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28–558 PDF 2006

S. HRG. 109–464

NOMINATIONS OF:

SHELIA BAIR, JAMES B. LOCKHART, III

DONALD L. KOHN, AND KATHLEEN L. CASEY

HEARING

BEFORE THE

COMMITTEE ON

BANKING, HOUSING, AND URBAN AFFAIRS

UNITED STATES SENATE

ONE HUNDRED NINTH CONGRESS

SECOND SESSION

ON

NOMINATIONS OF:

SHELIA BAIR, OF KANSAS, TO BE MEMBER AND CHAIRPERSON OF THE BOARD

OF DIRECTORS OF THE FEDERAL DEPOSIT INSURANCE CORPORATION

JAMES B. LOCKHART, III, OF CONNECTICUT, TO BE DIRECTOR OF

THE OFFICE OF FEDERAL HOUSING ENTERPRISE OVERSIGHT

DONALD L. KOHN, OF PENNSYLVANIA, TO BE VICE CHAIRMAN OF

THE BOARD OF DIRECTORS OF THE FEDERAL RESERVE SYSTEM

KATHLEEN L. CASEY, OF VIRGINIA, TO BE A MEMBER OF

THE U.S. SECURITIES AND EXCHANGE COMMISSION

JUNE 8, 2006

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

(

Available at: http://www.access.gpo.gov/congress/senate/senate05sh.html

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

MEL MARTINEZ, Florida

PAUL S. SARBANES, Maryland

CHRISTOPHER J. DODD, Connecticut

TIM JOHNSON, South Dakota

JACK REED, Rhode Island

CHARLES E. SCHUMER, New York

EVAN BAYH, Indiana

THOMAS R. CARPER, Delaware

DEBBIE STABENOW, Michigan

ROBERT MENENDEZ, 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 Member

ANDREW OLMEM, Counsel

JONANTHAN GOULD, Professional Staff Member

DEAN V. SHAHINIAN, Democratic Counsel

JONATHAN MILLER, Democratic Professional Staff

LYNSEY GRAHAM REA, Democratic Counsel

JOSEPH R. KOLINSKI, Chief Clerk and Computer Systems Administrator

GEORGE E. WHITTLE, Editor

(II)

CONTENTS

THURSDAY, JUNE 8, 2006

Page

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

Opening statements, comments, or prepared statements of:

Senator Sarbanes .............................................................................................. 4

Senator Crapo ................................................................................................... 5

Senator Johnson ............................................................................................... 6

Prepared statement ................................................................................... 22

Senator Dole ...................................................................................................... 6

Senator Bunning ............................................................................................... 7

Senator Hagel ................................................................................................... 8

Senator Reed ..................................................................................................... 8

Senator Martinez .............................................................................................. 8

Senator Allard ................................................................................................... 23

NOMINEES

Shelia Bair, of Kansas, to be Member and Chairperson of the Board of

Directors of the Federal Deposit Insurance Corporation .................................. 9

Prepared statement .......................................................................................... 24

Biographical sketch of nominee ....................................................................... 25

Response to written questions of:

Senator Shelby ........................................................................................... 66

Senator Bunning ....................................................................................... 67

James B. Lockhart, III, of Connecticut, to be Director of the Office of Federal

Housing Enterprise Oversight ............................................................................ 11

Biographical sketch of nominee ....................................................................... 35

Response to written questions of Senator Bunning ....................................... 67

Donald L. Kohn, of Pennsylvania, to be Vice Chairman of the Board of

Directors of the Federal Reserve System ........................................................... 12

Biographical sketch of nominee ....................................................................... 43

Response to written questions of Senator Bunning ....................................... 69

Kathleen L. Casey, of Virginia, to be a Member of the U.S. Securities and

Exchange Commission ......................................................................................... 13

Biographical sketch of nominee ....................................................................... 57

ADDITIONAL MATERIAL SUPPLIED FOR THE RECORD

Statement of Bob Dole, a former U.S. Senator from the State of Kansas .......... 73

(III)

(1)

NOMINATIONS OF:

SHEILA BAIR, OF KANSAS

TO BE MEMBER AND CHAIRPERSON OF

THE BOARD OF DIRECTORS

FEDERAL DEPOSIT INSURANCE CORPORATION

JAMES B. LOCKHART III, OF CONNECTICUT

TO BE DIRECTOR, OFFICE OF

FEDERAL HOUSING ENTERPRISE OVERSIGHT

DONALD L. KOHN, OF PENNSYLVANIA

TO BE VICE CHAIRMAN OF

THE BOARD OF GOVERNORS OF

THE FEDERAL RESERVE SYSTEM AND

KATHLEEN L. CASEY, OF VIRGINIA

TO BE A MEMBER OF THE

U.S. SECURITIES AND EXCHANGE COMMISSION

THURSDAY, JUNE 8, 2006

U.S. SENATE, COMMITTEE ON BANKING, HOUSING, AND URBAN AFFAIRS, Washington, DC.

The Committee met at 10:09 a.m., in room SD–538, Dirksen Senate Office Building, Richard C. Shelby (Chairman of the Committee) presiding.

OPENING STATEMENT OF CHAIRMAN RICHARD C. SHELBY

Chairman SHELBY. The hearing will come to order. This morning,

we will consider the nominations of four very distinguished individuals. I appreciate the willingness of the nominees to appear before

the Committee. The panel of nominees, if confirmed, will have very

important responsibilities for ensuring public confidence in the viability of our Nation’s financial institutions, capital markets, and

housing finance system.

Our first nominee is Ms. Sheila C. Bair, nominated by President

Bush to serve as a Member and Chairman of the Federal Deposit

Insurance Corporation, FDIC. The FDIC, as we all know, is

charged with insuring deposits in banks and thrift institutions for

at least $100,000. In addition, the FDIC is the primary Federal

regulator of banks that are chartered by the States that do not join

the Federal Reserve System, roughly 5,250 banks and savings

2

banks. The FDIC also serves as an important role as the backup

supervisor for the remaining insured banks and thrift institutions.

The FDIC is currently implementing changes to the Deposit Insurance Program mandated by Congress in legislation passed earlier this year. I believe that ensuring that this implementation

process is carried out effectively and in a manner that tracks the

will of Congress will be a key responsibility of the new Chairman.

The nominee understands that well.

Ms. Bair brings a wealth of financial services experience to the

Federal Deposit Insurance Corporation. Currently a Professor of Financial Regulatory Policy at the University of Massachusetts, Ms.

Bair has served as Assistant Secretary for Financial Institutions at

the Department of the Treasury, as Senior Vice President of the

New York Stock Exchange and as Commissioner and Acting Chairman of the Commodity Futures Trading Commission. She is also

the author of numerous articles on the financial services industry.

Our second nominee with us is James B. Lockhart, III, nominated to be the Director of the Office of Federal Housing Enterprise

Oversight at the Department of Housing and Urban Development

that we call OFHEO. Mr. Lockhart, for the past several years, this

Committee has made regulatory reform for the Government Sponsored Enterprises a key priority, as you well know. The internal

controls, risk management, and accounting problems of the GSE’s

point to the need for our efforts to bear fruit in this regard. We will

be looking to you to assume the stewardship of OFHEO and use

the authority you may have available to ensure that these entities,

which are so important to our housing markets, operate in a safe

and a sound manner.

Mr. Lockhart was previously nominated and confirmed to serve

as the Deputy Commissioner for the Social Security Administration. In that position, he serves as the Agency’s Chief Operating

Officer, Secretary to the Social Security Board of Trustees, and as

a member of the Executive Committee of the President’s Management Council. Prior to this, he served as Managing Director at

NetRisk, Incorporated. Earlier in his career, he served as Executive

Director of the Pension Benefit Guaranty Corporation and has held

senior positions at National Reinsurance, Smith Barney, Alexander

& Alexander, and Gulf Oil. Mr. Lockhart received his bachelor’s degree from Yale University and his master’s degree from Harvard.

Our third nominee is Donald L. Kohn, nominated to serve as the

Vice Chairman of the Board of Governors of the Federal Reserve

System. Dr. Kohn took office on August 5, 2002, as a Member of

the Board of Governors of the Federal Reserve System for a full

term ending January 31, 2016.

The Federal Reserve System is in a period of transition. Chairman Bernanke assumed his position earlier this year and has the

unenviable task of following the much-commended tenure of Alan

Greenspan. Given his extensive background and training, this

Committee was pleased to see Chairman Bernanke assume those

duties. In another type of transition, the future path of interest

rates appears less predictable than it has been in recent years, and

the recent volatility in financial and stock markets reflects that uncertainty. Additionally, the Federal Reserve Board is in the process

of developing new capital requirements for our banking system.

3

These requirements are an extremely important part of our capital

regime, and any changes must be implemented in a thoughtful and

deliberative manner that recognizes and preserves the operation of

the existing minimum capital requirement. For all these reasons,

the Committee is again pleased that President Bush nominated

someone with the depth and breadth of experience that you possess, Dr. Kohn, to assume the role of Vice Chairman of the Board

of Governors of the Federal Reserve System.

You have a very distinguished record with the Federal Reserve

System already. Before becoming a Member of the Board, he served

on its staff as Adviser to the Board for Monetary Policy from 2001

to 2002; Secretary of the Federal Open Market Committee from

1987 to 2002; Director of the Division of Monetary Affairs, and

Deputy Staff Director for Monetary and Financial Policy. He has

also held several positions in the Board’s Division of Research and

Statistics: Associate Director, Chief of Capital Markets, and Economist. Dr. Kohn began his career as a Financial Economist at the

Federal Reserve Bank of Kansas City.

Dr. Kohn has written extensively on issues relating to monetary

policy and its implementation by the Federal Reserve. These works

were published in volumes issued by various organizations, including the Federal Reserve System, the Bank of England, the Reserve

Bank of Australia, the Bank of Japan, the Bank of Korea, the National Bureau of Economic Research, and the Brookings Institution.

Dr. Kohn received a B.A. in economics in 1964 from the College of

Wooster and a Ph.D. in economics in 1971 from the University of

Michigan.

Our fourth nominee today is no stranger to this Committee. It

is Kathleen Casey to be a Commissioner of the Securities and Exchange Commission. Ms. Casey has served, as we know, as the

Staff Director and Counsel of the Senate Banking Committee for

the past 31⁄2 years. During this period, the Committee has considered many significant securities issues, among them addressing

trading abuses in the mutual fund industry, oversight of the Sarbanes-Oxley Act, the structure of the capital markets and the

hedge fund industry. The Committee has also reviewed the impact

of the global analyst settlement and increased scrutiny of both

credit rating agencies and the self-regulatory organizations that we

call SRO’s. In examining these key issues, the Committee is always

mindful of the SEC’s role and its interrelationship with the SRO’s,

State regulators, and international regulatory bodies. As Staff Director, Ms. Casey has acquired substantial expertise in these areas.

