ‘‘the derivatives rule [FAS 133] is only GAAP for banks if the Federal

banking supervisors certify that it should be,’’ which is what you

told the Bond Buyer on November 24, 1997 was your reason for

supporting Senator Faircloth’s bill, S. 1560. Your testimony clearly

indicates that you understand that you must enforce FAS 133 as

a regulator because it is now part of GAAP. However, is it still

your view that a better course of action would have been to allow

the banking regulators to be able to decide if whether or not to

apply FAS 133 to the banks?

A.5. I believe that the article to which you are referring was published on November 24, 1997, in CFO Alert, a newsletter published

by the same company that publishes the Bond Buyer. In that article, I was quoted as saying, ‘‘This legislation could assure that the

derivatives rule is only GAAP for banks if the Federal banking supervisors certify that it should be.’’ This statement was a description of what, in my judgment, was the principal, possible effect of

the legislation, not an assessment of that result. As I indicated in

my testimony before the Committee, if confirmed, I will enforce the

existing requirement that the Enterprises report using GAAP, including FAS 133.

Q.6. Would you have the same preference with regards to the

GSE’s?

A.6. My thinking with respect to the GSE’s is no different from my

thinking about banks as indicated in my response to Question 5.

As I indicated in my testimony before the Committee, if confirmed,

I will enforce the existing requirement that the Enterprises report

using GAAP, including FAS 133.

Q.7. Did you or do you believe that only the derivatives rule (FAS

133) should apply to banks at the regulators discretion, or should

this discretion extend to all GAAP accounting rules? Please explain

why or why not.

A.7. I see no reason to single out the derivatives rule for special

treatment. As I indicated in my testimony before the Committee,

60

if confirmed, I will enforce the existing requirement that the Enterprises report using GAAP, including FAS 133.

Q.8. Given your belief that regulators should have this discretion,

wouldn’t this result in the return of regulatory capital for financial

institutions separate and apart from GAAP? Do you have concerns

about this? Please explain.

A.8. As I understand the question, as to whether this method of

establishing accounting principles for banks would have created

differences between regulatory accounting and GAAP it is my understanding that such differences existed already between the accounting by banks for regulatory purposes and their accounting for

GAAP, so that this would not have been a new situation.

Q.9. The Dow Jones Newswire reported (July 16) that you prepared

a memorandum for the House sponsor of the legislation, Mr. Baker.

Is this accurate? If so, please provide a copy of this memorandum.

A.9. A memorandum containing the language quoted in the Dow

Jones story was sent to Ted Beason on February 1, 1998. I believe

the memorandum was drafted for his benefit, but it is certainly

possible that it may also have been shared with Representative

Baker. A copy is attached.

Q.10. Please describe fully your lobbying activities on FAS 133 on

behalf of the legislation introduced by Representative Baker and

Senator Faircloth.

A.10. I attended meetings in New York and Washington and communicated with others to discuss the proposed rule and some of the

concerns expressed by major businesses (including JP Morgan), as

well as the Federal Reserve Board and the Department of the

Treasury.

Q.11. The Faircloth and Baker bills would have had the effect of

undermining the independence of the accounting standards setting

body—the Financial Accounting Standards Board—whose independence was recently affirmed in the Sarbanes-Oxley Act. Efforts

like the Faircloth and Baker bills, and other proposals, have sought

to undo FASB accounting standards via legislative fiat. Do you

agree with that analysis? If not, please explain your reasons for

your disagreement with that analysis.

A.11 It is my understanding that Congress has from time to time

addressed accounting issues, both through its grant of authority to

the Securities and Exchange Commission to require U.S. securities

issuers to use the GAAP rules of FASB, and occasionally by addressing individual accounting issues such as stock option accounting, and as Congressman Baker and Senator Faircloth sought to

do. I would not characterize those Congressional endeavors as legislative fiat, however, since that I believe that Members of Congress undertook them after reasonable deliberation.

