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[Senate Hearing 107-]
[From the U.S. Government Publishing Office]

                                                       S. Hrg. 107- 476

                     NOMINATIONS OF: MARK W. OLSON
                 SUSAN SCHMIDT BIES, JAMES E. GILLERAN
                ALLAN I. MENDELOWITZ, FRANZ S. LEICHTER
                  JOHN T. KORSMO, EDUARDO AGUIRRE, JR.
                        AND RANDALL S. KROSZNER

=======================================================================

                                HEARINGS

                               before the

                              COMMITTEE ON
                   BANKING,HOUSING,AND URBAN AFFAIRS
                          UNITED STATES SENATE

                      ONE HUNDRED SEVENTH CONGRESS

                             FIRST SESSION

                                   ON

                            NOMINATIONS OF:

        MARK W. OLSON, OF MINNESOTA, TO BE A MEMBER OF THE BOARD
               OF GOVERNORS OF THE FEDERAL RESERVE SYSTEM

                               __________

   SUSAN SCHMIDT BIES, OF TENNESSEE, TO BE A MEMBER OF THE BOARD OF 
                GOVERNORS OF THE FEDERAL RESERVE SYSTEM

                               __________

      JAMES E. GILLERAN, OF CALIFORNIA, TO BE THE DIRECTOR OF THE
                      OFFICE OF THRIFT SUPERVISION

                               __________

 ALLAN I. MENDELOWITZ, OF CONNECTICUT, FRANZ S. LEICHTER, OF NEW YORK,
      AND JOHN T. KORSMO, OF NORTH DAKOTA, TO BE DIRECTORS OF THE
                     FEDERAL HOUSING FINANCE BOARD

                               __________

     EDUARDO AGUIRRE, JR., OF TEXAS, TO BE FIRST VICE PRESIDENT AND
      VICE CHAIRMAN OF THE EXPORT-IMPORT BANK OF THE UNITED STATES

                               __________

        RANDALL S. KROSZNER, OF ILLINOIS, TO BE A MEMBER OF THE
                      COUNCIL OF ECONOMIC ADVISERS

                               __________

                 OCTOBER 17, 23, AND NOVEMBER 15, 2001

                               __________

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

79-899              U.S. GOVERNMENT PRINTING OFFICE
                            WASHINGTON : 2002
____________________________________________________________________________
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Internet: bookstore.gpr.gov  Phone: toll free (866) 512-1800; (202) 512�091800  
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            COMMITTEE ON BANKING, HOUSING, AND URBAN AFFAIRS

                  PAUL S. SARBANES, Maryland, Chairman

CHRISTOPHER J. DODD, Connecticut     PHIL GRAMM, Texas
TIM JOHNSON, South Dakota            RICHARD C. SHELBY, Alabama
JACK REED, Rhode Island              ROBERT F. BENNETT, Utah
CHARLES E. SCHUMER, New York         WAYNE ALLARD, Colorado
EVAN BAYH, Indiana                   MICHAEL B. ENZI, Wyoming
ZELL MILLER, Georgia                 CHUCK HAGEL, Nebraska
THOMAS R. CARPER, Delaware           RICK SANTORUM, Pennsylvania
DEBBIE STABENOW, Michigan            JIM BUNNING, Kentucky
JON S. CORZINE, New Jersey           MIKE CRAPO, Idaho
DANIEL K. AKAKA, Hawaii              JOHN ENSIGN, Nevada

           Steven B. Harris, Staff Director and Chief Counsel

             Wayne A. Abernathy, Republican Staff Director

                  Martin J. Gruenberg, Senior Counsel

                        Sarah A. Kline, Counsel

      Brian J. Gross, Republican Deputy Staff Director and Counsel

     Geoffrey P. Gray, Republican Senior Professional Staff Member

           Sherry E. Little, Republican Legislative Assistant

        Thomas A. Readmond, Republican Professional Staff Member

                      Adrienne B. Vanek, Economist

   Joseph R. Kolinski, Chief Clerk and Computer Systems Administrator

                       George E. Whittle, Editor

                                  (ii)

                            C O N T E N T S

                              ----------                              

                      WEDNESDAY, OCTOBER 17, 2001

                                                                   Page

Opening statement of Chairman Sarbanes...........................     1

Opening statements, comments, or prepared statements of:
    Senator Gramm................................................     3
    Senator Carper...............................................    16

                                NOMINEES

Mark W. Olson, of Minnesota, to be a Member of the Board of 
  Governors of the Federal Reserve System........................     4
    Prepared statement...........................................    22
    Biographical sketch of nominee...............................    24
Susan Schmidt Bies, of Tennessee, to be a Member of the Board of 
  Governors of the Federal Reserve System........................     6
    Biographical sketch of nominee...............................    35

                              ----------                              

                       TUESDAY, OCTOBER 23, 2001

Opening statement of Chairman Sarbanes...........................    45

Opening statements, comments, or prepared statements of:
    Senator Gramm................................................    46
    Senator Johnson..............................................    55

                                NOMINEE

James E. Gilleran, of California, to be the Director of the 
  Office of Thrift Supervision...................................    47
    Prepared statement...........................................    55
    Biographical sketch of nominee...............................    57

                              ----------                              

                       TUESDAY, NOVEMBER 15, 2001

Opening statement of Chairman Sarbanes...........................    73

Opening statements, comments, or prepared statements of:
    Senator Bunning..............................................    75
    Senator Reed.................................................    75
    Senator Corzine..............................................    83
    Senator Gramm................................................    89
    Senator Bennett..............................................    89
    Senator Hutchison............................................    98

                                NOMINEES

Allan I. Mendelowitz, of Connecticut, to be a Director of the 
  Federal Housing Finance Board..................................    75
    Prepared statement...........................................    99
    Biographical sketch of nominee...............................   100
    Response to written questions of:
        Senator Sarbanes.........................................   151
        Senators Bennett and Crapo...............................   155
Franz S. Leichter, of New York, to be a Director of the Federal 
  Housing Finance Board..........................................    77
    Prepared statement...........................................   109
    Biographical sketch of nominee...............................   110
    Response to written questions of:
        Senator Sarbanes.........................................   156
        Senators Bennett and Crapo...............................   157
John T. Korsmo, of North Dakota, to be a Director of the Federal 
  Housing Finance Board..........................................    79
    Biographical sketch of nominee...............................   119
    Response to written questions of:
        Senator Sarbanes.........................................   158
        Senators Bennett and Crapo...............................   160
Eduardo Aguirre, Jr., of Texas, to be First Vice President and 
  Vice Chairman of the Export-Import Bank of the United States...    90
    Biographical sketch of nominee...............................   126
Randall S. Kroszner, of Illinois, to be a Member of the Council 
  of Economic Advisers...........................................    95
    Prepared statement...........................................   133
    Biographical sketch of nominee...............................   134

 
                            NOMINATIONS OF:
                      MARK W. OLSON, OF MINNESOTA
                         TO BE A MEMBER OF THE
                       BOARD OF GOVERNORS OF THE
                         FEDERAL RESERVE SYSTEM
                                  AND
                    SUSAN SCHMIDT BIES, OF TENNESSEE
                         TO BE A MEMBER OF THE
                       BOARD OF GOVERNORS OF THE
                         FEDERAL RESERVE SYSTEM

                              ----------                              

                      WEDNESDAY, OCTOBER 17, 2001

                                       U.S. Senate,
          Committee on Banking, Housing, and Urban Affairs,
                                                    Washington, DC.

    The Committee met at 10:30 a.m., in room SD-538 of the 
Dirksen Senate Office Building, Senator Paul S. Sarbanes 
(Chairman of the Committee) presiding.

         OPENING STATEMENT OF CHAIRMAN PAUL S. SARBANES

    Chairman Sarbanes. Let me call our hearing to order.
    We are pleased to welcome before the Banking Committee this 
morning two nominees to be Members of the Board of Governors of 
the Federal Reserve System. First is Mark Olson, who has been 
nominated to complete the unexpired term of 14 years, from 
February 1, 1996, of Alice Rivlin. This means that, if 
confirmed, he would have about 8-plus years to serve on the 
Board. The second is Susan Bies, who has been nominated to the 
Fed to complete the 14 year term from which Susan Phillips 
resigned on February 1, 1998. This means if she is confirmed, 
she would have 10-plus years to serve on the Fed.
    Just for elaboration, I should note that the Fed has seven 
Members. They receive 14 year terms and the terms are fixed. So 
if the vacancy exists, the person appointed fills the remaining 
part of the term. In other words, they do not get the 14 years. 
They get whatever is left of the term of their predecessor. Of 
course, if the predecessor served the full term, then they get 
the full term.
    It is set up on a staggered basis. We get a vacancy every 2 
years in the normal rotation, although if people step down, as 
is the case here, then we have openings and people fill the 
unexpired period.
    I have had the opportunity to meet with both nominees. In 
fact, both have indicated to me their intention to serve the 
full period remaining on the terms for which they have been 
nominated. And I simply want to say, in my view, that is very 
much in the interest of the Federal Reserve as an institution, 
to have Members of the Board of Governors serve most, if not 
all, of the rather exceptionally long terms provided to Members 
of the Board.
    Other than Federal judges, who serve for life, I do not 
know of anyone that we give this lengthy term to.
    It used to be common practice for nominees to serve their 
terms. In recent years, that has become less the case. And I 
have been disturbed by that growing trend. I commend Mr. Olson 
and Ms. Bies for their stated willingness to serve.
    Mark Olson, of course, is well known and respected by the 
Members of this Committee, since he served with distinction as 
Staff Director of the Securities Subcommittee, then chaired by 
Senator Grams of Minnesota, from February 2000 to January 2001.
    We always like to claim our alumni as best we can around 
here.
    Mark Olson is from Minnesota, a graduate of St. Olaf 
College in 1965. From 1966 to 1970, he worked in retail banking 
and commercial lending for First National Bank of St. Paul, now 
U.S. Bancorp.
    Mark then became involved with Bill Frenzel, serving as his 
Campaign Manager, a former very distinguished colleague of ours 
who served in the House of Representatives. He worked for 
Congressman Frenzel as a Legislative Assistant. He then worked 
for Andrews Allen Company, a commercial real estate developer. 
Then as President and CEO for 12 years of the Security State 
Bank in Fergus Falls, Minnesota.
    Actually, during that period of time, he served a term as 
President of the American Bankers Association. From 1988 to 
1999, he was a Partner and National Director of Regulatory 
Consulting for Ernst & Young.
    Ms. Bies received her undergraduate degree in Education 
from State University College in Buffalo, her M.A. in 1968, and 
Ph.D. in 1972 in economics from Northwestern University.
    As you know, Senator Gramm, our Ranking Member, is a Ph.D. 
in economics. I will just put that on the record as well, as I 
frequently do.
    Ms. Bies worked at the Federal Reserve Bank in St. Louis 
from 1970 to 1972, as an economist responsible for reviewing 
bank holding company and bank merger applications. Prior to 
that, she worked for a year at the Federal Reserve Bank in 
Chicago on a fellowship. She was then Assistant Professor of 
Economics at Wayne State University in Detroit, Associate 
Professor of Economics at Rhodes College in Memphis. And since 
1979, she has been with the First Tennessee National 
Corporation in Memphis as an Economist and Chief Financial 
Officer. Since 1995, as the Executive Vice President for Risk 
Management.
    Both of these nominees obviously would bring substantial 
expertise and experience to the Federal Reserve Board of 
Governors. Mr. Olson served as a banker, the head of a leading 
banking association, performed important work in the accounting 
field, was the Director of Regulatory Consulting for Ernst & 
Young, and had experience here on Capitol Hill. Ms. Bies, of 
course, is an economist with the Fed, in academia, and now, 
most of her career in senior banking positions.
    I am very pleased that we have been able to schedule this 
hearing in a timely fashion, and I welcome the witnesses here. 
We look forward to hearing from them. But, first, I yield to 
the Ranking Member, Senator Gramm.