Beyond this institutional experience, Ms. Casey has developed a

reputation for her keen intellect, diligence, and consummate professionalism. Perhaps more importantly, she recognizes the fundamental importance of honesty, integrity, and fairness in the operation of our capital markets.

Upon confirmation, Ms. Casey will become a Commissioner at

the Securities and Exchange Commission during a time of great

change in the global markets. The Commission is charged with protecting investors; maintaining fair, orderly, and efficient markets;

and facilitating capital formation. Recently, the Securities and Exchange Commission has had to confront a host of issues, among

them, increased retail investment, new investment products, new

4

investment vehicles, new markets, and the emergence of publicly

traded exchanges with more global interaction and innovation than

ever before. As the flow of capital has become increasingly international in scope, regulatory considerations will need to adapt to

meet these changes. On the domestic side, consolidation and exchange demutualization further demonstrate that change and evolution are a constant in our financial markets. Again, the Securities and Exchange Commission must keep pace with these developments.

Prior to working on the Banking Committee, Ms. Casey served

as my Chief of Staff and Legislative Director for a number of years.

She also worked as a Legislative Assistant and Staff Director for

the Subcommittee on Financial Institutions of this Senate Banking

Committee. She received her B.A. from Pennsylvania State University and her J.D. from George Mason University. I commend the

President for nominating Ms. Casey and look forward to hearing

her testimony and the testimony of all our nominees this morning.

Senator Sarbanes.

STATEMENT OF SENATOR PAUL S. SARBANES

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

I am very pleased that this morning, we are considering the

nominations of four highly qualified individuals, and I want to commend the President and his advisers for sending people of such

quality before us to assume important responsibilities. Amongst

other things, it makes our job a lot easier, so I welcome it for that

reason as well.

At the very outset, I want to pay a special tribute to Kathy

Casey, who has been nominated to serve as a Commissioner of the

Securities and Exchange Commission. Ms. Casey, as the Chairman

observed, has been the Staff Director of this Committee since January 2003. During that period, the Committee has reported out

many bills. Bills of some consequence number well into the

twenties. Virtually all of them came out of this Committee unanimously. On only a couple of instances did we have a division, and

a lot of the credit, I think, goes to very effective staff work.

Mr. Chairman, I am sure you and my colleagues will agree with

me that Senators often get credit for the success of the Committee,

but we know that a large part of the work is done by the staff.

Chairman SHELBY. Absolutely.

Senator SARBANES. Also, Ms. Casey has led the Committee as

Majority Staff Director in a highly transparent manner, with an

open door policy, an open mind to hearing all points of view, and

with a commitment to try to work toward consensus amongst the

Members of the Committee. And, at a time that has been marked

by fractious division and so forth, this is a welcome quality and I

am sure will be of important service on the Commission.

Ms. Casey has been an excellent Staff Director. I believe she will

be a very able Commissioner at the SEC, and I am very pleased

and look forward to supporting her nomination.

Let me turn to the other nominees. Sheila Bair, of course, is also

very well known to the Committee. She has been confirmed three

times before, most recently in 2001, when she served President

Bush as Assistant Secretary for Financial Institutions at the TreasVerDate 11-MAY-2000 21:48 Aug 21, 2006 Jkt 025856 PO 00000 Frm 00008 Fmt 6633 Sfmt 6633 28558.TXT SBANK4 PsN: SBANK4
5

ury Department. At Treasury, she played a lead role in developing

policy relating to Federal Deposit Insurance reform, which obviously is highly relevant now to the nomination to be the Chair of

the FDIC, and on terrorism risk insurance, which the Cain-Hamilton Group, ranking how their recommendations were being carried out, this was the only A that they gave to how it was being

implemented.

Chairman SHELBY. That is right.

Senator SARBANES. And we all worked together in trying to

achieve that.

Most recently, she has been teaching at the University of Massachusetts at Amherst. I have come to know Sheila Bair over the

years, and I want to express my appreciation to her for her willingness to serve yet another tour of duty in Government as the Chair

of the FDIC.

Don Kohn has served in the Federal Reserve for over 36 years,

the last 4 as a Member of the Board of Governors. He is very highly respected as a consummate and dedicated professional public

servant. As a staff member, he was well known for his intellect and

for being invaluable to both Chairman Volcker and Chairman

Greenspan, and I believe it is only fitting and appropriate that he

is now being considered to be the Vice Chairman of the Federal Reserve Board.

And Mr. Lockhart, not as well known to this Committee, but he

has had extensive Government experience: Executive Director of

the Pension Benefit Guaranty Corporation from 1989 to 1993 and

Deputy Commissioner and Chief Operating Officer at the Social Security Administration since 2002. He is also currently serving as

Acting Director of OFHEO, and if confirmed, will be leading

OFHEO at, I think, one of the most important times in its history.

Finally, Mr. Chairman, I want to take this opportunity to express

my appreciation to Roger Ferguson, who served so ably at the Fed,

first as a Member of the Board and then as its Vice Chairman from

October 1999 to April 2006. Among other things, I would note that

he provided a very steady hand and a strong leadership at the Fed

during the crisis surrounding September 11. We will recall that

Chairman Greenspan was out of the country when that tragedy occurred, and Roger Ferguson responded with, I think, great ability

and rendered really a tremendous service.

I also want to express my appreciation to Cynthia Glassman,

both for her dedicated service at the Securities and Exchange Commission and before that as a Senior Professional Economist at the

Federal Reserve Board. I want to take this opportunity to wish

each of them well in their future endeavors.

Thank you very much.

Chairman SHELBY. Senator Crapo, you have an opening statement you would like to give?

STATEMENT OF SENATOR MICHAEL CRAPO

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

I simply want to join with you and Senator Sarbanes in your

comments about each of those who are on our panel today. We have

very strong candidates for the positions to which they have been

nominated, and I also, because of our close relationship with Kathy

6

Casey here, want to give her my personal congratulations and commendations for the great work that you have done here and the

great work that you will do at the SEC.

Chairman SHELBY. Thank you.

Senator Johnson.

STATEMENT OF SENATOR TIM JOHNSON

Senator JOHNSON. Thank you, Mr. Chairman, and Ranking Member Sarbanes. I want to thank you for holding this hearing.

We have a very impressive slate of nominees to consider. I look

forward to hearing from them. I would especially like to offer my

congratulations to Ms. Casey, a member of our own Banking Committee family. She has been with you, Mr. Chairman, for many

years, and I appreciate the hard work she has done on behalf of

this Committee and her service to the financial services industry.

And while her nomination is a loss for us, it is well-deserved, and

I have no doubt she will be a great asset to the SEC.

I have a number of comments that I would like to share, but in

order to expedite the consideration of this hearing, Mr. Chairman,

what I would like to do is to submit my statement for the record.

Chairman SHELBY. Without objection, it will be made part of the

record in its entirety.

STATEMENT OF SENATOR ELIZABETH DOLE

Senator DOLE. Thank you, Mr. Chairman.

While I could talk about all of these outstanding nominees before

us today in some detail, there is one that Bob Dole and I are especially proud of. Bob has asked that I let you know that he very

much wanted to be here today and is so sorry he had to be out of

town. He wanted to once again introduce Sheila Bair, the President’s nominee for Chairman of the Federal Deposit Insurance Corporation.

We have known Sheila for 25 years, Mr. Chairman. Earlier in

her career, she served as Bob’s Counsel on the Senate Judiciary

Committee, handling issues including civil and constitutional

rights, intellectual property, and judicial reform. Bob and I knew

her to be an outstanding member of his staff, one on whom we

could count for advice and analysis, both of us, a role at which she

certainly has excelled.

Bob was here before this Committee on July 12, 2001, when he

sang Sheila’s praises for her confirmation as Assistant Secretary of

the Treasury. He asked that my colleagues on the Committee keep

in mind his high praise and confidence in Sheila Bair. Within 24

hours of her confirmation for that position, Mr. Chairman, Sheila

was before this Committee, testifying on the need for deposit insurance reform. If confirmed in this new role, she will be charged with

implementing the reform.

On numerous issues, Sheila has been a great resource to both

Bob and me over the years. She has been a catalyst for greater action for financial literacy and financial institutions policy. Both Bob

and I are confident that Sheila will be approved speedily and overwhelmingly, and we both give her our unqualified support.

I look forward to working with Sheila in this new capacity on

critical issues impacting the financial services industry, such as the

7

implementation of Basel II. I have some concerns that the proposed

U.S. regulation differs from the internationally adopted accord and

how these differences might disadvantage U.S. banks of all sizes

abroad and on our own soil.

I am confident that Sheila will keep an open mind at the FDIC

and that she will engage in an open dialogue about the concerns

of some of the industry with regard to the draft rule.

Mr. Chairman, I would ask unanimous consent that Bob Dole’s

full statement be made a part of the record.

Chairman SHELBY. Without objection, it will be done

I also want to recognize Dr. Don Kohn, who has been nominated

as Vice Chairman of the Board of Governors of the Federal Reserve. He has very ably served as a Member of the Board since

2002 and has my full support for this new position.

The Committee will also consider the nomination of Jim

Lockhart to serve as Director of the Office of Federal Housing Enterprise Oversight. I had the great pleasure of working with Jim

when he was the Executive Director of the Pension Benefit Guaranty Corporation during my years as Labor Secretary for the first

President Bush. In my role, Mr. Chairman, I served as the Chairman of the Board of Directors for the PBGC and relied on Jim’s

wise advice and counsel. Jim did a great job of reform at PBGC in

his time there and has now dedicated himself to the daunting task

of oversight of Fannie Mae and Freddie Mac. I am confident, Mr.

Chairman, he will do an excellent job there as well, and he has my

unqualified support.

Thank you, Mr. Chairman.

Chairman SHELBY. Senator Bunning.

STATEMENT OF SENATOR JIM BUNNING

Senator BUNNING. Thank you, Mr. Chairman.

Today, we have four very important nominations before this

Committee. Each of the nominees will fill a high ranking position

at one of the most influential Government agencies overseeing the

financial sector, and each of the nominees will play a critical role

in preserving the safety and soundness of our national economy.

Two of the nominees face immediate challenges in their jobs. The

Government Sponsored Enterprises like Fannie and Freddie must

be cleaned up, and the risks that they pose to our economy must

be brought under control. That is a job that we must act on in Congress in addition to what is done by the Office of Federal Housing

Enterprise Oversight. Also, the Federal Reserve is at a point where

it is going to do some serious damage to our economy if its Members are not careful.