Q.12. One of the problems that led to the passage of the SarbanesOxley bill was the undue influence of industry interest groups on

FASB, either directly or by bringing political pressure to bear.

Wouldn’t the Faircloth and Baker bills have exacerbated this problem? Please explain your views.

61

A.12. I understood that the Sarbanes-Oxley bill was passed, in

part, because Congress concluded that the accounting industry

needed closer Federal oversight, and Congress created an oversight

board to address that need. While I do not have direct knowledge

about the source of the problems that Congress acted to remedy,

I note that Congress did ultimately conclude, as Baker and Faircloth had earlier, that legislative action was appropriate to address

them. It is not clear to me that legislation, such as that introduced

by Senator Faircloth, which was apparently intended to give Federal banking supervisors a role in the accounting standard setting

process for the institutions they regulated, or such as that introduced by Congressman Baker, which was apparently intended to

incorporate FASB standards into actual SEC regulations, should be

characterized as legislation that would have exacerbated undue influence of industry groups on FASB.

Q.13. Do you have a view today as to whether your support for the

Baker and Faircloth legislation was wise? Please explain.

A.13. I stand by the views expressed above. As I indicated in my

testimony before the Committee, if confirmed, I will also rigorously

enforce the existing requirement that the Enterprises under my supervision report using GAAP, including FAS 133.

Derivatives and Systemic Risk

In testimony to the House Banking Committee in 1993, you said,

‘‘it was hard to find justification for the view that derivatives pose

a greater systemic threat than other financial activities.’’ The next

year, ISDA published a critique of a GAO study on derivatives. The

critique claims that, ‘‘there is no concentration of credit exposures

among [derivatives] dealers.’’ In a Dow Jones News Service story on

May 19, 1994, you were quoted as saying, ‘‘These exposures aren’t

of a new kind, they are not particularly large, and they are not particularly concentrated. So where’s the big threat to the system?’’

Since that time, Warren Buffet, in Berkshire Hathaway’s 2002 annual report described derivatives as ‘‘financial weapons of mass destruction . . . .’’

One of the risks that Mr. Buffet cites is the systemic risk created

by the concentration of derivatives: ‘‘Large amounts of risk . . .

have become concentrated in the hands of relatively few . . . dealers, who . . . trade extensively with one another. The troubles of

one could quickly infect the others. [T]hese dealers are [also] owed

huge amounts by nondealer counterparties, [s]ome of [which] are

linked in ways that could cause them to contemporaneously run

into a problem because of a single event. Linkage, when it suddenly

surfaces, can trigger serious systemic problems.’’ In fact, the GSE’s

are some of the largest nondealer counterparties.

A Business Week article (March 2003) explained, ‘‘exposure to derivatives is highly concentrated. The OCC says seven U.S. banks

own nearly 96 percent of the derivatives in the banking system.

And because most derivatives are traded directly between the parties and not on exchanges, they are almost entirely unregulated.’’

Even Federal Reserve Chairman Greenspan, who disagrees with

Mr. Buffett’s conclusions, has acknowledged the problems associated with systemic risk: ‘‘One development that gives me and othVerDate 11-MAY-2000 11:03 Sep 01, 2004 Jkt 000000 PO 00000 Frm 00065 Fmt 6633 Sfmt 6601 95603.TXT SBANK4 PsN: SBANK4
62

ers some pause is the decline in the number of major derivatives

dealers and its potential implications for market liquidity and for

concentration of counterparty credit risks . . . . When concentration reaches these kinds of levels, market participants need to consider the implications of exit by one or more leading dealers. Such

an event could adversely affect the liquidity of types of derivatives

that market participants rely upon for managing the risks of their

core business functions.’’

One example of such concentrations is U.S. dollar interest rate

options, which are used extensively by both Fannie Mae and

Freddie Mac.