                STATEMENT OF SENATOR PHIL GRAMM

    Senator Gramm. Mr. Chairman, thank you very much. I was 
over at one of those interminable meetings that we seem to be 
having in the last few days. It started at 9 a.m. I apologize 
to everybody for being late.
    Let me first say that I think we have been blessed in 
having excellent people nominated to positions that we oversee 
on this Committee. Obviously, in the previous Administration, 
there were policies that I did not agree with. But never, ever, 
did I feel that any of their nominees that fell under the 
jurisdiction of this Committee were unqualified. I thought that 
President Clinton, like President Bush, and President Reagan 
before him, nominated good people to serve in these very 
important positions. And I think President Bush is following 
exactly that same pattern.
    I want to begin by thanking each of you for your 
willingness to serve. Many positions in Government offer only 
an opportunity to do hard work at relatively low pay, with 
relatively little recognition. And it is the willingness of 
people to do this important work that helps make our 
Government, while still a Government and embodying all the 
inherent problems Government has, the greatest Government in 
the history of the world. So, again, I want to thank both of 
you for your willingness to serve.
    Mr. Chairman, we all know Mark Olson. He worked with us. As 
you pointed out, we like to point out our alumni. I like to 
remind colleges and universities that the ultimate test of a 
great university is not its library or its football team or 
even its faculty. It is its graduates.
    We are proud of you, Mark. Mark has an extensive 
background. In fact, I doubt that there are many people who 
have ever served on the Fed Board that have as broad a 
background as Mark Olson. He ran a small bank, was the 
President of the American Bankers Association, worked for a 
Congressman and a Senator. Very broad background and I think it 
will be very helpful to him.
    Sue Bies has an excellent academic background. In fact, she 
and my wife were graduate students together at Northwestern 
University, I am very proud to say. She has had a distinguished 
career in academics and in business. I think her appointment is 
an excellent appointment.
    So, I want to congratulate both of you, and I look forward 
to your confirmation.
    Let me say one more thing, Mr. Chairman. I know we have had 
trouble with background checks and trouble with getting people 
nominated. At times, it has created an imbalance between 
Democrat and Republican Members of various boards and 
commissions. I think you have every right to be concerned about 
that. In fact, it is part of your job. And I pledge to work 
with you to see that we keep this balance moving forward and 
when we have a Democrat and Republican opening, we try to bring 
the two together.
    I just want to thank you for bringing these two nominations 
forward. We are in a period where we need more people on the 
Board. We have another Board Member, I understand, who is 
thinking or is preparing to leave.
    I want to thank you for holding this hearing.
    Chairman Sarbanes. Well, as I indicated at the outset when 
we made, I guess, the transition, might be the way to describe 
it, that we would do our best to try to help the Administration 
put its people into place.
    I also want to just acknowledge that the White House 
personnel have in recent days at least been more responsive on 
the problem that you outlined. So, I hope that we will be able 
to proceed without any difficulties.
    We are going to turn to you now for your statements. Before 
I do that, though, I would ask you to stand because it is the 
practice of the Committee to place the nominees under oath.
    Do you swear or affirm that the testimony that you are 
about to give is the truth, the whole truth, and nothing but 
the truth, so help you God?
    Mr. Olson. I do.
    Ms. Bies. I do.
    Chairman Sarbanes. Do you agree to appear and testify 
before any duly-constituted committee of the U.S. Senate?
    Ms. Bies. I do.
    Mr. Olson. I do.
    Chairman Sarbanes. Thank you very much.
    Mark, why don't we start with your statement. And I invite 
both of you, if you have members of your family here that you 
wish to present to the Committee in the course of making your 
statement, we certainly invite you to do so.

            STATEMENT OF MARK W. OLSON, OF MINNESOTA

            TO BE A MEMBER OF THE BOARD OF GOVERNORS

                 OF THE FEDERAL RESERVE SYSTEM

    Mr. Olson. Thank you, Mr. Chairman. I would like to 
introduce my wife, Renee Korda, who is with me today.
    Both of you referred to Congressman Bill Frenzel, who is my 
mentor and former boss, who may be here during the course of 
the day also.
    First of all, I would like to repeat what Senator Gramm 
said. Mr. Chairman, thank you on behalf of both of us for 
holding this hearing at a time when both this Committee and the 
Congress have a lot of competing issues. We are certainly 
appreciative of your attention to that.
    You have summarized my background, Mr. Chairman. I do have 
a statement that I would like to submit in its totality for the 
record and I will skip the first part of it, which you have 
summarized, if that is fine.
    Chairman Sarbanes. The full statement will be included in 
the record. And take whatever time you need to make your 
statement.
    Mr. Olson. Thank you.
    Chairman Sarbanes, Senator Gramm, and Members of the 
Committee, I am pleased to appear before you today as one of 
President Bush's nominees to serve on the Board of Governors of 
the Federal Reserve System. I am honored that President Bush 
has nominated me to serve on the Board. And if I am confirmed 
by the Senate, I look forward to fulfilling the important 
responsibilities of Board membership.
    You have reviewed my background, which I won't repeat. But 
in summary, I have been part of the financial services industry 
as a practicing banker for 16 years, a regulatory consultant 
for 12 years, a Congressional staff member for 5 years, and was 
elected to the highest leadership position in the banking 
industry.
    I particularly enjoyed, I must say, the year that I spent 
as part of this Committee. I served as an aide and had a chance 
to work with some very dedicated and talented Senators and I 
served unofficially as the grandfather to the staff people 
around here because I was by a considerable margin the oldest 
person while I was here. But I think that experience was of 
benefit.
    The combination of experiences has allowed me the 
opportunity to understand the important issues challenging the 
financial services industry, its regulatory authorities, and 
the U.S. Congress. I look forward to bringing that experience 
to the Board of Governors.
    Let me now turn to a couple of specific issues, areas of 
responsibility of the Fed.
    Monetary policy is a critical Federal Reserve 
responsibility. The Federal Open Market Committee and the Board 
establish policy, which is implemented through the Federal 
Reserve Banks and, ultimately, through the banking system.
    As a banker, I gained a hands-on familiarity with the tools 
used to implement monetary policy as the banks are, 
effectively, the counterparties to Federal Reserve decisions 
including: Federal funds rate targets, discount rates for 
Federal Reserve Bank borrowing, and establishment of reserve 
requirements. My background has provided me an understanding of 
how monetary policy is implemented, and the impact these policy 
decisions have on individuals and businesses. Importantly, as a 
banker, I witnessed firsthand the difficulties caused by both 
recession and high inflation in more volatile economic times. 
As a result of that experience, I fully support the mandate 
Congress has given the Federal Reserve System to pursue 
``maximum employment, stable prices, and moderate long-term 
interest rates.''
    Turning to regulatory issues, with the passage of the 
Gramm-Leach-Bliley Act of 1999, the Federal Reserve was 
accorded by Congress an expanded role in financial services 
supervision. That bill allowed financial institutions from 
banking, thrift, securities and insurance industries to 
affiliate in a newly-authorized financial holding company. 
Though each of the financial services entities will continue to 
be regulated by its principal functional regulator, the Fed has 
been accorded the important role as umbrella regulator with 
overall regulatory coordinating responsibility. As a result, 
the Fed has effectively been given the oversight responsibility 
for monitoring the blending of financial industries at a time 
when these industries are being dramatically impacted by 
technological innovation and industry consolidation. That Act 
is now 2 years old, and is not yet fully implemented. Given my 
background, I look forward to being an active participant in 
this continuing effort.
    Regarding the payment system, the Board also has 
supervisory responsibility for the proper functioning of the 
payment system. As we were again reminded following the horror 
of September 11, the smooth and efficient functioning of our 
payment system is vital to this Nation's economic health. The 
dramatic improvements in technology continue to provide 
opportunities for greater efficiency, but also raise new 
regulatory issues as the system continues to progress from 
paper-based to an increasingly electronic system. I look 
forward to bringing my banking and consulting experiences to 
addressing these important issues.
    Another important role of the Board is its responsibility 
to consumers. I have been particularly pleased to learn of the 
increasing role the Fed now plays in consumer education. 
Financial literacy is an important element in our citizens' 
ability to fully experience the benefit of a free-market 
economy. I look forward to being an active participant in this 
important area.
    The Congress has also entrusted the Board with important 
consumer protection responsibilities. There are a number of 
regulatory issues currently awaiting Board action. Among these 
are the proposed changes in the Home Ownership and Equity 
Protection Act, HOEPA, and the Truth In Lending Act, TILA, 
intended to crack down on predatory lending. Also, changes have 
been proposed concerning mortgage loan data collection under 
the HMDA. The comment period for both has expired and the 
comments by interested parties are now under review. While I 
have a working familiarity with both proposals from my prior 
experience, I look forward to an opportunity to review the 
public comments and also the Federal Reserve staff analysis in 
order to fully acquaint myself with all the implications of 
these proposed rule changes.
    Chairman Sarbanes and Senator Gramm, my goal as a 
prospective Member of the Board is to utilize my banking 
industry background and my public policy experience to continue 
the important work of the Federal Reserve. It is my intent to 
help the Fed continue to provide a regulatory framework which 
will allow the banking industry to meet the evolving financial 
needs of its customers, and continue as a critical source of 
strength for the economies of the United States and the world.
    Thank you again for holding the hearing, and I look forward 
to your questions.
    Chairman Sarbanes. Thank you very much.
    Dr. Bies.