I hear a lot of talk about inflation showing up, but there are two

things we need to keep in mind when talking about inflation: First,

our inflation measures are backward-looking. Second, there is a lag

between Fed action and when we have an impact on inflation and

the economy. Both of those should lead the Fed to be cautious

when taking action to fight inflation.

I am afraid the Fed is going to overshoot this year just as they

did the last time. Overshooting will have a devastating impact on

this economy and maybe worse than before, because of the artificially inflated housing prices this time around. I am not alone in

8

my concern, either. All you need to do is look at the stock market

since the Fed’s last action to see that the markets are really worried. Just this week, the Dow is down 317 points, mostly because

of talk from the Fed Chairman that has everyone convinced there

are going to be more rate hikes coming. I am very worried about

this not just because of all of the money people are losing in the

markets but because of the lasting damage that could be done to

the economy.

I thank all the nominees for coming before the Committee today,

and I congratulate them on their nomination by the President. I especially want to congratulate Ms. Casey, who has served this Committee well over the years. One thing that sticks out most in my

mind was her help with my TVA provisions 2 years ago. Mr. Chairman, it is always nice to see our staff succeed and go on to bigger

and better things, and I congratulate both of you.

Thank you.

Chairman SHELBY. Thank you.

Senator Hagel.

STATEMENT OF SENATOR CHUCK HAGEL

Senator HAGEL. Mr. Chairman, thank you.

I would only add that it is a remarkable opportunity when we

have before us four exceptional individuals that represent competency and commitment to causes greater than their own self-interest. We are grateful for your service and for your willingness to

once again take on big assignments with significant consequences

in these jobs, and, in particular, I would add my note of appreciation to our own Ms. Casey’s nomination. I am strongly supporting

each of these four nominees and look forward to work with them.

Thank you very much.

Chairman SHELBY. Senator Reed.

STATEMENT OF SENATOR JACK REED

Senator REED. Thank you very much, Mr. Chairman, and I do

want to commend all the nominees.

I have had a chance to meet with Ms. Bair, Mr. Lockhart, and

Governor Kohn and am impressed with not only the quality of their

thought but also their commitment to public service and thank you,

and a special thanks to our local nominee. Kathy Casey has served

this Committee with great distinction, great fairness, great integrity, and it is a delight and pleasure to see you here today for your

nomination.

Thank you, Mr. Chairman.

Chairman SHELBY. Senator Martinez.

STATEMENT OF SENATOR MEL MARTINEZ

Senator MARTINEZ. Thank you, Mr. Chairman.

I very much appreciate the opportunity I have had to work with

Ms. Casey as Secretary of HUD and then here in this Committee,

and I am delighted for the opportunity that she has here today. It

looks like the votes are going pretty well for you on the Committee.

[Laughter.]

So, I am happy to forecast a confirmation for you.

[Laughter.]

9

But I am also very interested in discussing the issues facing

OFHEO. It is a very important time at a very important entity and

just very much appreciate the steps you have taken but also very

much look forward to discussing with you where the future might

lead in terms of the work at OFHEO, and I likewise commend and

congratulate the other nominees for their public service and their

desire to serve.

Thank you.

Chairman SHELBY. Will all four of you stand, hold up your right

hand, and be sworn.

[Witnesses sworn.]

Chairman SHELBY. Ms. Bair, we will start with you. Do you have

anybody you want to recognize here this morning?

Ms. BAIR. Yes, I certainly do: my husband, Scott Cooper, my husband and best friend is here with me. My son, Preston Cooper.

Chairman SHELBY. Okay.

Ms. BAIR. And my daughter, Colleen Cooper.

Chairman SHELBY. Great.

Ms. BAIR. They are here, and I trust the Committee will understand if they do not——

Chairman SHELBY. Mr. Lockhart, do you have anybody here with

you today?

Mr. LOCKHART. My wife, Cricket, and her brother.

Chairman SHELBY. Mr. Kohn.

Mr. KOHN. My wife, Gail; my son, Jeff; my niece, Sarah Friedman; my mother, Pat; and my niece, Marcy Friedman.

[Laughter.]

Chairman SHELBY. You brought them all.

Mr. KOHN. It takes a crowd to support me, I think.

Senator SARBANES. I wondered where this large crowd came

from.

[Laughter.]

Chairman SHELBY. Ms. Casey.

Ms. CASEY. I have my father, Bernie Casey, and my mother,

Kathy Casey, and several friends.

Chairman SHELBY. Thank you all.

Ms. Bair, I will start with you, but all of your written testimony

will be made part of the hearing record of the Banking Committee

in its entirety. If you will sum up briefly your remarks, because we

have a lot of Senators here.

STATEMENT OF SHEILA BAIR, OF KANSAS

TO BE MEMBER AND CHAIRPERSON OF

THE BOARD OF DIRECTORS

FEDERAL DEPOSIT INSURANCE CORPORATION

Ms. BAIR. Thank you, Senator. I have a short statement. I will

be brief.

Thank you very much. It is a pleasure to appear before you this

morning with such a distinguished panel. At the outset, I would

like to thank the President for having the confidence in me to lead

this historic agency. Established in the throes of the Great Depression, the FDIC restored depositor confidence in our crippled banking system and since that time has served as a beacon of safety for

the financial assets of the average consumer. It is a well-run, wellVerDate 11-MAY-2000 21:48 Aug 21, 2006 Jkt 025856 PO 00000 Frm 00013 Fmt 6633 Sfmt 6633 28558.TXT SBANK4 PsN: SBANK4
10

respected agency, comprised of 4,500 dedicated staff and a Board

of Directors who bring a broad depth of experience as well as a rich

diversity in regulatory viewpoints. It will be my privilege to work

with these outstanding individuals if confirmed by the Senate.

I would like to thank my family for their support of my decision

to accept this nomination and their willingness to disrupt their

lives to move back to Washington, DC. I have introduced my family. I would also like to thank my parents, Dr. Albert and Clara

Bair, who are quite elderly and could not join me this morning. Finally, I would like to recognize my former boss, Senator Dole, for

his help in this endeavor and all the other challenges I have undertaken over the past two decades. Washington can be a difficult

place to navigate, and having someone of high stature and integrity

to guide you is crucial. I was fortunate enough to have Senator

Dole as a mentor. His wise counsel and advice have always served

me well.

Another benefit of my association with the Senator was the opportunity to get to know the senior Senator from North Carolina.

Elizabeth, I thank you for those kind words. I first had the privilege of meeting Elizabeth Dole in the 1980’s, when we worked on

so-called ‘‘gender gap’’ issues in the Reagan Administration, to

show you how old I am.

[Laughter.]

I have seen first-hand her formidable intellect, strong work ethic,

and utmost dedication to public service, and I am very glad she is

on this Committee and that perhaps we will have the chance to

work together again.

The last time I appeared before this full Committee, I was the

President’s nominee to be the Assistant Secretary for Financial Institutions, as was noted. Upon my confirmation for that position,

my first assignment was to represent the Administration on deposit

insurance reform. If confirmed by the Senate, I will play a role now

in the implementation of that comprehensive new law. Deposit insurance reform is just one of the many major policy issues confronting the FDIC: ILC’s, Basel II and IA, regulatory burden,

antimoney laundering; the list goes on. There is no shortage of cutting edge issues at the FDIC, and for many, there are no easy answers. But as one who loves public policy and believes that Government can be a force for positive change, I do welcome these challenges.

In concluding, I would reiterate my strong commitment to the

millions of individuals who rely on the FDIC for security and peace

of mind in protecting their deposits. As the ownership society

evolves, it is important for everyday working men and women to

know that they have a safe haven for a selected portion of their financial assets. It is equally important to the functioning of our

banking system that consumers have confidence in their banks.

The FDIC stands proudly at that intersection, and I look forward

to the opportunity to serve this fine agency.

Thank you very much, Mr. Chairman.

Chairman SHELBY. Mr. Lockhart.

11

STATEMENT OF JAMES B. LOCKHART, III, OF CONNECTICUT,

TO BE DIRECTOR

OFFICE OF FEDERAL HOUSING ENTERPRISE OVERSIGHT

Mr. LOCKHART. Chairman Shelby, Ranking Member Sarbanes,

and Members of the Committee, it is a real honor to be before you

today as President Bush’s nominee for the Director of the Office of

Federal Housing Enterprise Oversight, OFHEO.

This will actually be my fourth opportunity for public service.

The first was as a Naval officer aboard a nuclear submarine, the

USS George Washington Carver. The boat’s motto is one that has

always stuck with me, which is ‘‘Strengthen through Knowledge,’’

and it is going to be important in this upcoming job as well.

As was noted, I have also had the opportunity to run the Pension

Benefit Guaranty Corporation, to be the Deputy Commissioner and

Chief Operating Officer of Social Security, and for the past month,

the Acting Director of OFHEO.

But despite all of that time in Government, I have spent most

of my career in the private sector in financial services. As such, I

have extensive experience with many of the issues the Enterprises,

Fannie Mae and Freddie Mac, are facing, which include internal

controls, risk management, systems development, investments including asset-backed securities, mortgages, guarantees, and capital

management.

A secure retirement and homeownership are key components of

the American Dream. In many ways, trying to make those dreams

come true has been the mission and goal of all three agencies for

which I have worked. The three also share a need for strengthening. At PBGC, I was charged with shoring up the agency so that

it could better fulfill its mission of protecting the private sector

pensions of Americans. Social Security’s mission of ‘‘ensuring economic security for the Nation’s people’’ is a very important one, and

we did a lot of work to improve service and strengthen stewardship. We need to do more on ensuring sustainable solvency for future generations.

Obviously, OFHEO is a much smaller agency than Social Security. Almost everything is in the Government. And just last week,

it only had its 13th anniversary. But it does have an extremely important and compelling mission, and that mission is: ‘‘to promote

housing by ensuring the safety and soundness of Fannie Mae and

Freddie Mac and to strengthen the Nation’s housing finance system.’’ These two companies own or guarantee about 41 percent of

the residential mortgages in the United States and are amongst

the largest guarantors and borrowers in the world economy.

There are four key goals that OFHEO needs to accomplish to fulfill our mission. First and by far the biggest is to ensure the safety

and soundness of the Enterprises. My first challenge, as you know,

at OFHEO was to complete the Special Examination Report of

Fannie Mae and to negotiate a settlement agreement. The work on

the report was almost done when I arrived, and we were able to

issue it and the settlement agreement on May 23. I look forward

in the future to having an opportunity to testify before this Committee on that settlement. We must continue to monitor both

Fannie Mae is and Freddie Mac’s compliance and progress with

their agreements. As the Chief Executive Officers of both compaVerDate 11-MAY-2000 21:48 Aug 21, 2006 Jkt 025856 PO 00000 Frm 00015 Fmt 6633 Sfmt 6633 28558.TXT SBANK4 PsN: SBANK4
12

nies have told me, it will take them several years of hard work to

change the corporate culture and to strengthen internal controls,

risk management, and accounting systems to acceptable levels.