In your testimony, you appear to minimize this concern. You say

that the limited number of counterparties, ‘‘may very well be because the party in question has chosen to enter into contracts with

others that he knows well and trusts and whose credit he can

judge.’’

While such behavior may be rational on the part of individual

market participants, regulators must look after the health of the

institutions and the markets as a whole.

Q.14.a. Have the events of the past 10 years, since you made your

comment on the GAO report, or the concerns raised by Mr. Greenspan, changed your attitude regarding the potential systemic risks

of derivatives? Please comment in detail.

A.14.a. No. In fact, I believe that the events and comments of the

past 10 years tend to validate the judgment that the risks of derivatives are similar to the risks of other, related financial and

trading activities, and that they should be managed with similar

care. By making it easier for those who are already exposed to risk

in their existing business activities to manage those risks with

greater precision, transferring to others those risks they do not

wish to take, and taking on those risks that they would prefer, derivatives tend to strengthen the position of individual firms and, in

the process, tend to strengthen the financial system and the economy. As Chairman Greenspan said on April 22, 2002:

Financial derivatives, more generally, have grown at a phenomenal pace over the

past 15 years. Conceptual advances in pricing options and other complex financial

products, along with improvements in computer and telecommunications technologies, have significantly lowered the costs and expanded the opportunities for

hedging risks not readily deflected in earlier decades. The performance of these increasingly complex financial instruments, especially over the past couple of stressful

years, has been noteworthy. These financial products have contributed importantly

to the development of a far more flexible and efficient financial system—both domestically and internationally—than we had just 20 or 30 years ago.

Q.14.b. You have been quoted often to the effect that market discipline is the best regulator of swaps and derivatives. My fear is

that the GSE’s, as such enormous users of derivatives, could trigger the kind of liquidity crisis both Warren Buffett and Chairman

Greenspan have discussed in recent months, if they are not effectively regulated. In your view, what role ought OFHEO play in

terms of regulating the use of derivatives by the GSE’s in order to

avoid systemic risk to the financial system, or will you simply rely

on market discipline, whatever the consequences to the rest of the

economy?

A.14.b. I understand your concerns. I understand that regulation

can be especially appropriate where there is any weakening of the

63

discipline that market forces bring to financial activity. I believe

that the Office of Federal Housing Enterprise Oversight should supervise and address activities of Fannie Mae and Freddie Mac that

could threaten the safety and soundness of those institutions—including their derivatives activities—and as I indicated at the July

22 confirmation hearing, if confirmed I will provide vigorous oversight as Director of OFHEO.

64

65

RESPONSE TO WRITTEN QUESTIONS OF SENATOR REED

FROM MARK C. BRICKELL

Q.1. Do you have any concerns about the growth of the GSE’s, especially of their debt?

A.1. I am concerned about any adverse impact that the growth of

the Enterprises might have on their safety and soundness. If confirmed as the Director of OFHEO, I will work to ensure that the

Enterprises do not engage in any activities or grow in a fashion

that threatens safety and soundness.

Q.2. Do you believe that Fannie and Freddie still have a role to

play today as Government Sponsored Enterprises, or has the secondary mortgage evolved to the point where Government Sponsored Enterprises are no longer needed?

A.2. As I indicated in response to a question at the July 22 confirmation hearing, Fannie Mae and Freddie Mac perform a vitally

important function for housing finance in this country. They bring

capital market benefits to housing finance and, in that way, they

give us the broadest, deepest, most successful housing markets in

the world. That means expanded home loan opportunities, and it

means reduced costs for home loans. These are important benefits

and, if confirmed, I would work to ensure that they are preserved.

Q.3. Should any of the Enterprises’ ties to the Federal Government

be modified or discontinued? Please explain.

A.3. While I am unable to make specific recommendations at this

time, I support the changes in regulatory structure and oversight

recently proposed by Secretaries Snow and Martinez in testimony

before the House Financial Services Committee.