         STATEMENT OF SUSAN SCHMIDT BIES, OF TENNESSEE

            TO BE A MEMBER OF THE BOARD OF GOVERNORS

                 OF THE FEDERAL RESERVE SYSTEM

    Ms. Bies. Thank you.
    Mr. Chairman, Senator Gramm, and Members of the Committee, 
I am very pleased to have this opportunity to appear here today 
as you consider my nomination to serve as a Member of the Board 
of Governors of the Federal Reserve System. I look forward to 
serving in this position. If the Committee and the full Senate 
approve my nomination, I promise to work with the other Members 
of the Board, and with this Committee, to carry out the 
objectives that the Congress has established for the Federal 
Reserve.
    I am honored that President Bush has nominated me to be a 
Member of the Board of Governors. This brings me back to where 
I began my professional career. When I was at graduate school 
at Northwestern University, I received a fellowship from the 
Federal Reserve Bank of Chicago that enabled me to conduct 
research at the Bank to complete my doctoral dissertation.
    Chairman Sarbanes. And that fellowship is going to be like 
an endowed chair now and in the future at the Federal Reserve 
Bank of Chicago.
    [Laughter.]
    Ms. Bies. And I hope that there are many more young folks 
that can get that.
    The decisions of the Federal Reserve affect the economic 
well-being of every American consumer and business. The Federal 
Reserve has responsibilities for establishing monetary policy 
and for assuring the safety and soundness of the banking and 
payment systems. I believe my background in these areas 
qualifies me to serve on the Federal Reserve Board.
    I hold an M.A. and Ph.D. in economics from Northwestern and 
have taught economics for 7 years. My first professional 
position after graduate school was with the Federal Reserve 
Bank of St. Louis. There, and at the Chicago Federal Reserve 
Bank, I gained valuable experience in issues regarding bank 
mergers and acquisitions, regional economics, and monetary 
policy.
    I have spent 21 years with First Tennessee National 
Corporation, a large, nationwide diversified financial services 
institution that is headquartered in Memphis, Tennessee. My 
experience has primarily been in the areas of finance, risk 
management, and audit, which has given me a real appreciation 
of the day-to-day workings of the financial system and the 
issues relevant to implementing regulations.
    I approach this nomination understanding the 
responsibilities that the Federal Reserve has to create the 
monetary policy environment that will support full employment 
and maximum sustainable economic growth. Based on my experience 
over the years, I believe that this can only be accomplished by 
restraining inflation. Inflation increases the cost of capital 
to businesses and thereby reduces the amount of long-term 
investment, which in turn lowers economic growth and job 
creation. High inflation expectations increase long-term 
interest rates, which reduces the ability of households to buy 
homes, finance their children's education, and provide the 
means to their families that improve their standard of living.
    While the primary focus of monetary policy is to contain 
inflation, the Federal Reserve must also be constantly aware of 
the rate of economic growth and the level of unemployment. The 
American economy benefited from more rapid productivity growth 
in the 1990's, which permitted the economy to enjoy faster 
growth and lower rates of unemployment without triggering 
significant inflation. Economic growth has slowed since late 
last year and has been adversely affected by the recent tragic 
events. This led to short-term actions to lower interest rates 
to strengthen the economy.
    When unusual events occur, such as those horrible events on 
September 11, the Federal Reserve has the additional 
responsibilities of providing liquidity and assuring the smooth 
functioning of the payment system. By stepping in promptly to 
ensure that banking and payment systems continue to function, 
and to provide sufficient liquidity to keep transactions moving 
as smoothly as possible, the Federal Reserve helped to keep 
short-run disruptions in that awful week to a minimum. In the 
aftermath of the September 11 events, bankers throughout the 
country were able to support the transaction and credit demands 
of their customers due to the effective and prompt response of 
the Federal Reserve.
    We are in a time of changing technology, competitive 
factors, and business practices that affect the financial 
system. Recent innovations in financial instruments, such as 
derivatives, and securitization of loans, have changed the way 
that risks and liquidity move among financial market 
participants. With laws like Gramm-Leach-Bliley, the 
distinctions among products and services offered by commercial 
banks, investment banks, insurance carriers, and nonfinancial 
firms are diminishing. The Fed must respond appropriately to 
these forces to keep markets competitive and efficient, while 
balancing the need to protect the safety and soundness of the 
banking system.
    Financial institutions now have more tools to manage the 
credit, market and operating risks they face. This has 
important implications for the way the safety and soundness of 
our financial institutions should be measured and monitored. 
The Federal Reserve and other bank and financial institution 
regulators will have to modify their rules to encourage the 
beneficial aspects of these new innovations and encourage risk 
mitigation tools without significantly increasing systemic 
risks to financial markets. This requires that the staff of the 
Fed continue to develop their knowledge base to effectively 
monitor the financial institutions for which it has oversight.
    Finally, the Federal Reserve must also provide regulations 
and oversight of the manner in which financial services are 
provided to ensure that the varying needs of consumers, 
businesses, and communities are met in a fair and efficient 
manner. The Federal Reserve should encourage the appropriate 
mix of regulation, customer disclosures, and improved financial 
literacy so that consumers and businesses can more fully 
benefit from innovations in technology and financial services.
    In conclusion, I approach my nomination as a Member of the 
Board of Governors of the Federal Reserve with an understanding 
of the broad responsibilities the position requires. I would 
like to thank the Committee for considering my nomination, 
particularly the promptness with which this hearing has been 
held, in light of all the other events that are on your 
agendas. And if I am confirmed, I look forward to working on 
these policy issues with Members of this Committee and other 
Committees of Congress. I will be happy to answer any questions 
that you may have.
    Chairman Sarbanes. Thank you very much.
    We appreciate both of your statements. I just have a few 
questions and then I will yield to Senator Gramm.
    There are some who have advanced the theory that there is 
an unemployment rate that you can determine and that if the 
economy expands or grows in such a way that it drives the 
unemployment rate down below that figure, almost automatically 
like a balance, the inflation will go up.
    There was a time when one advocate putting that forward 
said, well, the rate--just to put some meat on the bones of 
this framework--was 6.7 percent unemployment. This was when we 
were at 7\1/2\ percent unemployment rate. And if the 
unemployment rate went below 6.7 percent, we would have an 
inflation problem. Therefore, as the economy expanded and moved 
the unemployment rate down toward 6.7, the Fed should start 
raising the interest rates in order to dampen down economic 
activity in order to avoid an inflation problem.
    Now that theory was not followed and, of course, today that 
rate has now risen because of all these events. But we were 
down to 4 percent unemployment rate and no inflation problem. 
Do you have a view about that theory? In particular, I guess, I 
am interested in whether you reject that theory?
    Mr. Olson.
    Mr. Olson. The theory is more of a guideline at this point 
because, as you point out, what we discovered in the last half 
of the decade of the 1990's is that we could operate at an 
employment level that we had not seen previously in history, 
and at a level that was not inflation-inducing.
    What we discovered is that if there is a natural rate of 
unemployment, it is at a different level than it was perceived 
to be as recently as 10 years ago.
    I think to the credit of the Fed and others, they 
recognized that their analysis needed that flexibility, so that 
there would not be an automatic response to an employment level 
that would require a tightening of monetary policy.
    That is the way that the Fed responded and it seems to me 
that that is a perfectly acceptable response. I think, 
prospectively, we need to recognize that these are very fluid 
situations and there will probably be increasing productivity 
left in the economy, and that increasing productivity may 
change the way we alter the relationship between unemployment 
rates and the potential for inflation.
    Chairman Sarbanes. I might comment that Chairman Greenspan, 
in testimony before this Committee, in effect, rejected what I 
think is a simplistic concept and said that the analysis had to 
be much more complex and, in a sense, much more pragmatic, in 
making the judgments. Obviously, if we had adhered to that, we 
would have given away a lot of growth and a lot of employment 
to the economy and to the country.
    Mr. Olson. I fully agree.
    Chairman Sarbanes. Dr. Bies.
    Ms. Bies. I also agree that there is no rigid rule or fixed 
number.
    I think one of the difficulties that you have by looking at 
something like the unemployment rate is that it ignores the 
other side of the potential that we have for the population to 
be employed.
    One of the advances that we had was in productivity, which 
made given resources more able to handle the same number of 
transactions in business. But also in the last decade, we have 
continued to bring a lot of women into the marketplace, and 
that has enabled the supply of labor to greatly increase.
    I think one of the things we need to realize, too, is that 
of the people who are looking for work, do they have the right 
skills and talents that companies need when they are looking to 
fill positions?
    And it is important that we continue to make sure that our 
work force is able to respond to the changing employment needs.
    I think it is more these dynamics that we should be focused 
on rather than the unemployment rate by itself.
    Chairman Sarbanes. Mr. Olson, we have received a letter, 
and I think you have a copy of it, from the National 
Association of Realtors. They have expressed concern because of 
your past experience as a former President of the American 
Bankers Association, as to how you would implement the 
financial activities provisions of Gramm-Leach-Bliley. And I 
think it encumbent upon me to ask you about this matter. They 
are concerned because there is a petition at the Fed and the 
Treasury Department to, in effect, allow financial holding 
companies and financial subsidiaries of national banks to sell 
and manage real estate. Now this raises some very important 
questions about the separation of banking and commerce and I 
want to explore that with both of you just a little bit. But 
how would you respond to their letter?
    Mr. Olson. Mr. Chairman, I saw the letter for the first 
time last evening. I do have it in front of me. A couple of 
thoughts. Let me speak specifically to the letter, and then the 
broader question.
    First of all, with relation to my American Banking 
Association background and connection. I last served as an 
officer of the ABA 13 years ago. And for that matter, after we 
sold our bank in Minnesota in 1988, I was ineligible to be a 
voting member of the ABA. So, I have not been an eligible 
voting participant in the ABA for 13 years.
    When this Committee asked me about conflict of interest 
issues in the questionnaire you put out, I responded by saying 
that I would abide by the Government Ethics Office guidelines 
with respect to conflicts and I would do the same here.
    I would submit the facts of this issue to the Government 
Ethics Office and abide by their decision as to whether or not 
this is an issue on which I should recuse myself.
    More broadly, the question really speaks to the issue of 
when background in an industry is relevant to a regulatory 
position or whether there is potential conflict. I am quite 
familiar with the issue. I studied the issue carefully as a 
banker. I had an opportunity to review the issue as a 
consultant.
    But I think the role as a regulator is entirely different, 
and you just said it. The issue is not whether or not it would 
be my personal preference. The issue as a regulator is very 
specific--does real estate brokerage activity fit under the 
definition of financial activities as defined by Gramm-Leach-
Bliley?
    There is no way that I could answer that question until I 
had had an opportunity to look at the guidance provided by the 
Federal Reserve staff and the public comments.
    I think the background I have is relevant to understanding 
the issue. But the role as a regulator, is it consistent with 
the law as intended by Congress?
    Chairman Sarbanes. Well, let me put this question to both 
of you and let me use an example.
    We had before this Committee a nominee, Mr. Harvey Pitt, to 
be the Chairman of the Securities and Exchange Commission. Now 
Harvey Pitt, the first 10 years he was out of law school, 
worked for the SEC. In fact, he became the youngest General 
Counsel in its history. He then went into private practice and 
became one of the most recognized and successful securities 
lawyers in the country and represented a number of clients 
before the SEC, very effectively over 25 years. Then he was 
nominated to be the Chairman of the SEC.
    So the question becomes, how will you be able to shift over 
and handle this responsibility? To whom do you owe your 
judgment if you are confirmed and become a Member of the Board 
of Governors of the Federal Reserve System?
    Dr. Bies.
    Ms. Bies. I think as a Member of the Board of Governors, 
our responsibility is to the safety and soundness of the entire 
banking system, first of all. And for that reason, I think the 
knowledge we bring, including our personal experience, is an 
asset that helps us understand what the root cause issues are 
in any potential matter we might be looking at.
    It is much more dangerous to be on the other side where you 
have no background in an area. By working in a business 
operation day-to-day, particularly in many of the areas I have 
dealt with in risk management or setting accounting rules on 
the Emerging Issue Task Force of FASB, I have the experience of 