The next two goals that we need to fulfill are recommendations

from the Fannie Mae Special Examination, and the first is that we

need to continue to strengthen our regulatory infrastructure. The

recommendation is we must continue to support legislation to provide the powers essential to meeting our mission.

I have been very impressed with the OFHEO team, but we have

a lot of progress yet to make. There is a lot of hard work to do,

and we need the tools to do that work. In particular, legislative reform of the Agency is critical. The Agency must have powers on par

with other financial regulators, including budget flexibility.

OFHEO also needs safety and soundness powers equivalent to the

banking regulators such as flexible capital standards and strong receivership powers.

The fourth goal is to promote efficient financial markets to support homeownership through educational efforts. Over the years,

great progress has been made in homeownership, which at 69 percent is near an all-time high. A key role that OFHEO can play with

your help is to ensure that Fannie Mae and Freddie Mac, which

have been important elements of this growth, are restored to full

health and are properly focused on their core mission.

I look forward to working closely with the Members of this Committee and the professional and highly dedicated OFHEO team to

address these challenges so that our Nation’s housing finance system continues to be vibrant, safe and sound.

Thank you.

Chairman SHELBY. Governor Kohn.

STATEMENT OF DONALD L. KOHN, OF PENNSYLVANIA

TO BE VICE CHAIRMAN OF THE

BOARD OF GOVERNORS OF THE FEDERAL RESERVE SYSTEM

Mr. KOHN. Thank you, Chairman Shelby, Senator Sarbanes,

Members of the Committee, I am honored to have been nominated

by President Bush to be the Vice Chairman of the Board of Governors of the Federal Reserve System, and I am grateful to this

Committee for scheduling this hearing so expeditiously. I have enjoyed a long and productive relationship with the Banking Committee and its staff over the years, working together to determine

how the Federal Reserve can best contribute to the economic well

being of our citizens. As a Governor, and if you confirm me, as Vice

Chairman, I look forward to continuing to be part of the shared

pursuit of that objective.

The Board’s Vice Chairman has a very limited role under the

Federal Reserve Act—to preside over the Board in the absence of

the Chairman. By tradition and practice, however, the Vice Chairman has played a leadership role within the Federal Reserve System. He or she has acted as the Chairman’s deputy or alternate in

important international groups; has headed ad hoc committees

within the Board, System, or Federal Open Market Committee to

help develop policy alternatives for consideration by the larger

group, has helped the Chairman to lead the Board, and has worked

closely with the Chairman in a variety of circumstances, including

13

when responding to disturbances in the financial sector that had

the potential of affecting the broader economy.

The Federal Reserve faces considerable challenges today in meeting the responsibilities that you have given us for fostering price

stability and maximum employment at a time of rapid change in

the U.S. and global economies; for helping maintain a safe and

sound banking system and stable and efficient payments and financial systems in the face of innovations and financial instruments

and institutions; and for protecting and educating consumers as

they take advantage of the greater variety and sophistication of financial instruments available to them. I believe that my long and

wide experience within the Federal Reserve, at a Reserve Bank and

at the Board, on staff and as Governor, along with my close working relationship with Chairman Bernanke, will enable me to make

an even greater contribution to the work of the Federal Reserve as

the Board’s Vice Chairman should you choose to confirm me to this

position.

Thank you.

Chairman SHELBY. Ms. Casey.

STATEMENT OF KATHLEEN L. CASEY, OF VIRGINIA

TO BE A MEMBER OF THE

U.S. SECURITIES AND EXCHANGE COMMISSION

Ms. CASEY. Mr. Chairman, Ranking Member Sarbanes, and

Members of the Committee, I am honored to appear before you

today. I am deeply grateful and humbled by the President’s nomination to serve as a Commissioner on the Securities and Exchange

Commission, and I thank the President for this great honor.

I would also like to express my sincere gratitude to Chairman

Shelby, the Members of the Senate Banking, Housing, and Urban

Affairs Committee, and the staff. It has been both a privilege and

a joy to work on the Committee. As has so often been noted, this

Committee has a long history of collegiality and bipartisanship. I

believe this well-deserved reputation stands as a testament to the

Committee’s effectiveness and makes work, even on difficult and divisive issues, not only challenging but also rewarding.

I have also been fortunate to work with extraordinarily smart,

capable, and professional staff. I have come to know and respect all

of them, but I would like to particularly thank Steve Harris, the

Minority Staff Director, for his friendship and support over these

past several years. It has been invaluable to me, and working with

you has been a real pleasure, so thank you, Steve. The Securities

and Exchange Commission is the world’s preeminent market regulator. Having had the opportunity to work with members and staff

of the Commission over the years, it is easy to see why.

Over the past 13 years, I have had the opportunity to work on

a broad range of legislative and oversight issues affecting our capital markets and the work of the SEC. This experience has given

me a deeper understanding of the legal and regulatory framework

that guides our securities markets and has provided me with insight into the public policy considerations that underpin it.

Further, I believe that this experience has given me a strong appreciation of the important role the Securities and Exchange Commission plays in protecting investors and ensuring the integrity

14

and efficiency of our capital markets. I have a deep respect for the

efficiency and productive power of our capital markets.

I believe we should let market forces work. As it has often been

said, we have the deepest, most liquid, and efficient markets in the

world. Millions of Americans invest in them every day and rely on

the market’s vibrancy and depth to build and secure their futures.

But we should never lose sight of one fact: Our capital markets

enjoy this preeminent status because they are the most transparent. Because of this transparency, people in the United States

and around the world have confidence in their integrity.

This confidence in our markets is due in large part to the disclosure requirements of our securities laws. Full and accurate disclosure is the key to transparency. But if disclosure is to be meaningful to ordinary investors, it must be understandable. I believe that

Chairman Cox has identified in a most tangible way a promising

initiative that could help demystify financial disclosure for everyday Americans and empower them with meaningful and understandable information to guide their decisionmaking.

As has also been evidenced in the past, while strong and dynamic, our markets can be roiled if investors do not have confidence that they are fair. It is therefore important that investors

believe that fraud and misconduct will be pursued and penalized.

The SEC must play a leading role in policing our markets and in

enforcing the law. Firm but fair enforcement ensures that misconduct of the few does not erode the confidence of the many.

Our markets also continue to rapidly evolve and change in an increasingly global marketplace. This promises tremendous benefits

for U.S. investors but also poses unique challenges. The SEC will

play a vital role in ensuring that our regulatory framework is able

to adjust to those changes and continue to be responsive to the

needs of investors and to market forces. The SEC is already undertaking these efforts proactively to look ahead and to discuss with

international counterparts how the SEC can continue to fulfill its

mission in this changing marketplace.

The President has nominated me to take the seat being vacated

by Commissioner Cindy Glassman. I would like to note that she

has been an extraordinary Commissioner, and should I be confirmed, I hope to serve as ably as she has.

On a final and personal note, I would like to thank Chairman

Shelby again for giving me the privilege to serve him and this

Committee. Working in the U.S. Senate has been the most rewarding and enjoyable experience of my life, and I will cherish the

knowledge, wisdom, and friendships that I have gained here.

I think it is often easy to forget in the day-to-day course of business what a tremendous honor it is to work here. I recall fondly

one of my first days on the job for Senator Shelby. The Senate was

considering a very controversial and contentious bill, and I had to

accompany him to the Senate floor for the debate. I was very nervous, and despite the fact he kept calling me by the wrong name——

[Laughter.]

—I think he called me Peggy——

[Laughter.]

—I was still thrilled.

[Laughter.]

15

It really did not matter that he did not know my name at the

time. What mattered most was that I was sitting behind a U.S.

Senator on the floor of the U.S. Senate, and it is with this humility

and desire to continue to serve the public interest that I thank you

again for the opportunity to appear before you today, and I would

be pleased to answer any questions.

Chairman SHELBY. Thank you.

Governor Kohn, I will start with you. This week, Chairman

Bernanke, as you know, and the Atlanta Fed Bank President, both

spoke about their concerns regarding inflation. Senator Bunning

has brought that up already, and he should. What are your views

regarding the recent inflation data, and what data between now

and the Federal Open Market Committee meeting at the end of

June will you be watching most closely or some of it to see what

is raising its head out there, and what are your concerns as far as

price stability? That is important.

Mr. KOHN. I agree with you, Mr. Chairman, that price stability

is important, and I have found the recent inflation data somewhat

troubling. As Senator Bunning noted, they are backward looking.

That is about price increases in the last few months, but they were

higher than I had anticipated, and that raises a warning flag that

something might be entrain. In addition, some measures of inflation expectations over the longer-run have crept up just a little:

Surveys of households and financial market expectations of inflation. It is not a big move, but it is an upward move.

Chairman SHELBY. Does that feed the psychology of inflation?

Mr. KOHN. I think people are reacting to some extent to the energy price situation. The economy is facing a somewhat more difficult situation now because of the rise in energy prices, which has

both tended to raise inflation and also tended to dampen activity

going forward.

I think a lesson from our economic history, the 1960’s and particularly the 1970’s, is that prosperity, the maximum employment

that the Congress has instructed the Federal Reserve to foster, can

only happen under conditions of price stability. When inflation begins to rise, that undermines economic performance.

Chairman SHELBY. It undermines our whole monetary system.

Mr. KOHN. It undermines the confidence in our currency; it undermines our monetary system; and in the process will not permit

the economy to produce at its full potential. So, I think at this

stage, we have to acknowledge the economy is slowing down, and

that will help to dampen inflation pressures, but at the same time,

there are some danger signs out there that we need to be quite attentive to.

Chairman SHELBY. Thank you.

Mr. Lockhart, a question for you, if I could. OFHEO just signed,

and you mentioned this in your statement, a written agreement

with Fannie Mae to implement remedial measures as a result of

the special exam that went on. This agreement includes, among

other things, provisions on capital plans, internal controls, and a

growth limit.

The scope of this agreement has led some to question why any

additional legislation is needed, since OFHEO seems to be able to

take strong action when necessary. In that context, do you believe

16

that legislation is needed to strengthen the current regulatory

structure for you to do your job, and if so, what elements do you

believe are critical for a strong reform package?

Mr. LOCKHART. Yes, we did negotiate a settlement agreement

with Fannie Mae and the reason we were able to do that is because

they were basically in extremis. This is a company that cannot be

audited, cannot produce accounts, has questionable internal control

problems and risk management concerns, and we felt it was prudent to limit their growth.