Q.4. Are the derivative counterparty ‘‘haircuts’’ used in OFHEO’s

risk-based capital rule appropriate? Did you make any comments

to OFHEO on this topic on your own behalf, or on behalf of JP

Morgan, ISDA, or any other group? If so, please provide those comments, and explain your current views on this topic.

A.4. I do not recall having made comments about the capital requirements for derivatives in the capital rule and while I do not

believe that it would be appropriate to prejudge any matter that

is within the purview of the duties of the Director of OFHEO, I am

willing to consider ways to strengthen OFHEO’s regulation of

Fannie Mae and Freddie Mac, including ensuring that regulation

of their derivatives activity encourages safe and sound operation of

the Enterprises.

A 1994 GAO report on derivatives (Financial Derivatives, May,

1994) recommended that the ‘‘SEC registrants that are major endusers of complex derivatives products establish and implement’’

requirements for internal controls and the publication of those controls, including assessments of derivative risk-management systems. ISDA put out a response to the report suggesting that there

is no more reason to monitor controls on derivatives than there is

to have the SEC ‘‘monitor controls on new marketing campaigns or

research projects.’’

Q.5.a. As the chief lobbyist and spokesperson for ISDA at this

time, did you think it was accurate to compare controls on derivaVerDate 11-MAY-2000 11:03 Sep 01, 2004 Jkt 000000 PO 00000 Frm 00069 Fmt 6633 Sfmt 6601 95603.TXT SBANK4 PsN: SBANK4
66

tives risk-management with corporate research projects or marketing campaigns? Is that your view today?

A.5.a. While I was a member of ISDA’s Board for much of 1994,

I was not ‘‘the chief lobbyist and spokesperson for ISDA at [that]

time.’’ Nonetheless, to the best of my knowledge, that recommendation of the 1994 GAO report was not adopted at that time or since,

and I am not uncomfortable with that result. The risks of derivatives are similar to the risks of other, related, financial and trading

activities, and they should be managed with similar care.

Q.5.b. If confirmed, would you require that the Enterprises establish and implement internal controls for the use of derivatives?

Would you monitor those controls? Would you require that those

controls be made public?

A.5.b. I believe OFHEO has both safety and soundness regulatory

authority and authority to enforce compliance with the standards

and rules that it establishes. Using this authority, OFHEO should

ensure that the policies of Fannie Mae and Freddie Mac limit risk

taking and enhance risk management appropriately, and determine

that those policies have been carried out. If confirmed, I intend to

provide vigorous oversight of Fannie Mae and Freddie Mac, including oversight of their derivatives activities.

Q.6. Were you involved in the effort to block the regulation of energy or metal derivatives during the debate on the CFMA? Did you

take any position on this specific issue, or lobby anyone on this

issue? If so, please fully describe your activities.

A.6. Although questions about energy and metals were part of the

larger bill, I do not recall having taken a position or lobbied on this

specific issue.

Q.7. You are currently the CEO of Blackbird Holdings, which, as

I understand it, is a specialized inter-dealer electronic trading system for OTC financial derivatives. Blackbird’s website states that

it has 40 international dealers installed and trading on its system

in North America and an additional 35 dealers across Europe, and

that the Blackbird ‘‘trading network has consistently expanded

over time.’’ But the website specifically declines to release any volume records. And no press releases are listed on the website for

this year, although 8 are listed for 2002 and 12 for 2001.

The Wall Street Journal reported on February 18, 2003, a company named eSpeed, which is an affiliate of Cantor Fitzgerald, was

entering the same businesses as Blackbird. The Journal article

stated:

If successful, eSpeed’s planned move into electronic trading for dollar and eurodenominated interest-rate swaps would make it the only formidable player in the

wide-open area of online swaps trading. Only one firm, Blackbird Holdings, so far

has launched an online swaps platform. But it has failed to gain a foothold, despite

what was seen as a novel technology. [Emphasis supplied.]