knowing what the transactions really involve. I think it has 
made me, and would make me, a more effective regulator because 
I will make sure that I understand all the issues that should 
be addressed so that the regulation meets the objective, 
without unduly burdening the day-to-day operations.
    I think it is an asset in that respect. But the overall 
directive that we have is to keep the financial system and the 
payment system running smoothly.
    Chairman Sarbanes. Mr. Olson.
    Mr. Olson. When I joined Congressman Bill Frenzel's staff 
in 1971, my background at that point had been banking. And as a 
28-year-old, I discovered when I joined the Congressional 
staff, that when I took off my banker hat and put on my public 
policy hat, I look at the same issue from a different 
perspective.
    I took that responsibility very seriously. I took that new 
role very seriously then. I had a chance then to go back into 
the banking industry and work on public policy issues as an 
advocate for the industry. I also looked at them as a 
consultant. Then I had a chance a year ago to come back here 
and look at the issues from their public policy point of view. 
And that is the point of view that I would bring prospectively 
as a Fed Governor.
    There are two guidelines for acting on public policy 
issues. First, and very important, is the law as set out by 
this Congress in terms of guidelines as to what the Fed's role 
is. Second is the broader issue with what is appropriate public 
policy under the broad guidelines provided and the 
implementation of the regulations.
    Chairman Sarbanes. I think it is very important because 
people need to understand, because the fact that people come 
out of a particular background when they move into these public 
policy positions, their guiding star actually becomes the 
public interest. They have to leave behind them whatever biases 
might exist out of their previous experience.
    We like to get the knowledge and the expertise from the 
previous experience, but it is very important, as you have just 
indicated, I think, that people moving into these positions 
understand that their frame of reference will alter.
    I think it is important to get people on the record in that 
regard, because you will often be called upon in a sense to 
adjudicate issues between competing economic interests. One 
economic interest may be the one out of whose background you 
came. Another will be a different economic interest, out of 
whose background you did not come.
    And so, it is the same thing when people become judges. 
They need some sense that they then will rise above the 
attitudes of that background and make their judgments on the 
public interest.
    I appreciate your response.
    Senator Gramm.
    Senator Gramm. Mr. Chairman, thank you.
    I guess in looking at the National Association of Realtors' 
letter, it sort of calls me back to an approach that is often 
made by people in looking at nominees, that the best background 
would be to have just come in off a turnip truck.
    [Laughter.]
    But I think you are living proof, Mr. Olson, that your 
background does not always determine what you believe. Didn't 
you go to St. Olaf 's College?
    Mr. Olson. I sure did.
    Senator Gramm. And as far as I know, having worked with 
you, you are very conservative. So it goes to show that we are 
not simply chalkboards that experience writes upon. There are 
inner circuits that are implanted at birth or somewhere else.
    Let me say, Dr. Bies, I think your point is a very good 
one, that unemployment is a very poor indicator of the supply 
of labor. And I think that, as we look to the future in terms 
of our potential to grow, there have been various things 
written about the growth of the labor force. Before we had the 
current slowdown, and the demand for labor.
    But the plain truth is, as you pointed out, that there are 
many ways that we can expand the labor force. There are a 
substantial number of people who are not in the labor force.
    In fact, in the current boom period that we have 
experienced, really since 1982, my own opinion is that not only 
has the unemployment rate come down to quite low levels as 
compared to the post-war experience of America, but also that 
we have brought people into the labor force who before were 
viewed as unemployable. And I think that is a very important 
point.
    I do not know if you have family here, but did I miss you 
introducing them.
    Ms. Bies. No. I apologize to my family. Thank you, Senator.
    Senator Gramm. Why don't you introduce them?
    Ms. Bies. I have my husband here, John Bies, and my older 
son, John Matthew Bies.
    Senator Gramm. Well, in my experience with my wife's own 
profession, I would like to say that I have gained some insight 
into how some spouses feel. I will go to dinner with my wife 
and people and they want to talk to her. They talk about stuff 
I do not know anything about, or care anything about. So, I 
feel for your husband.
    Ms. Bies. Thank you.
    [Laughter.]
    Senator Gramm. You should be nice to him.
    [Laughter.]
    Let me just pose one question because Senator Sarbanes and 
I have to go to a meeting over in the Capitol.
    If you are looking at your role, if you are confirmed as 
being a Member of the Board of Governors, in setting monetary 
policy in the United States, obviously, there are many things 
that you want to achieve with monetary policy. There are 
various trade-offs.
    But I would like to give each one of you an opportunity to 
tell us, when you get down to the bottom line, which things do 
you think are most important in terms of monetary policy?
    What are sort of the crown jewels that you are dealing 
with, the things that are not important to the exclusion of 
everything else, but that are important in a higher order than 
other things in terms of objectives?
    Mr. Olson. Even though Susan has the Ph.D. in economics, I 
will start with an answer to that.
    It seems to me, Senator, that monetary policy has the most 
direct influence on price stability. It is typical of monetary 
policy to respond to the dynamics in the economy at a certain 
time to provide a leveling.
    Having said that, though, it is important for the monetary 
policy to accommodate the growth opportunities that are in the 
marketplace as well.
    I think I would take it in that priority, that the price 
stability is very important, but absolutely not to the 
exclusion of allowing for a dynamic economy to function much as 
the way we have seen it in the latter part of the 1990's.
    Ms. Bies. I would agree with Mr. Olson that the critical 
objective for the Federal Reserve is to make sure we have very 
moderate, low rates of inflation. I think it is important 
because it will help sustain long-term maximum employment 
growth for the economy.
    Senator Gramm. So, you do not see a conflict between price 
stability and growth. In fact, in the long-term, you see price 
stability as a necessary condition for economic growth.
    Ms. Bies. I surely do. I think one of the things that we 
have to be aware of at the Federal Reserve is that we continue 
to make the markets trust us to use monetary policy to make 
sure that inflation is under control so that there is not the 
uncertainty or the risk of inflation that may be perceived by 
markets because that uncertainty, in and of itself, can raise 
interest rates and slow growth down. So, our credibility is 
very important to help preserve that growth. We only can do it 
by consistently focusing on inflation.
    Senator Gramm. Well, I think that is Alan Greenspan's view. 
In fact, in looking at his career, until very recently, I think 
any time things are not going well, or well as compared to the 
most recent trend, people are more critical. But I think the 
criticism that Greenspan has had historically, which has 
primarily come from, ``pro growth advocates'' has been 
preoccupation with inflation.
    I have always defended the Chairman, believing that, in the 
long-term, price stability is a necessary condition for long-
term economic growth. It may not be sufficient, but it is 
necessary. In the long-term, if you do not have price 
stability, you undercut the ability of an economy to perform 
efficiently over long periods of time. And I think that 
Chairman Greenspan's priorities, Dr. Bies, are very similar to 
yours.
    I am finished, Mr. Chairman.
    Chairman Sarbanes. I think that when you are, in a sense, 
confronted with this kind of question, there is always refuge 
in the statute. I just want to read it to you. This is the 
statute that governs the Board of Governors of the Federal 
Reserve System.
    So this is your mandate. It was given to you by Congress. 
Congress could change the mandate and, in fact, we have had 
some Members on this Committee who wanted to change it and have 
it more single-focused, as it were, rather than the more 
complex discussion that I think we have just had and your 
response, and from Senator Gramm.
    I think it is important to just read the statute again.
    ``The Board of Governors of the Federal Reserve System and 
the Federal Open Market Committee shall maintain long-run 
growth of the monetary and credit aggregates commensurate with 
the economy's long-run potential to increase production, so as 
to promote effectively the goals of maximum employment, stable 
prices, and moderate, long-term interest rates.''
    Now, I am prepared to concede that is a very complex task 
and it is one you will have to wrestle with. But I want to 
underscore that it sets out, in a sense, a package of goals 
that you have to try to address.
    I just want to put that on the record and underscore it to 
you.
    And this is going to lead into another question I have on a 
different subject.
    Senator Gramm. Mr. Chairman, if you will let me butt in 
here.
    Chairman Sarbanes. Sure.
    Senator Gramm. I think there is no conflict among those 
goals. I think in the long-term, the policies that promote each 
one of those goals are consistent. In the short-term, there can 
be conflicts. But in the long-term, I think the mandate of the 
Federal Reserve System is achievable.
    Chairman Sarbanes. Their challenge is really how to 
harmonize them, I think.
    Senator Gramm. Yes.
    Chairman Sarbanes. I agree with that. Now this leads me to 
another question that I want to ask. And I am prompted to do 
this, Dr. Bies, by something that you said in your statement. 
``With laws like Gramm-Leach-Bliley, the distinctions among 
products and services offered by commercial banks, investment 
banks, insurance carriers, and nonfinancial firms, are 
diminishing.''
    I have a large question mark over non. If it had said 
financial firms, I really would not put the question mark. But 
one of the issues that was fought out in Gramm-Leach-Bliley was 
the separation of banking and commerce. Now some people thought 
there should not be a separation. But the decision that was 
made by the Congress--and this issue relates a little bit to 
this real estate letter that we have received--was to keep them 
separate.
    So the Fed's charge, in effect, its mandate, is to maintain 
separation which has been established by the Congress by law. 
If that is to be changed, you will have to come back to the 
Congress and get it changed.
    Now, we had testimony from Chairman Greenspan. We had 
testimony from Secretary Rubin. We had testimony from Henry 
Kaufman, from Paul Volcker, from a number of leading thinkers 
in this area who thought that maintaining the separation was an 
important thing to do. They cited the Japanese experience, the 
German experience, where they do not have the separation and 
the difficulties that they got into, in part, as a consequence.
    It is true that the distinction among banks, investment 
banks, insurance carriers, was all going to be allowed to meld 
and come together, although they have done less of that than 
people anticipated in terms of the mergers and the joining 
together. But it wasn't to extend outside of the banking side 
over into commerce. And so the use of the word, nonfinancial, 
here gives me some concern. Could you respond to that?
    Ms. Bies. Yes, sir. First, let me say that I believe very 
strongly that we need to continue to have a separation between 
banking and commerce because of the issues that you have just 
raised that we have seen in other countries where you have 
transactions between banks and nonfinancial affiliates in 
manufacturing and retailing. The transactions are not done at 
arm's length. It affects the safety and soundness of the banks 
themselves. And long-term, that has adverse effects in times of 
stress to the economy as a whole. I think we need to maintain 
that.
    Chairman Sarbanes. It may also affect, I might note, the 
competitive structure or nature of your economy, too. There is 
some concern about that, obviously.
    If you have one bank in town and it owns the major retail 
outlet or some commercial outlet, then there is a concern about 
the competitive position of the enterprises that compete with 
that retail or commercial outlet.
    So there are some even broader implications beyond that. 
But the safety and soundness is obviously important and the 
Japanese ran into a lot of trouble on that score.
    Ms. Bies. They clearly did. I think what I was trying to 
get to is that with particularly some of the new technologies, 
we have companies now who provide services that help payments 
happen, that help transactions occur in electronic mode that 
may, by tradition, not be part of a bank or an insurance 
company.
    It is the services that people are providing outside of the 
bank and outside of insurance carrier charters that I think we 
have to address because it is a new technologies area.
    Chairman Sarbanes. All right. Well, there are some 
difficult questions at the edge, so to speak, connected with 
technology, as you have just noted. But I think the use of the 
term, nonfinancial firms, potentially is much too broad to just 
simply set out in a statement and I am happy to accept that I 
think very important limitation on it.
    Mr. Olson, do you want to address this at all?
    Mr. Olson. I think the Gramm-Leach-Bliley Act provided two 
important things.
    Number one, there was an imbalance in 1999 with what the 
statute allowed and what was happening in the marketplace. I 
think the Gramm-Leach-Bliley Act addressed that. Number two, 
and very importantly, it provided the framework for 
decisionmaking in the future. What it says, and it is quite 
clear, and that distinction between banking and commerce has 
been preserved.
    The activities that, prospectively, the Fed, in 
consultation with the Treasury, can look at, are financial 
activities or activities complementary to financial activities.
    I am very comfortable with that definition and that 
guidance.
    Chairman Sarbanes. When in doubt, look to the statute, is 
what I would say.
    Senator Carper.