But we most definitely need legislation, and I strongly believe

that. We need the powers of a bank regulator that the people next

to me have. We need to be able to set capital limits and do that

in a flexible manner, and we need to consider not only market and

credit risks but also operational and systemic risks. We certainly

need budget flexibility and receivership powers. The new Agency

should be the one that looks at mission compliance and new products and have independent litigation authority. The Enterprises

should be required to register with the SEC. So there are a whole

series of things in the legislation that would be extremely useful

and really make us a much better regulator.

Chairman SHELBY. Ms. Bair, deposit insurance reform.

Ms. BAIR. Yes.

Chairman SHELBY. The deposit insurance reform legislation

passed earlier this year allows, as you well know, the FDIC to set

the designated reserve ratio within a range rather than mandating

a specific reserve ratio. This is a big sea change. This flexibility allows the FDIC, which you will chair, to build up the Deposit Insurance Fund during good economic times as insurance against any

future bad times, which makes sense. That is common sense.

We are currently in a period of record bank profits and no bank

failures; keep our fingers crossed. Do you intend to use this flexibility in setting the reserve ratio? You probably do not want to tell

us everything you are going to do or signal everything, and I understand that.

[Laughter.]

Ms. BAIR. Right.

Chairman SHELBY. But this does give you a lot more power, in

a sense.

Ms. BAIR. Right; it does, and 5 years ago, I was testifying in

favor of it for precisely those reasons. An important component of

this was to get rid of the 23 basis point cliff, the premium shock,

if you will, when reserve ratios fell below the DRR. So now, we

have a range. We have the ability to smooth the premiums according to economic cycles and also better reflect risk differentiation in

our premium structure.

These are important tools. I agree with you. We need to closely

follow legislative intent. I know you, Mr. Chairman, continue to

have a keen interest in how we implement this new law.

Chairman SHELBY. Certainly. We all have a keen interest.

Ms. BAIR. Having worked for the Senate, I know how important

it is for agencies to try to follow the statutory structure and intent,

and we will do so going forward. And I am just glad that we have

the flexibility now that we did not have before.

Chairman SHELBY. Thank you. Basel capital standards.

17

Ms. BAIR. Yes.

Chairman SHELBY. I will direct this question to Ms. Bair and

also Governor Kohn; Dr. Kohn and Ms. Bair, the Federal Reserve,

the FDIC, you are both regulators, are presently preparing the

rules that will implement the Basel II capital accord. Basel II aims

to modernize U.S. capital requirements to make sure banks hold

capital commensurate with the risks they assume, among others.

While modernizing capital requirements is a laudable goal, the

most recent quantitative impact—Senator Sarbanes has brought

this out many times up here—quantitative impact study indicated

that Basel II could result in a drastic decline in the capital that

the U.S. banks hold, which is troubling to a lot of us. Such a reduction in capital standards could increase bank failures, which we

have not had lately in the United States. This is especially worrisome to us as the Committee charged with protecting the taxpayers, among other people, who are on the hook if a bank fails because the Federal Government ensures bank deposits, Ms. Bair.

Accordingly, I will start with you, Governor Kohn, do you support

maintaining the leverage ratio to make sure that banks are sufficiently capitalized?

Mr. KOHN. I do, Mr. Chairman.

Chairman SHELBY. Okay; Ms. Bair.

Ms. BAIR. Yes, Mr. Chairman, I do. And I would add editorially

I do not think anybody at this point is arguing we should get rid

of the leverage ratio. I think we are beyond that issue.

Chairman SHELBY. You have given that up.

Ms. BAIR. Yes.

Chairman SHELBY. Senator Sarbanes.

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

aware that a vote has begun. I will try to move very quickly here.

Actually, the regulators, and this goes to a follow-up on the

Chairman, have now put forward a proposal that has certain

benchmarks for the reduction of capital which would help to address this concern over the safety and soundness of the banking

system, which was greatly increased by this quantitative impact

study, which showed an over 15 percent aggregate decline in capital; half the participating banks getting capital reductions of over

25 percent; and one bank nearly a 50 percent capital reduction.

Of course, that raises a lot of red flags and a lot of alarms. But

I understand now that some of the major banks are trying to undercut or undermine this concerted position that our regulators

have put forward now, which encompasses within it measures to

try to guard against any substantial decline in capital. Do you have

a view on that issue?

Mr. KOHN. Senator Sarbanes, I think any decline in capital

should be limited and certainly should be limited to any commensurate reduction in risk or improvement in risk management in the

banking system. I voted in favor of the proposal that the Federal

Reserve put out for comment. That proposal contained a gradual

phase-in of the Basel capital accords. It contained provisions for

dialogue back and forth between the supervisors and the banks to

make sure the banks were adequately measuring and ensuring

against risk, and it contained the trigger points that you mentioned.

18

So, I think it is important that the safety and soundness of the

banking system be protected. The goal of Basel II is to build a safer

and sounder banking system, and I certainly would oppose anything that I thought would undermine the safety and soundness of

the system.

Senator SARBANES. Ms. Bair.

Ms. BAIR. Yes, I agree. I think the QIS–IV results were quite

problematic, and everyone deemed them to be unacceptable. I know

there are some concerns now in the large bank community. I think

the regulators have reached agreement on an NPR. It is currently

undergoing OMB review. OCC and OTS must have their proposed

rules cleared by OMB before they can be released, and the FDIC

plans to wait until OCC and OTS are prepared to go forward as

well.

I think the forum for these concerns and arguments is the comment period, and they should come forward with arguments, and

that is the whole point of having a comment period. I, and I know

everyone else, will read all the comments very carefully, and if

there are better approaches, they will be considered, but all four

regulators have agreed on this approach, which is going to be reflected in the NPR.

Senator SARBANES. Mr. Lockhart, as currently constituted, the

Office of Federal Housing Enterprise Oversight, OFHEO, is part of

HUD, although it is directed by the statute to act independently of

HUD and of the Administration for purposes of overseeing the safety and soundness operations of the GSE’s, which is supposed to act

as an independent regulator, which I think is a very important feature with respect to all of our financial institution regulators.

Now, and indeed, all of the legislative measures in the Congress

to strengthen OFHEO provide actually for it to come out from

under HUD and be independent. There are differing proposals, but

they are all in agreement on that particular point. I want to ask

you just a question or two about how you view the importance of

independence for the Director of OFHEO.

I am additionally prompted to put this question to you because

of a story in The New York Times in February of last year. ‘‘In the

midst of a fractious debate over changes to Social Security, a senior

official of the agency that administers the program has been joining Republican Members of Congress at public events around the

country devised to promote personal retirement accounts.’’

And my concern is also heightened a bit by a story in the American Banker about a month ago: what new chief brings to OFHEO,

and then goes on to say that one of the most important things is

that you have been a friend of President Bush since the two attended prep school and college together.

So if I have this concern about the independence of the regulator

in carrying out those responsibilities, I think you will understand

why these, and there have been some other press reports that I

could also cite, raise some question about the independence of the

person who would become the Director of OFHEO.

Mr. LOCKHART. Certainly, on the independence issue, I strongly

believe in it. I have actually worked in two independent agencies,

the PBGC and the Social Security, so I understand the issues of

independence, and I applaud the legislation for strengthening that

19

independence and also combining us with the Federal Housing Finance Board, because I think that is another way to give strength.

One of Social Security’s key missions was educating the American people about the future of Social Security, and that is the role

I played. I did town halls with both Democrats and Republicans

and sometimes both at the same time, so it was a very bipartisan

effort.

Yes, I did an educational effort, but I was not strongly supporting personal accounts. What I was really looking at was the future of the Agency and the need to change the system for future

generations. And that is really what Social Security reform is

about. But I understand independence, and I strongly believe in it.

Senator SARBANES. It is certainly an important dimension to any

financial regulator, and we will be watching that very carefully.

Mr. Chairman, I do not have any questions of Kathy Casey. I

mean, we know her well. We have seen her at work.

Chairman SHELBY. You have asked her a lot of questions in the

past.

[Laughter.]

Senator SARBANES. I thought I would try to make up for it a little bit this morning.

[Laughter.]

I would note, though, that under your leadership, the Committee

has held a number of hearings on such subjects as separating the

business and regulatory functions of the self-regulatory organizations, giving the SEC more authority with respect to the credit rating agencies, and monitoring the hedge funds, and I hope Ms.

Casey will pursue those interests once confirmed. And I also urge

her—I do not think I need to do this, but just for the public

record—to strive to continue to ensure that America’s capital markets remain the gold standard of the world with respect to the protection of investors.

I perceive some effort to move to lower denominators, and I think

we have to be very careful about that. It is always argued now,

particularly the globalization and competition, that we have to go

to this lower standard, but past experience, as I read an article,

shows that in the past, when we have sought to protect the investor, we got this kind of reaction initially for a little bit, and then,

everyone started moving toward the higher American standard.

And my own view is we should come at this question with that

frame of mind.

Mr. Chairman, I think we are going to miss the vote if we do

not——

Chairman SHELBY. Senator Martinez.

Senator Martinez, Mr. Lockhart, as you know, knows a lot about

housing.

Mr. LOCKHART. Yes, he does.

Chairman SHELBY. Secretary of Housing and Urban Development; he used to be at the table, but we are glad to have him up

here.

Senator MARTINEZ. Yes, sir, I am happy to be up here, and I will

try to be brief. I know we have to go vote, but Mr. Lockhart, I did

not want to fail to ask a couple of very specific things relating to

your testimony. One was in answer to a question earlier, you indiVerDate 11-MAY-2000 21:48 Aug 21, 2006 Jkt 025856 PO 00000 Frm 00023 Fmt 6633 Sfmt 6633 28558.TXT SBANK4 PsN: SBANK4
20

cated, obviously, the independence of OFHEO is something that we

all acknowledge. I always felt uncomfortable having OFHEO under

my tutelage at the same time I had no real functional oversight

over what they did, and I do understand as well the need for there

to be broader legislative authority on budgeting and financial

soundness and all of the things you mentioned.

One that concerns me, though, is mission compliance and new

product approval, particularly new product approval. Some of the

legislative ideas that we have thrown around merged that with

some participation, significant participation, or leaves it at HUD,

particularly as it relates to new product approval, and I wonder if

you have any fixed views on how that should work or whether, in

fact, it should be a shared role between the HUD Secretary and

OFHEO?

Mr. LOCKHART. New product approval is important, and from

time to time, the companies have gotten into trouble with new

products. I think it should be a shared responsibility. We have a

lot of inherent expertise. We have examiners in there every day, we

are looking at what they are doing. And we are discovering not

every day, hopefully, but occasionally that they have not complied

with the approval process. So, I think it is very important to not

only have a stronger responsibility at the new entry but also work

with the HUD team.

Senator MARTINEZ. Also, prior approval, not just after the fact,

you know, when in fact there has been a practice established.

Mr. LOCKHART. That is true.