What is the state of Blackbird’s business now? Why did both

Blackbird’s two large institutional investors, Reuters and ICAP

PLC sell out their Blackbird investments?

A.7. Blackbird continues to market its service to potential customers in several countries. Other aspects of the business are proprietary information. I understand that Reuters sold its Blackbird

67

shares as part of a realignment of its business activities. By terms

of a settlement agreement with ICAP PLC, Blackbird is not allowed to disclose any details of our settlement arrangements with

that firm.

Q.8. During the CFMA debate you were very public about that fact

that you thought a company should be able to ‘‘opt for regulation.’’

It was your view then, is it your view now? Is this something you

believe would work for Fannie Mae and Freddie Mac?

A.8. Congress adopted this approach in the Commodity Futures

Modernization Act (CFMA). The CFMA, in part, assures that swap

activity will be subject to Commodity Futures Trading Commission

(CFTC) regulation when a participant seeks and the CFTC agrees

to provide that regulatory oversight. Members of the President’s

Working Group on Financial Markets, including Treasury Secretary Summers and Federal Reserve Board Chairman Greenspan,

supported the legislation, which was enacted into law. I shared the

view of the regulators and Congress that this approach was appropriate then, and I still do today.

I believe that the Office of Federal Housing Enterprise Oversight

(OFHEO) already possesses the authority to supervise and address

activities of Fannie Mae or Freddie Mac that could threaten the

safety and soundness of those institutions—including their derivatives activities. Stated plainly, swap activity oversight by OFHEO

is mandatory, not optional.

Q.9. According to an article published online by the American

Banker (July 16), you own stock of American International Group

(the parent of mortgage insurer United Guaranty), General Electric

(the parent of GE Mortgage Insurance); and HSBC Holdings (the

parent of Household International). You also hold a number of

other bank stocks and stocks of other companies that have significant finance affiliates.

You have agreed to divest certain of your holdings within 90

days. Given the role of some of the companies in which you hold

shares—especially JP Morgan Chase—in the derivatives markets,

do you think it is appropriate for you to wait up to 90 days before

divesting your interest? How do you plan to divest yourself of your

holdings in other banks or companies with significant finance affiliates? Do you plan to do so immediately? Did you consider simply

placing all of your shares in a blind trust for the duration of your

government service?

Rather than dispose of your wife’s holdings of more than $1 million dollars in Citigroup shares and options, you have chosen to

recuse yourself during your service ‘‘from participating personally

and substantially in any particular matter that will have a direct

and predictable effect on the financial interests of Citigroup.’’

Citigroup is the Nation’s largest financial institution, and it is also

a substantial participant in the Nation’s derivatives and mortgage

markets. Given the nature of your responsibilities, and the size and

importance of Citigroup, how can you perform your post effectively

and satisfy the terms of your recusal? Even if technical compliance

is possible, why have you chosen to allow a situation to arise that

many may view as tantamount to the appearance of a conflict of

interest?

68

A.9. If confirmed, I will comply fully with the terms of my Ethics

Agreement and all applicable laws and regulations. It is my understanding that, after undertaking a thorough review of my financial

holdings, the Office of Government Ethics and the U.S. Department

of Housing and Urban Development have reconfirmed that the

terms of my Ethics Agreement meet or exceed the requirements of

applicable laws and regulations, and will not impair my ability to

perform effectively the duties of Director of OFHEO.

Q.10. Do you believe that the secondary mortgage market needs

Federally chartered institutions, instead of private financial institutions to maintain a stable, liquid, and reliable source of mortgage

financing, or could it be maintained by private financial institutions alone? Describe in detail why or why not.

A.10. As I indicated in response to a question at the July 22 hearing, Fannie Mae and Freddie Mac perform a vitally important function for housing finance in this country. They bring capital market

benefits to housing finance and, in that way, they give us the

broadest, deepest, most successful housing markets in the world.

That means expanded home loan opportunities, and it means reduced costs for home loans. These are important benefits and, if

confirmed, I would work to ensure that they are preserved.