              COMMENTS OF SENATOR THOMAS R. CARPER

    Senator Carper. Thank you, Mr. Chairman. And to both of our 
nominees, welcome. It is nice to see you both again. Thank you 
for visiting with my staff and me last week.
    A couple of questions, if I could.
    Let me just start off by asking each of you, how will the 
Board of Governors be different if you are a Member of it?
    Ms. Bies. In my case, it will hopefully benefit by the fact 
that I think I bring some unique skills relative to the current 
Members of the Board. I have a lot of experience in 
derivatives, in accounting, in credit-scoring models, risk 
management tools, a lot of the new evolving methods that banks 
are using to manage risks and monitor risks. And I think some 
of these types of skills I can bring to the table will help me 
deal with a lot of the safety and soundness issues that the 
Board has to deal with.
    Having worked in a bank that has the distinction of twice 
in our history acquiring the second largest bank failures that 
have ever occurred, I also understand the disruptions that 
affect the average person when they have their life savings in 
an uninsured institution, which we had in one neighboring case. 
And I think that brings me a perspective to realize how 
important it is to look to the consumers and understand we have 
to protect the safety and soundness of the banks for them.
    So, I think that kind of relationship with customers is 
something else I bring rather uniquely.
    Senator Carper. Good. Thank you.
    Mr. Olson.
    Mr. Olson. Susan's background and my background overlap in 
one narrow respect in that I also spent some years with a 
regional banking organization.
    What is more unique with respect to the current make-up of 
the Board, I also have 12 years in a community bank background, 
12 years as a financial institution regulatory consultant, and 
5 years working in public policy on Capitol Hill staffs, none 
of which now exist on the Board, but are all relevant to what 
the Board does.
    I think that with all of those experiences I will work to 
try to represent and bring that vantage point and that 
viewpoint to the Federal Reserve.
    Senator Carper. Good. We have been discussing, but not 
debating on the floor very much, the elements of a potential 
stimulus package that the Congress might work out with the 
President.
    The four leaders of the Budget Committee, House and Senate 
Budget Committees, Democrat and Republican in each body, have 
agreed on a number of principles as to what that package might 
look like.
    I am going to ask if you would just share any thought that 
you have on these principles. I am not going to ask you to 
necessarily spell out what you think we ought to do with 
respect to a stimulus. But I would be interested in your 
comments on the principles that they seem to be in unanimous 
agreement on.
    Number one, they have suggested, at least on the tax side, 
that what we do should be of a temporary nature and that we 
should sunset it within 1 to 2 years. They have indicated that 
the size is such that it should be consistent with moving back 
toward a balanced budget within a relatively short period of 
time. They believe that the impact should be near-term, almost 
immediate from its adoption and not something that kicks in 
several years down the road. Do you have any thoughts on those 
principles?
    Ms. Bies. I think what is unusual about how events are 
affecting the economy this time is we have never really been 
through this kind of terrorism. And to keep the economy 
growing, and to get us to move ahead, it is important that we 
provide confidence to consumers and to businesses.
    To make that happen, I think the ability short-term to give 
more after-tax dollars to consumers to spend is important and 
for businesses to invest is important, to sort of jump-start 
the economy and get us back on that road of confidence that 
leads to more long-term investments.
    We have spent a lot of time in this country to get us to 
the point where we have a balanced budget that is keeping long-
term interest rates relatively low, which makes it easier to 
control inflation.
    So in the long-term, when we get back to a faster rate of 
growth and back up to full employment, I think we do need to 
get back to that discipline of a balanced budget.
    However, the unusual events that are occurring right now I 
think require an unusual short-term response.
    Senator Carper. Thank you.
    Mr. Olson.
    Mr. Olson. The guidance that has made the most sense to me, 
independent of what you have laid out, is the guidance that it 
does seem appropriate that there ought to be a fiscal response 
to an extraordinary circumstance.
    The general guidance that I am hearing is that it ought to 
be big enough to make a difference, but not so big as it would 
affect the long-term markets.
    It seems to me all three of the principles that you have 
outlined here fit that. Sunsetting the tax effort is consistent 
with that guidance. The size outline that you are suggesting is 
consistent. And that it be near-term and immediate are all 
three consistent with what strikes me as being a sound 
approach.
    Senator Carper. How important--to both of you--this is my 
last question, but how important is it that we return to paying 
down the publicly-held debt of our country?
    Mr. Olson. Well, I think this is a time of unusual 
uncertainty. I would think that we need to respond to a time by 
demonstrating recognition of the current uncertainty and 
evaluating some of the long-term impacts as we go along. It is 
not a time, I think, for conventional thinking.
    I would say, however, that we are already seeing in the 
economy more underlying strength than we might have thought 
existed there, even as recently as 2 weeks ago.
    If consumers have confidence in our economy and the 
underlying strength of that economy, it seems to me that 
further debt reduction is warranted. And I think some of the 
longer-term questions like fiscal responsibility will be dealt 
with in that context.
    Ms. Bies. I think, in the long run, it is important to get 
back to the discipline. But I think we would all be remiss if 
we did not respond to the crisis we have here.
    We have to spend money to address the threats that are 
facing the economy today--the safety, the security of the 
United States, the ability of local and State governments to 
respond, companies to respond, industries to respond 
appropriately to security questions. That needs to be done 
today and we need to support that response in the public and 
private sectors.
    We have to look at the ability of the Federal Government to 
be unique in the sense that it has the financial wherewithal to 
support and fund those short-term requirements, which the 
private sector alone cannot respond to.
    So, I think it is critical that we do have the short-term 
response. But hopefully, this will pass and we can get back to 
the long-term growth of the economy. But we must respond today.
    Senator Carper. Mr. Chairman, can I ask one more?
    Chairman Sarbanes. Certainly.
    Senator Carper. Thank you.
    Chairman Greenspan was before us about 4 weeks ago, along 
with Secretary O'Neill and the head of the SEC. Chairman 
Greenspan said during his testimony--it is better to be right 
than fast--talking about what we do in terms of responding, on 
the tax side, on the spending side. He said, ``It is better to 
be right than fast.''
    Mr. Olson, you alluded just a moment ago to the underlying 
strength of our economy. Delaware is a car State. We build all 
the Durangos in the country, all the Saturn LS's. So, we have a 
real interest in the auto industry.
    And I am struck by, even with the trouble that we are going 
through, that autos, cars, trucks, vans, we are going to sell 
about 60\1/2\ million units this year. Sales seem to be holding 
up pretty well, although they are being fueled right now by 
low-interest rates, deep discounts, and incentives.
    But when you refer to the underlying strength of the 
economy, I look at housing. Housing is down a little bit, but 
it is holding up actually remarkably well and presumably, long-
term rates are helping to fuel that.
    Just give us, anecdotally, both of you, if you will, the 
underlying strengths of the economy, can you give us some 
particulars that lead you to talk about and to refer to the 
underlying strengths of the economy?
    Those are two points that I mention and I think suggest 
that there are underlying strengths of the economy. But any 
others that you would add to that or take away?
    Mr. Olson. Well, we have recently seen indication in new 
construction starts that are also up from the previous year. 
And I think that the entire housing industry is strong, in part 
as a result of the fact that rates have come down significantly 
over the course of the past year.
    We have been talking about a soft economy in a period where 
unemployment is still under 6 percent, where we have a 9,400, 
roughly, Dow. And I think that if you look in general at what 
we consider now a soft economy compared to what was considered 
a soft economy at other times, you would have to say that there 
is clearly some underlying strength broadly.
    Now, I think what we are seeing is, so far in the recovery, 
that there are a number of industries that are more directly 
impacted by the horror of September 11, the transportation 
industry and the tourist industry, among others. But what is 
interesting is the numbers of industries across the Board that 
have not been impacted in a significant way.
    Senator Carper. Thank you.
    Dr. Bies.
    Ms. Bies. I think what has contributed to this economic 
weakness is a little different than traditional economic 
cycles, in that this was really led by a slowdown in business 
investment.
    Typically, we see slowdowns due to consumers reducing their 
spending. Through the slowdown we have had in the last 12 
months, aside from the recent events, the consumer has been the 
mainstay of the economy. And since the consumer is two-thirds 
of the economy, and because they were fully employed, they had 
the wherewithal to continue to support their standard of 
living. The housing, the car sales numbers, show that consumer 
confidence kept us moving ahead, despite the fact that business 
investment had really dropped during the last year.
    I think the recent events are why I am concerned about the 
consumer confidence being important. And we are living through 
an episode that we have never lived through before. I think all 
of us are trying to determine what those indicators are going 
to be and how the consumers are going to respond, because none 
of us have lived through these kinds of horrible events before.
    And that is why I think we need to watch things very 
carefully as the indicators come out and to look at the signals 
of confidence. But the consumer has been the mainstay in the 
last 12 months.
    Senator Carper. Mr. Chairman, thank you. You have been very 
generous with the time.
    One of the points that a number of advisors to us and to 
the President seem to agree on, is that we need to incent 
capital investment. And one of the ways to do that is to 
expedite the write-off or to permit companies to expense those 
kinds of investments in a year.
    One of the folks that runs one of the major Big 5 
Accounting firms in the country that I talked to last week 
suggested we have to be careful with respect to accelerating 
depreciation and expensing and not touching at all the 
alternative minimum tax for companies. He suggested to me that 
if we are not careful, we can go ahead and think that we are 
encouraging capital investment, but if we do not do anything on 
the AMT for businesses, we may not be successful.
    Could I just ask the panelists to maybe take 30 seconds and 
comment on that? Do you mind?
    Ms. Bies. I tried to deal with the Alternative Minimum Tax 
issue when I was Chief Financial Officer and I always had to 
defer to my tax manager. I think it is a very complicated 
issue. But it does hit any time that businesses have low-
taxable income. And with the slowdown that is happening, 
companies could be thrown in a low-taxable income position. In 
general, it would be something that would need to be looked at, 
but I do not pretend to be an expert on the tax code.
    Mr. Olson. I would be less than candid if I suggested to 
you I could define the correlation between alternative minimum 
tax and depreciation schedules. Therefore, I will defer to my 
more learned colleague.
    [Laughter.]
    Senator Carper. Mr. Chairman, every now and then it is nice 
to hear an honest answer like that.
    [Laughter.]
    Thank you, Mr. Chairman. Thank you for letting me ask these 
questions of the witnesses.
    Thanks. Good luck.
    Chairman Sarbanes. As we draw the hearing to a close, I 
want to come back and underscore the fact that while Members of 
the Board of Governors have a lot of discretion within which to 
make judgments, they operate within a statutory framework that 
has been provided to them by the Congress. The Federal Reserve, 
after all, is a creation of the Congress. And the provisions of 
those statutes, in effect, define the framework within which 
you operate and make your judgments.
    In making that point, I would like to quote first from 
Public Law 106-102, November 12, 1999, the Gramm-Leach-Bliley 
Act, which of course we wrestled with for quite an extended 
period of time. Right at the outset it says: ``An Act to 
enhance competition in the financial services industry by 
providing a prudential framework for the affiliation of banks, 
securities firms, insurance companies, and other financial 
service providers, and for other purposes.''
    Then it goes on in Title I to say: ``Facilitating 
affiliation among banks, securities firms, and insurance 
companies.'' And Section 103 discusses financial activities and 
says that a financial holding company may engage in activities 
financial in nature or incidental to such financial activity.
    Later in that Section it says: ``Activities that are 
financial in nature, lending, exchanging money or securities, 
ensuring, guaranteeing or indemnifying against loss, harm, 
financial investment or economic advisory services, 
underwriting, dealing in, or making a market in securities,'' 
et cetera.
    So it is all spelled out right here. And of course, I am 
sure you have the benefit of the debate and the discussion that 
took place over this banking and commerce separation.
    The judgment was made here that it is an important 
separation and the mandate that the Fed has to operate under 
is, of course, sustaining that separation.
    We took a big step to allow, as we said here, a framework 
for the affiliation of banks, security firms, and insurance 
companies, and other financial service providers, which had not 
been permitted before.
    The previous arrangement had been there had to be a 
separation, Glass-Steagall and so forth. Of course that had 
been eroded in many ways and we are trying to, to some extent, 
adjust to what had taken place in the marketplace. But we did, 
after a great deal of focus, debate controversy, sustained--in 
fact, we even pulled some firms back who were using the Unitary 
Thrift loophole, which was closed up, as you will recall.
    So the extent of the Congressional judgment on that was not 
the status quo, but we sought to close up a loophole that was 
being used, in effect, to cross the line.
    The other quote that I will end with, and we will conclude, 
is I just want again to say that in the Federal Reserve Act, 
Section 2(a), Monetary and Credit Aggregates, general policy. 
This is the mantra, and that is why I am going to read it 
again. ``The Board of Governors of the Federal Reserve System 
and the Federal Open Market Committee shall maintain long-run 
growth of the monetary and credit aggregates commensurate with 
the economy's long-run potential to increase production, so as 
to promote effectively the goals of maximum employment, stable 
prices, and moderate long-term interest rates.''
    Good luck in that endeavor.
    Thank you very much for coming today.
    The hearing is adjourned.
    Mr. Olson. Thank you, Mr. Chairman.
    Ms. Bies. Thank you, sir.
    [Whereupon, at 10:58 a.m., the hearing was adjourned.]
    [Prepared statements and biographical sketches of the 
nominees supplied for the record follow:]