Senator MARTINEZ. And then, one other thing: I want to commend you for your report and for the settlement. I think it is important. I think it is well done. I am concerned about the liability

of this company now of $400 million, Fannie Mae, and I wonder,

I know in your report you indicated or instructed that there be

some review as to compensation paid to officials of the company in

the past which might have been tainted by what appears to have

been a manipulation of books in order to trigger extraordinary and

extravagant bonuses.

What would be your attitude toward pursuing of that issue and

those issues, and what response have you had, if any, from Fannie

Mae so far?

Mr. LOCKHART. There was the $400 million fine that was paid to

the Government, the SEC, and OFHEO, and as the SEC Chairman

said, they committed fraud. We believe, and we have in our settlement agreement, that the first line of defense should be that the

Board of Fannie Mae should go after these individuals and try to

get restitution, that is disgorgement of some of the bonuses paid.

We have that in the agreement for both previous management and

present management.

Senator MARTINEZ. But do you not think they owe that to the

shareholders, in fact?

Mr. LOCKHART. I believe they owe it to the shareholders and, if

the company fails, we have already referred it to our General

Counsel. They will be looking into it as well.

Senator MARTINEZ. Have you had any response from Fannie

Mae?

21

Mr. LOCKHART. We have talked to Fannie Mae. I talked to the

Chairman of the Board last week and I have another meeting

scheduled, I think, next week on the topic. We will continue to

work with them on that. We expect to have a report. They have appointed four independent directors to look at this, and we expect

to receive a report 30 days after we signed the agreement.

Senator MARTINEZ. Very good.

Chairman SHELBY. Senator Martinez, for the record, we are

going to have Mr. Lockhart and Chairman Cox up to the Committee as an oversight hearing to detail what went on at Fannie

Mae, what their findings are, and go from there.

Senator MARTINEZ. I look forward to that and thank you for making that hearing available.

Chairman SHELBY. Very good.

Senator MARTINEZ. I believe it is an important hearing.

And thank you, sir, and thank all of you and congratulate you

on your appointments. Thank you.

Chairman SHELBY. As you can tell by the absence of Senators,

we have a huge vote on the floor of the Senate. Our time is gone.

We are going to recess, because I have some questions that I might

want to ask at least for the record and give the others an opportunity. We will stand in recess until we get back here, maybe 10,

15 minutes.

[Recess.]

Chairman SHELBY. The hearing will come back to order.

As you well know, we have had a big vote on the floor. I do not

know if any other Senators have any other questions. I have some

questions for the record that we would submit to you, but what we

would like to do is move all four of your nominations as expeditiously as possible. Senator Sarbanes, I think, joins me in that, and

we would do our best to move you quickly, because you have important nominations and important jobs to do.

We thank you for waiting. We thank you for your patience, but

more than that, we thank you for offering to serve the American

people. The hearing is adjourned.

[Whereupon, at 11:33 a.m., the hearing was adjourned.]

[Prepared statements, biographical sketches of nominees, response to written questions, and additional material supplied for

the record follow:]

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PREPARED STATEMENT OF SENATOR TIM JOHNSON

Mr. Chairman, Ranking Member Sarbanes, I want to thank you for holding this

important hearing today. We have before us an impressive slate of nominees to consider, and I look forward to hearing from them.

I would especially like to offer my congratulations to Ms. Casey, a member of our

own Banking Committee family. She has been with you, Mr. Chairman for many

years, and I appreciate the hard work she has done on behalf of this Committee

and her service to the financial services industry. And while her nomination means

a loss for us, it is well-deserved, and I have no doubt that she will be a tremendous

asset to the SEC.

Mr. Chairman, there are a few issues that I would like to raise this morning.

First, our Nation is blessed with the strongest and most resilient economic and

financial system the world has ever known. And what makes our system strong and

resilient is the diversity of the system, and the fairness of it.

Our system is based on the impartial allocation of credit, and consumers and

small businesses have a wide choice of credit providers, which means that the terms

and cost of that credit are determined by the market, and not central planners.

That system is being threatened today, in my opinion, by some of the world’s largest corporations that are trying to get into the banking business by taking advantage of an obscure loophole in the law—the ILC loophole.

I am concerned that this growing trend of commercial firms chartering or acquiring ILC’s is putting us on a path toward a dangerous concentration of economic

power that would rival all but a handful of nations, and it would create a system

where conflicts of interest would run rampant.

I know that both Wal-Mart and Home Depot are operating within the letter of

the law in their pursuit of a banking affiliate. And I recognize, Ms. Bair that you

will not be able to comment on those specific applications pending before the FDIC,

but you should know that Congress never intended for this loophole to be exploited

in this manner, and I believe that we must carefully consider the precedent that

is being set, and the adequacy of the supervisory and regulatory structure of ILC’s

before heading down what is arguably dangerous and irreversible course. Kieretzu

did not work in Japan; there is no reason to believe it would work here.

Now I should say to my colleague from Utah that I mean no harm to the ILC’s

chartered in his State that are serving small niche markets. That is precisely why

the loophole was allowed to exist when other loopholes were closed in the CEBA Act

of 1987.

But we need to draw the line somewhere, and I would suggest that the best way

to protect the existing ILC’s is to begin to consider ways to stem the tide and restrict further expansion of this loophole. I would like to work toward that goal and

I invite the Senator from Utah to join me in protecting the integrity of our financial

system.

Our long history of keeping banking and commerce separate has served this Nation well. Now is not the time to abandon it. I am also interested in Ms. Bair’s views

on Basel II and how she views her role going forward. I am troubled by several aspects of the latest draft rule, which is currently being reviewed by the Office of

Management and Budget and could yet be changed prior to its publication in the

Federal Register.

Basel II was intended to create a risk-based capital regime. However, because of

what I presume are political compromises, the latest draft would impose a heavy

regulatory burden on large banks, while ironically reducing their competitiveness in

the global marketplace. In fact, the draft ANPR would impede the ability of larger,

U.S.-based banks from competing on a level playing field with their international

competitors. While safety and soundness of our insured depositories is of course

paramount, the last thing we should be doing is making it harder for American

banks to compete, both at home and abroad.

In addition, I am deeply troubled that the draft rule contains a loophole to exempt

ILC’s from operational risk capital standards. In my view, any insured depository

institution which has a significant volume and value of transactions that could directly or indirectly affect the payments system, should be required to capitalize that

risk. Operational risk is not a function of the nature of the parent company; it is

a function of the scale and complexity of the activity taking place inside of the insured depository institutions.

I recognize that the agencies appear to have reached a consensus with this latest

draft. However, Ms. Bair, I would hope that you will keep an open mind at the

FDIC, and be willing to hear through the very serious concerns that some parties

have raised about the draft rule, even if it means revising the rule prior to its publication in the Federal Register.

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Finally, there is still a very real issue of consumer access to affordable, short-term

credit. Ms. Bair, I share the view you expressed in your study entitled, ‘‘Low Cost

Payday Loans: Opportunities and Obstacles’’ that cautioned,

Though they are not identified and marketed as payday loan alternatives, feebased bounce protection programs are functionally equivalent to payday loans

when used by customers as a form of credit.

I agree with your conclusion that ‘‘When used on a recurring basis for small

amounts, the annualized percentage rate for fee-based bounce protection far exceeds

the APR’s associated with payday loans.’’ And I support your recommendation that

the same APR disclosure requirements that apply to payday loans should also apply

to fee-based bounce protection programs.

I hope that you share my view that competition for ‘‘small dollar’’ credit services

must be maximized. There is something to be said for striking the right balance between regulation, consumer protection, and effectively meeting consumers’ credit

needs. I have a real concern if financial services are pushed outside of a regulated

environment due to increased regulatory requirements, because it can open the door

for abuse and inevitably results in less consumer protection. It is critical that the

regulatory environment is one that supports short-term credit products and one in

which such products can thrive while providing the greatest benefit to the consumer.

Thank you all for being here this morning. I look forward to your testimony and

I hope that the Committee will move quickly with your nominations.

—————

PREPARED STATEMENT OF SENATOR WAYNE ALLARD

I would like to thank Chairman Shelby for holding this hearing. Today, we are

considering a number of nominees for key positions at the agencies under the Committee’s jurisdiction.

First, we will consider the nomination of Sheila Bair to be Chairman of the FDIC

Board of Directors. In this position she will be instrumental in ensuring the safety

and soundness of our banks. Ms. Bair will also be responsible for implementing the

recently enacted deposit insurance changes, as well as responsibility for a decision

on Wal-Mart’s pending application for deposit insurance.

Next, we have the nomination of Donald Kohn to be the Vice Chairman of the

Board of Governors of the Federal Reserve System. Given the recent change in leadership from Chairman Greenspan to Chairman Bernanke, I look forward to learning

more about Governor Kohn’s leadership plans.

Third, we will hear from James Lockhart, who is nominated to be the Director

of OFHEO. Mr. Lockhart certainly has experience leading troubled agencies, given

his experience at PBGC and the Social Security Administration. While I appreciate

your willingness to take on this challenge, Mr. Lockhart, I hope that we are able

to put you out of business very soon by enacting fundamental reform of GSE regulation. As I am sure you would agree, OFHEO in its current form is unable to provide

the necessary regulatory oversight.

Finally, I would like to make special mention of the nomination of Kathy Casey

to be a Member of the Securities Exchange Commission. As everyone is well aware,

Kathy has spent a number of years working for Senator Shelby, and I would like

to join my colleagues in thanking her for her service. Not only has she served the

Chairman with distinction, but she has also served each one of us as well. Kathy

has fostered an open and inclusive atmosphere that has allowed Members to have

their concerns addressed in a fair, bipartisan manner. Thanks to her skills and expertise, this Committee has achieved a number of legislative victories. We will all

miss her as the Committee Staff Director, and while it is tempting to put a hold

on her nomination to keep her here, I offer my thanks and best wishes as she moves

forward. Kathy, you will undoubtedly be a great asset to the SEC, and they are

lucky to have you.

In closing, I would encourage all the nominees to become familiar with the Government Performance and Results Act (GPRA), which has been named ‘‘PART assessment’’ by the Administration. The Results Act is a key tool in giving them the

focus and vision to carry out effective, efficient programs. I would exhort the nominees to become familiar with the appropriate strategic plans, annual performance

plans, annual accountability reports, and financial statements. If properly utilized,

they can help you achieve success in meeting your mission.

Thank you, Mr. Chairman.