Q.11. What are the three most important challenges you believe

the Office of Federal Housing Enterprise Oversight (OFHEO) faces

at the moment? If confirmed, describe in detail how you will address such challenges.

A.11. My first objective, if confirmed, would be to ensure that

OFHEO, or its successor entity, continues its swift evolution into

a world-class financial regulator of the Enterprises under its supervision. I will dedicate my energies to the completion of this task.

Second, OFHEO must provide rigorous, continuing oversight of the

entities under its jurisdiction to ensure that they operate safely

and soundly. Third, OFHEO must ensure that it has the necessary

resources, authority, and enforcement power to respond to the concerns raised by the recent accounting and management difficulties

at one of the Enterprises. I look forward to helping to pursue these

important goals.

Q.12. Under what circumstances, if any, would you ever recommend formally rescinding the GSEs’ line of credit with the Federal Treasury? Describe those circumstances in detail. Are there

any other Federal benefits that GSE’s currently have that you

would consider eliminating? Please explain in detail.

A.12. The mission of OFHEO is to work to ensure that Fannie Mae

and Freddie Mac operate in a safe and sound manner. While I am

unable to make specific recommendations at this time, any policy

recommendations by OFHEO concerning the Enterprises should be

based on their impact on the safe and sound operation of the Enterprises.

Q.13. On your Statement for Completion by Presidential Nominees,

in answer to Question 4 in the ‘‘Potential Conflicts of Interest’’ section, you are asked to list any lobbying activity during the past 10

years you have engaged in. In your brief answer, you state that you

have, ‘‘participated in discussions in Washington and, to a lesser

69

extent, in London, Paris, Basel, and Tokyo, concerning the development and implementation of the regulatory framework for swaps

and other privately negotiated derivative transactions.’’ Please list,

to the most complete extent possible, all of your lobbying activities

between 1993–2003.

A.13. During that time I filed lobbying reports, as required by law,

describing that activity. I would be happy to obtain additional copies for you, if necessary.

Q.14. Given what you currently know about OFHEO and the

GSE’s, do you believe the current risk-based capital rule is identifying the real risks that Fannie and Freddie are taking? Describe

in detail why or why not. Which specific changes, if any, would you

propose to the risk-based capital rule? Describe in detail why you

believe such changes are necessary.

A.14. I believe that it is important that the Enterprises are managed in a safe and sound manner, and are perceived to be sound.

If confirmed, I would fully enforce the existing capital standard

that has been mandated by statute. I have no reason, based on

what I now know, to believe that current capital requirements are

ineffective, but I would look forward to working with Congress as

requested to discuss any legislative proposals regarding the statutorily mandated minimum capital requirement, should I be confirmed and have had the opportunity to explore more fully the effects of the current capital requirements on the Enterprises. I support the improvements outlined in testimony by Secretaries Snow

and Martinez before the House Financial Services Committee.

Q.15. Given what you currently know about OFHEO and the

GSE’s, do you believe that the GSE’s are overcapitalized? Please

describe in detail why or why not. What level of capitalization do

you believe is necessary in order to ensure the safety and soundness of the GSE’s? Describe in detail your rationale for the level

of capitalization specified and how it could be best accomplished.

A.15. I believe that it is important that the Enterprises are managed in a safe and sound manner, and are perceived to be sound.

If confirmed, I would fully enforce the existing capital standard

that has been mandated by statute. I have no reason, based on

what I now know, to believe that current capital levels are inappropriate, but I would look forward to working with the Congress as

requested to discuss any legislative proposals regarding the statutorily mandated minimum capital requirement, should I be confirmed and have had the opportunity to explore more fully the effects of the current capital requirements on the Enterprises. I support the improvements outlined in testimony by Secretaries Snow

and Martinez before the House Financial Services Committee.