                  PREPARED STATEMENT OF MARK W. OLSON

           Member-Designate of the Board of Governors of the
                         Federal Reserve System
                            October 17, 2001

    Chairman Sarbanes, Senator Gramm, and Members of the Committee, I 
am pleased to appear before you as one of President Bush's nominees to 
serve on the Board of Governors of the Federal Reserve System. I am 
honored that President Bush has nominated me to serve on the Board. If 
I am confirmed by the Senate, I look forward to fulfilling the 
important responsibilities of Board membership.

Background
    My background has prepared me well for my prospective service on 
the Board. The Board has responsibility for both the conduct of 
monetary policy in the United States and also for the supervision of 
bank holding companies, financial holding companies, State-chartered 
banks that are members of the Federal Reserve System, and U.S. offices 
of foreign banks. I have spent the past 35 years in the financial 
services industry in a variety of roles. After graduating from St. Olaf 
College in 1965 with a bachelor's degree in Economics, I began my 
career in banking with First Bank System in Minnesota, which is now 
part of US Bancorp, a major regional bank holding company. In my 4 
years with First Bank System, I spent 2 years in retail banking and 2 
years in commercial lending. In 1971, I moved to Washington, DC, and 
served with former Congressman Bill Frenzel as his Legislative 
Assistant for banking while he was a Member of the House Banking 
Committee. In 1976, I returned to the banking industry as President of 
the Security State Bank in Fergus Falls, Minnesota. Security State Bank 
was, and is, a community bank, which my father was instrumental in 
chartering in 1957. I served as President and CEO of that bank for 12 
years.
    With a combination of banking and Capitol Hill experiences, I 
became active in the American Bankers Association, and was elected 
President of the ABA in 1986. My ABA responsibilities involved the 
development and presentation of the industry perspective on public 
policy issues and, among other activities, brought me to testify before 
this Committee on two previous occasions.
    In 1988, our family sold its interest in Security State Bank and I 
returned to Washington, DC, as a Partner with what is now Ernst & Young 
LLP. At Ernst & Young, I headed the Financial Services Industry 
Regulatory Consulting Group. In that capacity, I worked with a wide 
variety of financial services businesses including every type of 
charter supervised by the Federal Reserve System with the single 
exception of Edge Act Corporations. Our role was to assist financial 
institutions in anticipating, understanding, and complying with laws 
and regulations. In addition, I consulted on a variety of strategic and 
managerial issues. Our clients included some of the largest financial 
institutions in the country.
    After taking an early retirement from Ernst & Young, I was invited 
by then Senator Rod Grams to serve as the Staff Director of the 
Securities Subcommittee of the Senate Banking Committee. In that 
capacity, I worked with Subcommittee Chairman Grams, and the other 
Members of this Committee on a variety of securities and accounting 
industry oversight issues.
    In summary, I have been part of the financial services industry as 
a practicing banker for 16 years, a regulatory consultant for 12 years, 
and a Congressional staff member for 5 years, and was elected to the 
highest leadership position in the banking industry. This combination 
of experiences has allowed me the opportunity to understand the 
important issues challenging the financial services industry, its 
regulatory authorities, and the U.S. Congress. I look forward to 
bringing that experience to the Board of Governors.

Monetary Policy
    Monetary policy is a critical Federal Reserve responsibility. The 
Federal Open Market Committee and the Board establish policy, which is 
implemented through the Federal Reserve Banks and ultimately through 
the banking system.
    As a banker, I gained a hands-on familiarity with the tools used to 
implement monetary policy as the banks are, effectively, the 
counterparties to Federal Reserve decisions including: Federal funds 
rate targets, discount rates for Federal Reserve Bank borrowing, and 
establishment of reserve requirements. My background has provided me an 
understanding of how monetary policy is implemented, and the impact 
these policy decisions have on individuals and businesses. Importantly, 
as a banker, I witnessed firsthand the difficulties caused by both 
recession and high inflation in more volatile economic times. As a 
result of that experience, I fully support the mandate Congress has 
given the Federal Reserve System to pursue ``maximum employment, stable 
prices, and moderate long-term interest rates.''

Regulatory Issues
    With the passage of the Gramm-Leach-Bliley Act of 1999, the Federal 
Reserve was accorded by Congress an expanded role in financial services 
supervision. That bill allowed financial institutions from banking, 
thrift, securities, and insurance industries to affiliate in a newly 
authorized financial holding company. Though each of the financial 
services entities will continue to be regulated by its principal 
functional regulator, the Fed has been accorded the important role as 
umbrella regulator with overall regulatory coordinating responsibility. 
As a result, the Fed has effectively been given the oversight 
responsibility for monitoring the blending of financial industries at a 
time when these industries are being dramatically impacted by 
technological innovation and industry consolidation. That Act is now 2 
years old, and is not yet fully implemented. Given my background, I 
look forward to being an active participant in this continuing effort.

Payment System
    The Board also has supervisory responsibility for the proper 
functioning of the payment system. As we were again reminded following 
the horror of September 11, the smooth and efficient functioning of our 
payment system is vital to this Nation's economic health. Dramatic 
improvements in technology continue to provide opportunities for 
greater efficiency but also raise new regulatory issues as the system 
continues to progress from paper based to an increasingly electronic 
system. I look forward to bringing my banking and consulting 
experiences to addressing these important issues.

Consumer Responsibilities
    Another important role of the Board is its responsibility to 
consumers. I have been particularly pleased to learn of the increasing 
role the Fed now plays in consumer education. Financial literacy is an 
important element in our citizens' ability to fully experience the 
benefit of a free market economy. I look forward to being an active 
participant in this important area.
    The Congress also has entrusted the Board with important consumer 
protection responsibilities. There are a number of regulatory issues 
currently awaiting Board action. Among these are proposed changes in 
the Home Ownership and Equity Protection Act (HOEPA) and the Truth In 
Lending Act (TILA) intended to crack down on predatory lending. Also, 
changes have been proposed concerning mortgage loan data collection 
under the Home Mortgage Disclosure Act (HMDA). The comment period for 
both has expired and the comments by interested parties are now under 
review. While I have a working familiarity with both proposals from my 
prior experience, I look forward to an opportunity to review the public 
comments and also the Federal Reserve staff analysis in order to fully 
acquaint myself with all the implications of these proposed rule 
changes.

Conclusion
    Mr. Chairman and Members of this Committee, my goal as a 
prospective Member of the Board is to utilize my banking industry 
background and my public policy experience to contribute to the 
important work of the Federal Reserve. It is my intent to help the Fed 
continue to provide a regulatory framework which will allow the banking 
industry to meet the evolving financial needs of its customers and 
continue as a critical source of strength for the economies of the 
United States and the world.
    Thank you again for holding this hearing, and I look forward to 
your questions.

                             NOMINATION OF:
                    JAMES E. GILLERAN, OF CALIFORNIA
                       TO BE THE DIRECTOR OF THE
                      OFFICE OF THRIFT SUPERVISION

                              ----------                              

                       TUESDAY, OCTOBER 23, 2001

                                       U.S. Senate,
          Committee on Banking, Housing, and Urban Affairs,
                                                    Washington, DC.

    The Committee met at 2:30 p.m., in room S-116 of the United 
States Capitol, Senator Paul S. Sarbanes (Chairman of the 
Committee) presiding.