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PREPARED STATEMENT OF SHEILA BAIR

MEMBER OF THE BOARD AND CHAIRMAN-DESIGNATE

FEDERAL DEPOSIT INSURANCE CORPORATION

JUNE 8, 2006

Chairman Shelby, Ranking Member Sarbanes, and Members of the Committee. I

am pleased to appear before you this morning as the President’s nominee to be the

next Chairman of the Federal Deposit Insurance Corporation. At the outset, I would

like to thank the President for having the confidence in me to lead this historic

agency. Established in the throes of the Great Depression, the FDIC restored depositor confidence in our crippled banking system and since that time, has served

as a beacon of safety for the financial assets of the average consumer. It is a wellrun, well-respected agency comprised of 4,500 dedicated staff and a Board of Directors who bring a broad depth of expertise, as well as a rich diversity in regulatory

view points. It will be my privilege and honor to work with these outstanding individuals if confirmed by the Senate.

I would also like to thank my family for their support of my decision to accept

this nomination and their willingness to disrupt their lives to move back to Washington. Joining me this morning are my husband and dearest friend, Scott Cooper,

and the two best kids in the world, Preston and Colleen. I would also like to thank

my parents, Dr. AE and Clara Bair for all of their support. Finally, I would like

to recognize my former boss, Senator Robert Dole, for his help in this endeavor and

all the other challenges I have undertaken over the past two decades. Washington

can be a difficult place to navigate. Having someone of high stature and integrity

to guide you is crucial. Early in my career, I was fortunate to have Senator Dole

as a mentor. His wise counsel and advice have always served me well.

Another benefit of my association with Senator Robert Dole was the opportunity

to get to know the senior Senator from North Carolina. I had the privilege of first

meeting Elizabeth Dole in the 1980’s, when we worked on so-called ‘‘gender gap’’

issues during the Reagan Administration. I have seen first hand her formidable intellect, strong work ethic, and utmost dedication to public service. I am very glad

that she serves on this Committee and that we may have the opportunity to work

together again.

The last time I appeared before the full Committee, I was the President’s nominee

to be the Assistant Secretary for Financial Institutions of the Treasury Department.

Upon my confirmation for that position, my first assignment was to represent the

Administration on deposit insurance reform. If confirmed by the Senate, I will play

a central role in the implementation of that comprehensive new law. Deposit insurance reform is just one of many major policy issues confronting the FDIC. Industrial

loan companies, Basel II and IA, regulatory burden, antimoney laundering and USA

PATRIOT Act enforcement, identity theft, Federal preemption, the list goes on.

There is no shortage of cutting edge issues at the FDIC, and for many, there are

no easy answers. But as one who loves public policy and believes that the Government can be a force for positive change, I welcome these challenges.

There are two additional issues which I care about deeply and where the FDIC

has been notably active: Financial education and banking services for underserved

populations. As part of the FDIC’s financial education efforts, I hope to place a particular emphasis on school-based education and the integration of math and financial curriculums, which I believe can improve both financial literacy as well as math

scores. Regarding underserved communities, I hope to work with industry leaders

and other regulators to encourage more products to facilitate asset accumulation

among lower-income families. To paraphrase financial columnist Jane Bryant

Quinn, saving money may not make you rich, but it can help keep you from poverty.

So much of the emphasis in the past has been on the extension of credit to underserved populations. We need to do at least as much to promote savings and asset

preservation.

In concluding, I would reiterate my strong commitment to the millions of individuals who rely on the FDIC for security and peace of mind in protecting their deposits. As the ownership society evolves, it is important for every day working men and

women to know that they have a safe haven for a selected portion of their financial

assets. It is equally important to the effective functioning of our banking system

that consumers have confidence in their banks. The FDIC stands proudly at this

intersection. I look forward to the opportunity to serve this fine agency.

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RESPONSE TO WRITTEN QUESTIONS OF SENATOR SHELBY

FROM SHEILA BAIR

Q.1. As an academic you have written about the future of financial

regulation, including the possibility of a fundamental restructuring

of the banking, securities, and insurance regulators such as the

consolidation of agencies. How will your views on the future of financial regulation impact your leadership of the FDIC?

A.1. As an academic, I advocated long-term reforms toward greater

consolidation and coordination among the various financial regulators. Your GSE bill, Mr. Chairman, is one good example of this

concept. By combining OFHEO and the FHFB, the legislation

would give the combined regulator more stature and a broader jurisdictional base to avoid regulatory capture. As Chairman of the

FDIC, one of my highest priorities will be to maintain effective

working relationships with other financial regulators to ensure a

safe and sound banking system. I am fortunate to already have

strong working relationships with many of the top regulators. To

that end, I will embrace consensus approaches to improving financial supervision, but I do not expect to be advocating significant

structural changes at this time.

Q.2. The size of the loss to the insurance fund resulting from the

failure of Superior Bank in 2001 led to criticisms that the OTS and

the FDIC had failed to recognize warning signs and to act in a

timely manner. Because the FDIC is frequently in the role of backup regulator, it is to some extent dependent upon the information

it receives from other regulators. What steps do you intend to take

to ensure adequate communication and coordination between the

FDIC and other regulators?

A.2 I believe that the FDIC’s authority as back-up supervisor is

key to its ability to prudently administer the Federal deposit insurance program. The FDIC and the other banking regulators reached

an agreement in January 2002 on protocols to ensure that necessary information is shared between the FDIC and the primary

Federal regulator and any disputes are resolved expeditiously. The

agreement also provided the FDIC with greater access to information regarding some of the largest banks. My sense is that this

agreement has been working well. I intend to work closely with my

colleagues at the other regulatory agencies to ensure that this cooperative relationship continues. While I believe that the current

structure is working, I will not hesitate to exercise the FDIC’s

back-up authority in appropriate circumstances if it becomes necessary.

Q.3. Although our dual banking system has a great number of benefits, it can pose certain jurisdictional challenges, particularly

when issues span jurisdictional lines among agencies. In 2003, you

suggested creating a rulemaking council composed of the heads of

all the major financial regulatory agencies to coordinate the formulation of rules having cross-jurisdictional impact. Do you believe

your proposal is still relevant in the current regulatory environment?

A.3. I think the bank regulators, for the most part, work well together. When I suggested the rulemaking council, it was to include

66

the functional regulators (SEC and CFTC), as well as insurance

regulators. The extended ongoing discussions between the SEC and

the bank regulators regarding Regulation B is one example where

such a council might assist in the resolution of a cross-jurisdictional issue.

RESPONSE TO WRITTEN QUESTIONS OF SENATOR BUNNING

FROM SHEILA BAIR

Q.1. We have experienced a period of relative stability in the banking sector. What do you see as the biggest threats to the banking

system today?

A.1. By virtually any measure, the banking industry is doing very

well. The industry is well-capitalized and has experienced 5 consecutive years of record earnings—and recently reported another

record quarter. Areas of concern are high and volatile energy prices

and an emerging slowdown in some housing markets. These are

areas of risk most likely to have an impact on the general economy

and ultimately to have an impact on banking performance. I am

also concerned about growing levels of consumer debt and the fact

that the personal savings rate in the first quarter for 2006 and for

all of 2005 was actually negative. This has not occurred since the

Great Depression. Personal savings act as a cushion against unexpected adverse economic conditions. A lack of savings reduces the

financial flexibility of households, which poses risks for them and

the financial institutions which serve them. The FDIC will need to

monitor all of these risks closely in the coming months;. Currently,

however, the banking industry remains healthy. Indeed, there has

not been a bank failure in almost 2 years—an historic record.

Q.2. Do you think that retailers such as Wal-Mart and Home Depot

could be honest brokers if they are let into the banking sector?

A.2. If I am confirmed, I may have to act on regulatory matters involving the two companies cited in your question. For that reason,

I cannot comment at this time on their circumstances. I can say as

Chairman of the FDIC, I will work to ensure that all participants

in the banking sector treat consumers and customers fairly.

RESPONSES TO WRITTEN QUESTIONS OF SENATOR BUNNING

FROM JAMES B. LOCKHART III

Q.1. The Office of Federal Housing Enterprise Oversight has the

authority to impose cease and desist orders and civil money penalties on GSE’s, but lacks explicit authority to take actions against

employees and consultants, or to remove officers and directors. In

other words, you cannot take any action against the very people

who promoted the culture of corruption at Fannie Mae. With such

limited enforcement power, wouldn’t you agree that leads to a pretty ineffective regulator?

A.1. The lack of such enforcement powers, that are similar to other

financial institution regulators, does adversely affect our effectiveness.

OFHEO has authority to direct an Enterprise to install qualified

individuals, but cannot directly remove a senior executive or a director. Should the Enterprise object, the process contained in

OFHEO’s statute could take years to conclude.

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OFHEO does not have explicit authority to remove officers and

directors from an institution as do depository institution regulators.

OFHEO does not have authority to act against consultants, such

as the power of depository institution regulators to act against ‘‘institution-affiliated parties.’’

Among the problems surrounding OFHEO’s enforcement authorities are the standards set in the statute are very high, and the procedural steps that are required are time consuming. One example

is that the statute sets a 2-year statute of limitations regarding

discharged employees versus 6 years for other safety and soundness regulators who have more time to build their cases and press

for potential settlement. In sum, OFHEO has enforcement authorities but these authorities are undermined by procedural hurdles

and missing explicit powers.

Q.2. There are serious concerns about the capability of the Office

of Federal Housing Enterprise Oversight to effectively regulate

GSE’s. As late as June 2002, the regulator reported that Fannie

Mae’s implementation of the derivatives accounting rule had a

sound basis even though regulators were already aware that the

Enterprise was operating under improper accounting methods. Do

you think that oversight of Fannie Mae and Freddie Mac has kept

pace with their growing portfolios? Is the regulator equipped to regulate these enterprises?

A.2. In retrospect, there is no doubt that the prior culture at both

the Enterprise and OFHEO contributed to what was known and

when on the accounting issues. It can also be said that in 2002

OFHEO did not have all the tools and staff it needed to ensure

safety and soundness of the Enterprises. Since then, management

has been strengthened and the budget and staff have doubled.

However, OFHEO still needs the full safety and soundness powers

of a bank regulator, budget flexibility and other powers in the proposed legislation.

In June 2002, OFHEO was not aware that the Enterprises were

operating under improper accounting methods. However, OFHEO

through it risk-based safety and soundness examination program

had begun to recognize a need for additional staff with selected expertise including but not limited to accounting. In a January 2001

memorandum, a proposal for strengthening the examination program was outlined. The memorandum included a proposal to create

a specialized Examination Activities group that would include a

team of accountants that would evaluate accounting policies and

treatments for specific transactions and hedges. As the financial resources became available to OFHEO, the accounting team began

with the hiring of an Examination Manager in the Fall of 2002,

which increased to a team of four during 2003.

As OFHEO assessed the risk at the Enterprises, the Agency continued to recognize the need for additional specialized staff. In

2003, the Director established two new supervisory offices: The Office of the Chief Accountant which has a current staff of 12 employees, 9 of which are CPA’s, and the Office of Compliance which has

a current staff of 14 employees, including 11 compliance examiners.