Q.16. While at JP Morgan and Blackbird Holdings, did you have

any interactions, discussions or written communications with FM

Watch/FM Policy Focus? If so, with which individuals did you interact, to what extent, and specifically, on which issues did you work

with them?

A.16. While I know personally and professionally some individuals

who are associated with that organization, and have worked with

70

them on other matters, I do not believe that I have worked with

them on matters involving the Enterprises.

Q.17. Dow Jones reported recently (February 6, 2003) that, during

the effort to pass the Commodity Futures Modernization Act

(CFMA), you ‘‘pushed for legislation allowing so-called Granny

swaps—derivatives that can be sold to ordinary investors.’’ Do you

believe that retail swaps should be completely unregulated? Describe in detail why or why not.

A.17. The CFMA was enacted, in part, to increase legal certainty

for counterparties in swap contracts. I believe that the benefits of

legal certainty should be available to all such counterparties, and

that was my view during the discussions that lead to the passage

of the CFMA.

Q.18. Describe in detail your experience at the International Swaps

and Derivatives Association (ISDA), both as a Director and as

Chairman. Describe in detail why you left the Chairmanship. Was

there a term limit to the position? If so, how long is it and when

was the term limit instituted? If not, did you have the support of

a majority of the Directors when you left the Chairmanship?

A.18. I served on the Board of the International Swaps and Derivatives Association for most of the period from 1986 to 1999. During

that time I spent 4 years as Chairman and 2 years as Vice Chairman of the organization. I served as Chairman in four consecutive

terms from 1988–1992, the first person to be elected to that post

for more than 1 year. Although ISDA did not have, and does not

have today, a term limit policy, I voluntarily stepped down as

Chairman after 4 years of service. I enjoyed serving on the Board

for another year until 1993, departing voluntarily at the end of

that term. While there was no formal measure of the support of the

Board when I resigned as Chairman or left the Board, I was

pleased that I was reelected to the Board in 1994 and that the

Board Members elected me Vice Chairman of the organization at

that time.

Q.19. Have you had any management complaints filed against you

from any employee of JP Morgan or Blackbird Holdings, Inc.? If so,

please describe the outcome of such complaints.

A.19. Not to my knowledge.

Q.20. Did you communicate, verbally or in written form, with the

Commodity Future Trading Commission (CFTC) about Blackbird to

the Chairman, or its enforcement personnel? If so, describe in detail such communications, and provide documentation, if available.

A.20. I do not recall having discussed Blackbird with the Chairman

of the CFTC or with CFTC enforcement personnel during my tenure as Chief Executive Officer of Blackbird.

Q.21. In testimony to the House Commerce Committee in 1999, you

said, ‘‘Hedge funds are not regulated and . . . let me say I am glad

that they are not regulated.’’ There have been growing concerns in

recent months about the retailization of unregulated hedge funds.

Is it still your view that hedge funds should remain unregulated?

In your view, should there be any limits on the net worth of people

who may invest in hedge funds? Please explain in detail.

71

A.21. I am not familiar with any policy proposals in this area, and

thus have no comment with respect to any such proposals.

Q.22. You have testified as recently as April 2000 that you believe

that futures exchanges should be unregulated. Is that still your position? Please explain in detail.

A.22. I do not recall having given such testimony. I am comfortable

with the current regulatory framework for futures exchanges.

Q.23.a. In a response to a question from Chairman Shelby, you

said, ‘‘In my career in financial services, every day that I have

spent at my desk, every day that I have worked has been spent at

a regulated financial institution.’’ My understanding is that Blackbird Holdings is not a regulated entity. Is that correct?

A.23.a. Blackbird is a regulated enterprise. Blackbird’s operating

companies, Blackbird North America, Inc., and Blackbird Europe,

Limited, are regulated by the NASD under the supervision of the

Securities and Exchange Commission, and the Financial Services

Authority of the United Kingdom, respectively.