         OPENING STATEMENT OF CHAIRMAN PAUL S. SARBANES

    Chairman Sarbanes. Let me call our hearing to order.
    I should explain right at the outset that we have a series 
of votes on. This is the first in a series, and so we may have 
to, as it were, recess, or some of us may slip away and come 
back as we proceed through the hearing. But we had to put this 
hearing over once and I did not want to do it again.
    Mr. Gilleran. I appreciate that.
    Chairman Sarbanes. While we have not opened up the office 
buildings yet, we have gotten, through the kindness of the 
Senate Foreign Relations Committee, the use of their hearing 
room here in the Capitol. And so, we will proceed.
    I want to welcome James Gilleran before the Banking 
Committee this afternoon. The President has nominated Mr. 
Gilleran to become the Director of the Office of Thrift 
Supervision, the OTS, to complete the remainder of a term 
expiring in October 2002.
    Mr. Gilleran earned a B.A. degree from Pace University. He 
received his law degree from Northwestern California 
University. He spent his professional career in the financial 
services industry.
    For approximately 30 years, he worked with Peat Marwick and 
eventually was a Managing Partner of their northern California 
operation. He left the accounting firm to become President of 
The Commonwealth Group, an investment banking company. 
Subsequently, he was appointed and served from 1989 to 1994, as 
Superintendent of Banks for the State of California. From 1994 
to 2000, he was at the Bank of San Francisco, a State-chartered 
bank with over $200 million in assets. He was the Chairman and 
Chief Executive Officer until the bank was sold in December 
2000, about a year ago.
    Mr. Gilleran has been active in banking and professional 
organizations. He served as Chairman of the Conference of State 
Bank Supervisors and served on the Federal Financial 
Institutions Examination Council, as Chairman of its State 
Liaison Committee, and on the Board of Directors of the 
California Society of Certified Public Accountants, the 
National Association of Corporate Directors, and other groups.
    He has contributed to his community by serving as Chairman 
of the Board of the American Red Cross for the Bay Area, 
Chairman of the National Conference of Christians and Jews, 
trustee of the Golden Gate University, and various leadership 
positions of other organizations, and has been honored by the 
YMCA, UNICEF, and many other organizations.
    The Director of the OTS plays a critical role in 
maintaining the strength of the U.S. Federal thrift system. He 
makes important decisions to provide for the examination, safe 
and sound operation, and regulation of the Nation's savings 
associations in a manner faithful to the letter and spirit of 
the Federal statutes.
    The Director also sits on the Board of the Federal Deposit 
Insurance Corporation, the FDIC, making decisions affecting the 
Federal deposit insurance system, as well as the safety and 
soundness of insured depository institution operations.
    I will turn to Senator Gramm for any opening statement he 
has before I give Mr. Gilleran the oath and we proceed to his 
statement and testimony.

                STATEMENT OF SENATOR PHIL GRAMM

    Senator Gramm. Mr. Chairman, first of all, I want to join 
you in welcoming James E. Gilleran before the Committee. For 
all the reasons you have cited, Mr. Chairman, Mr. Gilleran is 
eminently qualified to be head of OTS.
    I have made a similar remark at our hearings before, but I 
continue to be encouraged by the quality of people who are 
nominated to serve in the financial part of our Government. And 
I want to congratulate the President for his choice.
    Let me also say, Mr. Chairman, that we have never had a 
Chairman of this Committee who has been more diligent or fairer 
in holding hearings and moving nominees than you. I want to 
personally thank you for it.
    Welcome, Mr. Gilleran. This is an agency that you are going 
to that is very important. I know you are eminently qualified 
both in your education and your experience to do this job, and 
we are grateful you are willing to do it.
    The only way you are going to get your picture on the front 
page of the paper is to do something terribly stupid.
    [Laughter.]
    And the amazing thing about public service is that, for 
most people who are willing to come and serve their country, 
that if they do a good job, they are never heard of. If they do 
something wrong, they can become infamous.
    It is encouraging to me on behalf of the country that we 
have people who are willing to serve, that are willing to give 
up happy lives, and higher incomes, because they love this 
country and they think that they have something to contribute. 
I want to thank you for being willing to serve the greatest 
country in the history of the world.
    Mr. Gilleran. Thank you, Senator.
    Chairman Sarbanes. If you would stand, sir, and take the 
oath, I would appreciate that very much.
    Do you swear or affirm that the testimony you are about to 
give is the truth, the whole truth, and nothing but the truth, 
so help you God?
    Mr. Gilleran. I do.
    Chairman Sarbanes. Do you agree to appear and testify 
before any duly-constituted committee of the Senate?
    Mr. Gilleran. I do.
    Chairman Sarbanes. Thank you very much. We would be happy 
to hear your statement. And if there are members of your family 
here that you would like to introduce, we would be happy to 
receive them as well.

         STATEMENT OF JAMES E. GILLERAN, OF CALIFORNIA

       TO BE DIRECTOR OF THE OFFICE OF THRIFT SUPERVISION

    Mr. Gilleran. Thank you, Senators.
    First of all, I would like to introduce my wife, who has 
been not only my life-long companion, but also my greatest 
supporter and encourager and without whom I would not be 
sitting here today.
    Thank you so much, honey.
    Sitting next to my wife is my daughter Amy. Amy lives in 
the region north of San Francisco called the Wine Country.
    Sitting next to Amy is my daughter Laura from San 
Francisco. Laura was here for the confirmation hearing on 
Thursday. She had to fly back to San Francisco for the weekend. 
She had a responsibility at church. And then she flew back last 
night to be with her daddy here today.
    Thank you, honey.
    Sitting next to Laura is my nephew, Ryan McReynolds. Ryan 
was also here for the meeting on Thursday with his mother and 
his father. His parents are from Kalamazoo, Michigan. Ryan 
lives here in Washington, DC, and he is a Clean Water 
Specialist for the Environmental Protection Agency here in 
Washington.
    Sitting next to Ryan is Jean Andrews, who is my sister-in-
law. Jean and her husband own a commercial air conditioning 
business in southern California.
    Sitting next to Jean is my sister-in-law, Joy Jones. Joy is 
a missionary and has recently come back from India, where she 
has been working with earthquake victims. Her next tour is 
either in Kosovo or in Thailand.
    We are waiting to see which one you choose.
    Senator Gramm. Take your time.
    [Laughter.]
    Chairman Sarbanes. We are pleased to have everyone here 
with us. We would be happy to hear from you.
    Mr. Gilleran. Mr. Chairman, I do have a prepared statement 
which I will submit for the record, if that is all right with 
you. But under the circumstances, I will just summarize it by 
saying that, first, I am delighted to have received the 
President's nomination. And I am also delighted that you have 
tried so hard to schedule this hearing. I know it has been a 
very difficult period and I am very grateful.
    In summary of my opening statement, I would like to say 
that I think my background has uniquely qualified me for this 
position, in that I not only have experience in bank 
regulation, but in bank operation, as well as bank auditing and 
consulting.
    So, I offer myself to the Committee for your consideration 
and believe that if you do confirm me, I will do my level best 
to protect the safety and soundness of the thrift industry. And 
I look forward to answering whatever questions you have, and 
also to working with the outstanding staff of the Office of 
Thrift Supervision.
    I would appreciate the inclusion of my formal opening 
statement, as well as Senator Johnson's statement in the 
record.
    Chairman Sarbanes. Thank you very much, sir. The full 
statement will be included in the record.
    I must say that you have had a lot of experience that I 
think is very relevant to being the Director of the OTS.
    Mr. Gilleran. Thank you.
    Chairman Sarbanes. Both in the private sector in the 
accounting firm and, of course, with the Bank of San Francisco, 
which as you say in your statement, leading the Bank of San 
Francisco through this challenge granted me the invaluable 
opportunity to experience firsthand those factors that 
contribute to a financial institution's deterioration, as well 
as those which lead to its reclamation.
    And then, of course, your work for the State of California 
as the Banking Superintendent. Of course, that is the seventh 
largest economy in the world, so it is no small task.
    I have a few questions that I want to put to you and then I 
will turn to Senator Gramm.
    We held a hearing last week on the failure of the Superior 
Bank in Chicago. Several witnesses testified about red flags 
that were apparent 2 or 3 years ago and which indicated 
potential problems.
    Professor Kaufman testified, and I quote him:

    A number of red flags were flying high that should have 
triggered either rapid regulatory response or continuing 
careful regulatory scrutiny. These include very rapid asset 
growth, large amounts of risky residual assets, and other 
problems.

    Do you have any ideas on how we can prevent future costly 
thrift failures like the Superior one?
    Mr. Gilleran. Well, I think the attention of the Committee 
upon the prevention of future thrift failures is very good. I 
would hope to have the opportunity at some time in the future, 
if confirmed, to come back and answer whatever questions you 
may have in detail after having an opportunity to review the 
factual circumstances myself.
    I think that the focus of the testimony on red flags is 
very appropriate because one of the most crucial things that a 
regulator or an outside auditor can do in connection with an 
examination, is to look for the risk areas. And the risk areas 
are usually signalled by a red flag of some kind.
    It is important that the regulator or auditor make an 
assessment early on as to what the potential red flags are so 
that the examination and regulatory procedures may be focused 
upon those warning signals.
    The red flags you have referred to are very important ones.
    My understanding of the Superior Bank matter, based upon 
the newspaper accounts and other reading of testimony, is that 
a primary problem revolved around the residuals and the change 
in the accounting for the residuals toward the end of 
Superior's life cycle. That led to a very precipitous write-
down in capital.
    The most important thing that a regulator can do is to 
focus on the issue of what is the real capital of the 
institution? And to the extent that the real capital is tied up 
in an asset like residual values, it must receive great 
attention from the regulators and the auditors early on.
    In this area, it is extremely important that you have 
people in the regulatory field and the auditing field that are 
capable of evaluating it. And it is a very complicated area.
    I can say to you that I will give this a tremendous amount 
of my time and my effort and I look forward to having an 
opportunity to come back, if confirmed, to testify about it 
further.
    Chairman Sarbanes. We look forward to that opportunity. Let 
me follow that up with this question. In the Superior Bank 
situation, the Federal regulators and Superior's external 
auditor, Ernst & Young, strongly disagreed as to the valuation 
of the highly risky residual assets. But the OTS waited until 
Ernst & Young agreed to reverse its position before they 
formally determined that Superior had overstated the value of 
these assets and had a serious capital problem.
    Last week, we had a witness, Mr. Bert Ely, who testified, 
and let me just quote what he said:

    I think there has to be more frequent and conservative 
valuation of risky assets by the regulators. To this extent, 
the bank regulatory agencies need to develop their own 
capabilities to detect fraud and to value all types of bank 
assets.
    I think that it is inexcusable for the regulators to 
constantly try to lean on and, frankly, pass the blame to the 
outside accountants. The outside accountants do not work for 
the Government. They do not work for these agencies. The 
agencies need to be able to act independently on their own.