The Office of Examination has also been expanded since 2002 addVerDate 11-MAY-2000 21:48 Aug 21, 2006 Jkt 025856 PO 00000 Frm 00071 Fmt 6602 Sfmt 6602 28558.TXT SBANK4 PsN: SBANK4
68

ing 60 plus examiners in specialized areas like model, credit, market, and operational risk over the past 4 years.

In summary, OFHEO has increased its staffing level each year.

Today, OFHEO has 226 employees and plans to staff up to 250 by

the end of the fiscal year. As mentioned above the majority of the

increase in staffing has been in the direct supervision areas.

OFHEO continues to assess the optimal skill sets needed to keep

pace with Fannie Mae and Freddie Mac growth and their changing

business risk and adjust OFHEO staffing accordingly. Despite this

growth in staffing, OFHEO does need independence from the appropriations process and improved authorities.

Q.3. Do you think that the split oversight of GSE’s between HUD

and the regulator weakens the ability to regulate this sector?

A.3. Government Sponsored Enterprise regulation would be enhanced by having both new products and affordable housing programs located within the same agency that oversees safety and

soundness. This is the model of bank regulators and has worked

very well. OFHEO has worked cooperatively with HUD and has

been given the opportunity to provide its input on the safety and

soundness of product offerings subject to HUD review.

As the proposed legislation has the HUD Secretary as a board

member, the revamped GSE regulator would continue to cooperate

with and seek advice from HUD.

Q.4. HUD approved and increased funding for ADC construction

loans, eventually granting permanent approval of the program.

Given what the regulator knew about Fannie Mae, do you think

Fannie Mae should have been allowed to expand into construction

loans? Could this be an example of the weakness of divided regulation of this sector?

A.4. OFHEO is reviewing the operation of the ADC program at

Fannie Mae for safety and soundness and does consider construction-related lending a higher risk area requiring strong oversight.

At this point, OFHEO is not satisfied that the existing controls are

adequate to the expanded program. Furthermore, OFHEO has concerns about Fannie Mae actions in expanding business lines at a

time of fundamental problems with its overall control and management structures.

Begun as a pilot program in 1990, HUD lifted the cap on the program’s size in 2003. OFHEO was asked to provide its views on the

operation of the program at that time. OFHEO indicated that the

controls were adequate, but ongoing review was required should

the program grow. OFHEO communicates regularly with HUD on

its examination of the program’s operation.

As noted above, consolidation of new program authority with routine examination for safety and soundness should be beneficial.

RESPONSE TO WRITTEN QUESTIONS OF SENATOR BUNNING

FROM DONALD L. KOHN

Q.1. To date you have not dissented from any of the Fed’s interest

rate actions, including the most recent increase. Will you commit

to being an independent voice on the Fed and to speaking up when

you have a different viewpoint than the Chairman or other members?

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A.1. My responsibility as a member of the Board of Governors is,

and if I am confirmed by the Senate as Vice Chairman of the Board

will be, to provide my own best judgment on all policy issues facing

the Board and the Federal Open Market Committee. I pledge to uphold that responsibility by expressing my views in Federal Reserve

deliberations and by voting for the actions that I believe will best

foster the attainment of the Federal Reserve’s legislated objectives.

Q.2. As we have seen for the last few weeks, and particularly the

last 3 days, the financial media and stock markets are following

the words of you and your Fed colleagues extremely close. Just a

slight change in words from previous statements can drive the

markets up or down. Have you learned anything from those episodes, and are you going to be careful about what you say and

where you say it?

A.2. Clear communication about the macroeconomic situation and

monetary policy is an important aspect of the transparency and accountability of monetary policymaking by an independent central

bank. My colleagues and I at the Federal Reserve recognize both

that financial market participants closely scrutinize our statements

for the implications for the future course of the economy and monetary policy and that markets can sometimes react sharply to what

is perceived as new information. Consequently, we try to exercise

great care in such communications, a practice that I myself have

followed to date and will in the future.

Q.3. How long does it take for the Fed’s actions to affect the economy? In other words, how long of a lag is there between Fed rate

increases or cuts and the action’s impact on the economy? And

what kind of impact have we seen from the current stretch of Fed

tightening?

A.3. Changes in the stance of monetary policy have substantial economic effects, but the timing of those effects is uncertain and varies over time. Empirical estimates of the lag between a change in

the funds rate and its full effect on aggregate output range from

as short as one quarter to as long as a year and a half; the estimated lag in the response of inflation is also variable but tends to

be somewhat more drawn out. Some of this variability reflects differences across time in the extent to which financial markets anticipate future policy actions. In the current episode, Federal Reserve communications have enabled investors to anticipate much of

the rise in the funds rate that has occurred over the past 2 years

and incorporate those expectations into prices in financial markets,

speeding up the response of real activity and inflation relative to

a situation in which policy actions are less well-anticipated. Actual

and expected increases in short-term interest rates have likely already contributed to damping some forms of interest-sensitive

spending, most notably in the housing sector.

Q.4. In a speech last fall, you noted the importance of taking global

trends into account when measuring inflation. Would you expand

on what global trends the Fed should be looking at, what impact

they have, and if you think the Fed is properly taking them into

account?

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A.4. Globalization, which encompasses the various trends toward

greater integration of product and financial markets across countries, has been going on for some time, but it has accelerated in the

past 15 years or so as the economies of eastern Europe moved toward market-based systems and China, India and other east Asian

economies emerged as important players in the global trading system.

Among the trends we must monitor are the effects of these

emerging market economies on inflation and output in the United

States. To date, demands from these economies appear to have contributed to the rise in energy and other commodity prices, which

is boosting overall inflation here, while their supply of low-cost exports seems to have been placing some limited downward pressure

on our underlying inflation rate. But that latter result may not persist; it stems in part from the imbalance of production over spending in some of those economies and the constraints some have

placed on the appreciation of their currencies, neither of which is

likely to be sustained indefinitely.

More generally, the increasing integration of national economies

means that what happens in other countries can have a greater effect on prices and incomes here in the United States. Information

on foreign economies, financial markets, commodity markets, and

exchange rates, along with staff projections for our trading partners, all feed into our consideration of the U.S. economic outlook.

Policymakers need to factor into their decisions the implications

of globalization for the determination of inflation and output, and

we do. In the end, however, we cannot lose sight of the fundamental truth that in a world of separate currencies that can fluctuate against each other, the ultimate responsibility for ensuring

stable prices and maximum sustainable employment in the United

States rests with the Federal Reserve.

Q.5. What inflation measures do you think are the most important?

And what forward-looking measures do you think are useful?

A.5. I believe that it is important to monitor a range of inflation

measures in conducting monetary policy. No single measure can, by

itself, provide enough information with which to form a well-founded judgment about the prospects for inflation and economic growth.

Among the many inflation measures I consider are indexes of consumer prices (including the Personal Consumption Expenditure

price index and the Consumer Price Index)—both the headline indexes and the indexes that exclude the erratic prices of food and

energy; the price index for gross domestic purchases (the broadest

price measure of domestically purchased goods and services); and

the price index for Gross Domestic Product (the broadest price

measure of domestically produced goods and services). The Federal

Open Market Committee provides a forecast of core PCE price inflation in the semi-annual Monetary Policy Report to Congress because the Members of the Committee believe this index provides a

reasonably clear indication of underlying inflation pressures. But

looking also at a variety of other price measures helps me to gain

a deeper understanding of underlying inflation pressures and, more

generally, of the array of factors influencing the economy.

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Similarly, I find it useful to look at a variety of forward-looking

measures of inflation when considering the economic outlook. These

include both survey-based measures of inflation expectations, such

as those from the University of Michigan Survey Research Center

and Professional Forecasters surveys of the Federal Reserve Bank

of Philadelphia, and market-based measures, such as those derived

from inflation-indexed Treasury Bonds and futures markets. Each

measure is useful because it provides information about inflation

expectations from a different perspective and thus helps to form a

more complete picture of how individuals view the outlook for inflation. These expectations in turn influence the path that inflation

actually will follow, and it is the forecast of that path into the future that helps to shape the policy decision in the present.

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STATEMENT OF BOB DOLE

A FORMER U.S. SENATOR FROM THE STATE OF KANSAS

JUNE 8, 2006

Mr. Chairman and Members of the Committee, I am sorry I cannot be here to

re-introduce the Committee to Ms. Sheila Bair, the President’s nominee for Chairman of the Federal Deposit Insurance Corporation. Unfortunately, I am out of the

city on business.

Sheila is already known to you through her previous confirmation as Assistant

Secretary for Financial Institutions at the Department of the Treasury and through

her frequent dealings with this Committee, over many years, from within and outside of Government.

I am proud to offer my unqualified support for Sheila again, for this nomination—

as I did for her previous nomination—which I am confident will be approved speedily and overwhelmingly.

I have known Sheila for 25 years. Earlier in her career, she served as my Counsel

on the Senate Judiciary Committee, handling issues including civil and constitutional rights, intellectual property, and judicial reform. As I am sure many of you

can recall, she was an outstanding member of my staff whom I counted on for advice

and analysis, and she never failed me.

She has gone on to do many other good jobs and has held several important posts.

As a current Dean’s Professor of Financial Regulatory Policy at the Isenberg School

of Management at the University of Massachusetts-Amherst, she has continued her

strong record of research, analysis, and writing on financial institutions policy. She

has become an advocate for financial literacy and recently authored a children’s

book. Sheila has continued her strong record of service and contribution to this area

of public policy.

Prior to her position at the University of Massachusetts-Amherst, Sheila was responsible for the development and implementation of Administration’s policies with

regard to financial institutions policy at the Treasury Department. Immediately

after being confirmed for that position—in fact, within 24 hours if I am not mistaken—she was before this Committee again testifying on behalf of deposit insurance reform. If confirmed to head the FDIC, of course, she will be charged with implementing that new law.

At Treasury, Sheila handled bank regulatory policy, insurance, Government Sponsored Enterprises, critical infrastructure protection, securities regulation, consumer

protection, and financial education, among other issues. In that position, she dealt

directly with the Office of Thrift Supervision, the Comptroller of the Currency, the

Federal Reserve Board, and the FDIC.

I will not delve too deeply into more of her history and extensive experience which

qualify her for this position, much of which was part of my statement before this

Committee on July 12, 2001, when I supported her confirmation for Assistant Secretary of Treasury. But I would like to reiterate my support. I would like to reiterate how proud I am to have had her as a former member of my Senate staff.

Mr. Chairman and Members of the Committee, thank you for your previous support for Sheila, and thank you for your continued support for her. I know she will

serve us well in this new position.

Thank you.