Q.23.b. In fact, my understanding is that you have worked hard to

prevent Blackbird and its core business from being regulated. Is

that correct? Please describe in detail any lobbying or other actions

you have taken to keep Blackbird from being regulated.

A.23.b. The regulatory status of Blackbird, as described above, was

established before I joined the company, and I have not attempted

to change or modify those arrangements. I have worked to ensure

that Blackbird complies with its regulatory obligations.

RESPONSE TO WRITTEN QUESTIONS OF SENATOR SARBANES

FROM MARK C. BRICKELL

Q.1. In response to my question 4, you state in 1994 you jointly

headed a JP Morgan project for Freddie Mac. You identified the

project as, ‘‘a risk management advisory project that focused principally, as I recall, on the quality of Freddie Mac’s management of

the credit, market, legal, and operational risk of its derivatives activities.’’ Please provide the Committee with any documents in your

possession, including any presentations or reports, regarding the

project. In addition, please identify any individuals who you believe

may be in possession of any documents related to the project.

A.1. There are no documents regarding the project in my possession. For further information about the project and related documents, the Committee may wish to contact Tim Ryan or Courtney

Ward of JP Morgan, who are responsible for the firm’s relationship

with Freddie Mac.

Q.2. Did you or your team at JP Morgan at any time advise

Freddie Mac on how to use derivatives to structure financial transactions in a way that achieved desired results, that is manage

earnings?

A.2. I have never provided advice to Freddie Mac about using derivatives to manage earnings, and have no knowledge regarding

any advice of such a nature that others may have provided.

Q.3. Were you at any time a participant in any presentation or

briefing of Freddie Mac officials regarding the project? If so, please

72

identify the date(s) of such presentations or briefings, and the individuals present.

A.3. Yes. I participated in a briefing to members of the Finance

Committee of the Freddie Mac Board, most likely during the third

or fourth quarter of 1994. I do not recall all the names of the Finance Committee members and others who may have been present

at the time, but do recall that Tim Ryan and Steve Thieke from

JP Morgan participated along with me in the briefing.

RESPONSE TO WRITTEN QUESTIONS OF SENATOR CARPER

FROM ALICIA R. CASTANEDA

Q.1. What is your view of multidistrict membership? What factors

do you believe are most important to consider when deciding this

issue?

A.1. I understand the Federal Housing Finance Board began considering this issue after four Federal Home Loan Banks filed petitions seeking clarification on whether a member institution can be

a member of two or more Federal Home Loan Banks.

With any action a regulator considers, the statutory authority for

options under review must be a prime consideration.

In addition, as with all issues that come before the Federal Housing Finance Board, multidistrict membership must be considered in

the light of safety and soundness, that is, whether a change in

membership enhances or harms the safety and soundness of the

Federal Home Loan Banks.

I would also consider the question of whether any change serves

the housing finance and affordable housing missions that Congress

has given the Federal Home Loan Banks, as well as the effect of

any change on business choices the Banks make in serving these

missions.

Q.2. What is your position on requiring the Home Loan Banks to

register with the Securities and Exchange Commission under the

Securities and Exchange Act of 1934? As you may know Section

12(i) of the 1934 Act provides the bank regulatory agencies with

the powers, functions, and duties vested in the SEC to administer

and enforce the disclosure and reporting provisions of the 1934 Act.

What is your view of having the Federal Home Loan Banks register under 12(i) with the Finance Board?

A.2. I am aware of the Administration’s position that all Government Sponsored Enterprises, including the Federal Home Loan

Banks, should voluntarily register with the SEC under the Securities and Exchange Act of 1934.

The 12(i) concept is one that I have not had the opportunity to

familiarize myself with, but I intend to do so. If confirmed, I will

study all the factors involved with the disclosure issue.

My experience at the Bank of America has led me to appreciate

the importance of disclosure, and as a regulator, I would be a

strong supporter of transparency, of full disclosure. My duty is, ultimately, to the public, and the public is well-served through a

clear and consistent regime of disclosure.

73