    What is your reaction to that, about at what point do 
regulators, in a sense, overrule the accountants?
    Mr. Gilleran. Again, I would have to review it to find out 
exactly at what point that took place and the reasons for it. 
But my reaction to it is that the outside audit of any 
institution constitutes a piece, but only a piece, of the 
information that the regulators must use in terms of their 
total regulation.
    Additional pieces are the internal control procedures of 
the institution itself, the quality of management, the extent 
of capital, and the liquidity, as well as the quality of the 
lending portfolio, and the quality of the residuals.
    So the outside audit is an important piece, but certainly, 
it is only part of the picture.
    Chairman Sarbanes. I have some other questions, but I will 
come back to them.
    Senator Gramm.
    Senator Gramm. I am tempted to go back to Paul's question.
    It seems to me that, obviously, a regulator should be 
prepared, if they disagree with the outside auditor, to make a 
judgment based on their own evaluation. The outside auditor's 
reputation is at stake in terms of service they are providing 
to their client. But at OTS, you are basically a steward of the 
insurance fund, which, as we know from painful experience, is 
backed up by the Federal taxpayer, full faith and credit.
    We have had the unfortunate opportunity during our period 
of public service, both the Chairman and myself, of seeing the 
Federal taxpayer pay out tens of billions of dollars.
    So, I would hope that you would have no reservation 
whatsoever, if you were convinced that the audit was wrong, in 
overriding it.
    Mr. Gilleran. I have no reservation whatsoever. In fact, I 
agree with you completely that the regulator must have his own 
capability to make these evaluations and that, again, what the 
outside auditor thinks is confirmatory or perhaps is another 
piece of information as far as the total regulation.
    The regulator has to be prepared to take his own 
independent action when it is called for, when it is required 
for the safety and soundness of the institution, and for the 
system.
    Senator Gramm. I want to just ask you a question. And there 
is not any right answer to the question, but I am just trying 
to get an insight into your views. You, obviously, are familiar 
with the S&L crisis and generally familiar with the history. 
One of the things that I saw a lot of in my State was what we 
call brokered deposits, where in $100,000 increments, hundreds 
of millions of dollars of funds were moved into thrifts that 
were clearly insolvent, that were paying very, very high 
interest on 90-day CD's. These funds basically moved without 
any concern for safety and soundness because of the $100,000 
insurance. There have been proposals from various quarters to 
raise the level of insured deposits from $100,000 to $200,000. 
I would be interested to know what your view is of the proposal 
and any thoughts you have as to the impact of the 
implementation of the proposal on the whole safety and 
soundness question.
    Mr. Gilleran. I think it is a very important question and 
it is one that deserves a tremendous degree of consideration 
before action is taken.
    From an independent banker's point of view, a rise in 
insurance level might enable the bank to raise more deposits 
and therefore, grow faster.
    The ideas now being put forth include raising the coverage 
level for retirement funds. This idea deserves serious thought 
because I think it relates to the soundness of retirement funds 
and that is a good thing to think about.
    I have not concluded as to whether or not it should be 
done.
    As far as raising the amount for all deposits, I must say 
that, if confirmed, I would have to see much more study done on 
it because I really have not seen a comprehensive study which 
shows: Number one, that it would enable independent banks to 
gather more deposits, because once you raise it for one bank, 
you raise it for everybody; number two, a comprehensive study 
would need to show what the impact is on the assessment from 
the FDIC because once we find out by what amount the assessment 
would be increased, maybe people wouldn't want it.
    So the issue of insured deposit levels is one that I look 
forward to exploring fully and I hope to be helpful to you in 
your thinking about it. I think the issue needs yet more study.
    Chairman Sarbanes. Well, as you know, the FDIC has come in 
with a study and a series of recommendations. And at some 
point, those will have to be looked at, I think. But you are 
just coming on board and, of course, there is a new Chairman at 
the FDIC, too. He has preceded you by a few months. So all of 
that will have to be carefully examined. But it does have far-
reaching implications and we need to look at it with some care.
    We had better excuse ourselves for this vote. I will return 
at least because I have a few more questions.
    Mr. Gilleran. Very good.
    Chairman Sarbanes. So if you all will bear with us, we will 
take a short recess.
    [Recess.]
    Chairman Sarbanes. The Committee will resume.
    We have a few minutes now. I hope we can finish up here in 
short order.
    I do not know how closely you followed the Superior issue. 
But, obviously, once you get over there, you will have to 
follow it very closely.
    Apparently, the FDIC asked to participate in an OTS 
examination of Superior Bank and that request was turned down. 
Now, subsequently, the Director of OTS about a year later, 
stated that we have one policy. The door is always open. We 
have told our regional directors that whenever the FDIC asks to 
go into a thrift, that request must be honored. What is your 
view about the FDIC coming in on an examination?
    Mr. Gilleran. Having been a State regulator for 5-plus 
years, I can tell you that we, of course, cooperated on a daily 
basis with the FDIC because we were doing joint examinations 
with them.
    So, I myself personally have always been extremely open to 
the FDIC and have found them to be an outstanding regulatory 
entity.
    I believe that the FDIC should be involved in every problem 
institution in order to protect the public and the taxpayer. 
The FDIC should be involved so that they can participate in the 
decision as to whether and when to go out for a bid package.
    A bid package is usually put together when it is determined 
that an institution is highly likely to have to be closed and 
the FDIC will invite other banks to make a bid on the 
institution.
    It is very important that the bid package be put together 
in a timely fashion because if you can get a bid on an 
institution at the right time, it is possible that the buyer 
will take over the institution and take not only the insured 
deposits, but also the uninsured deposits. This is a great 
protection to the consumer.
    So, in my view, cooperation and communication with the FDIC 
is extremely important to safety and soundness.
    Chairman Sarbanes. Well, I think it is important to turn 
your attention to that as you move into the directorship 
because there was a problem in this particular case, and we do 
not want that to occur again.
    In September 2000, the Federal banking regulators 
promulgated a proposed rule to impose stricter capital rules 
and to limit the concentration of residuals. The comment period 
for the proposed rule closed on December 26 of last year.
    Yet, 10 months later, there is still no final rule. Now, 
they have a lot of comments, which they have to digest. In 
fact, they have one from the operating officer of Superior, 
saying that they did not need this rule and that everything was 
fine in his experience at his institution, and so forth and so 
on, which tells you something.
    Apparently, there is a lot of difficulty in moving this 
through the multiagency rulemaking. And I just wondered what 
might be done to expedite getting this rule into place.
    Mr. Gilleran. Again, I do not know all of the factors 
behind the scenes as to the nature of the hang-up between the 
agencies in getting that done. I must say, however, that the 
status of this inter-agency ruling should never be a reason for 
an individual regulator to avoid a safety and soundness 
decision as it relates to any particular institution.
    I think that the question of diversification is an 
extremely important one. When you have an asset like residual 
values constituting a large percentage of the capital of any 
institution, the question of how to value the residual must not 
languish for a long period of time. The regulators have to take 
a stand on what the value is as quickly as possible.
    In my experience, in banking and in bank regulation, any 
action delayed usually just exacerbates a bad problem. So 
dragging things out is not helpful.
    Chairman Sarbanes. In the testimony last week, in this 
hearing we had on Superior Bank, Mr. Bert Ely, who was an 
expert witness, pointed out, and I am quoting him now:

    I think that it is important that there be public 
notification that amended thrift financial reports and bank 
call reports have been filed with the regulators to alert 
depositors and outside analysts to a possible decline in a 
bank's financial condition because of the amended return.

    In the securities market, a registrant that amends a public 
filing, such as a form 10(k) or form 8(k), designates the 
amendment as a form 10(k)(a) or 8(k)(a), to alert investors. Do 
you feel that an amended thrift financial report should be 
publicly identified as having been amended to alert analysts, 
depositors and other interested parties? But, apparently, under 
the current procedure, they can be amended without there being 
any assured public notification of it.
    Mr. Gilleran. I am certainly completely sympathetic to the 
idea that it is a protection to depositors to get that 
information out.
    I do not know why in this case the information might not 
have been disclosed, but I certainly think that disclosure of 
that sort of information should be made.
    Chairman Sarbanes. Senator Gramm pointed out, you have one 
of those jobs where--it is not like a major league batting 
average. It is not that you hit .333 or something.
    It is just how often and how large a particular failure is 
because that comes right back to your doorstep.
    In the Financial Services Modernization bill last year, 
this Committee and the Congress addressed the issue of banking 
and commerce and, really, in a sense, decided it in the 
statutes. But I am curious to know your views on permitting the 
combination of thrift and commercial activities.
    Mr. Gilleran. I think it is an idea whose time has not 
come. It was thought about extensively before the most recent 
legislation was enacted, and it was not allowed then. It does 
not seem to be something that is required at this time. So it 
is not an idea that I would be interested in advocating at this 
time.
    Chairman Sarbanes. We had very strong testimony from both 
Chairman Greenspan and Secretary Rubin on this issue. It was 
controversial because there are Members of the Congress who 
feel that we should allow a mixing of commerce and banking. But 
the decision that was made, and that is embraced within the 
statute, was not to permit that. In fact, the Congressional 
decision required that some--because some had bridged that 
line--pull back from that. And it seems clear to me that the 
regulators now are in the posture of carrying out, in effect, a 
Congressional judgment as reflected in the statute.
    If it is to be changed, it seems to me people need to come 
back to the Congress----
    Mr. Gilleran. Absolutely.
    Chairman Sarbanes. --and have the statute changed. It 
should not be changed downtown through a series of regulatory 
decisions.
    I presume you would agree with that.
    Mr. Gilleran. I completely agree with you.
    Chairman Sarbanes. I hope when you get down there, you will 
take a look at the morale of the agency and what might be done 
to sustain it or to improve it. Perhaps we need to look at how 
it is funded. Some have said that the funding of the OTS and 
the OCC through fees from their institutions puts the agency in 
a difficult position because the people you are regulating are 
also the people who pay for your bread and butter, and that is 
not an altogether comfortable situation to be in. And maybe 
some thought needs to be given to obtaining operating revenues 
in a different way that would avoid that potential conflict.
    Have you had any exposure to that question?
    Mr. Gilleran. I have, sir. Having spent a long time in the 
public accounting industry, I know that it is an industry which 
is built upon independence, but at the same time, you must 
collect a fee from the client.
    I think that the model can actually be effective because it 
provides a discipline in how you are spending your time and 
whether or not it is effective and efficient. And therefore, I 
would like to have an opportunity to pursue how the agency is 
funded and how it is spending its money before I would conclude 
that we ought to change that model.
    I think changing the model brings into consideration all 
kinds of potential other problems. But I would like to have an 
opportunity, if confirmed, to really work on that aspect of it.
    Chairman Sarbanes. Well, I think it needs to be looked into 
because the current system does have the danger with it of 
reducing everybody to the lowest common regulatory denominator 
on the concern that if you are too tough, your clientele will 
change their charter and their primary regulator and leave your 
system. And of course, if enough of them do that, then the 
ability to support your system is undercut.
    On the other hand, obviously, you need to do what you have 
to do as regulators to assure that things are under control.
    Mr. Gilleran. Absolutely.
    Chairman Sarbanes. These are difficult times and we are 
facing a lot of challenges. But one of the challenges we face, 
I think, as the President has said, is to go on about doing our 
business.
    I share Senator Gramm's thanks for your willingness to take 
on this important responsibility. After all, in a sense, part 
of this attack is on our financial system. Witness the assault 
on the World Trade Center.
    Mr. Gilleran. Absolutely.
    Chairman Sarbanes. And we have to make sure that the system 
works and works effectively. Those of you who are front-line 
regulators carry a very great responsibility.
    I do not have any further questions. Anything you want to 
add?
    Mr. Gilleran. Senator, just to thank you once again for the 
hearing, and to say that I wanted very much to be of service, 
even before September 11. But I want to be of service even more 
now, and would look forward, if confirmed, to doing it.
    Chairman Sarbanes. Very good.
    Thank you very much, sir.
    Mr. Gilleran. Thank you, Mr. Chairman.
    Chairman Sarbanes. The hearing is adjourned.
    [Whereupon, at 3:20 p.m., the hearing was adjourned.]
    [Prepared statements and biographical sketch of nominee 
supplied for the record follow:]

               PREPARED STATEMENT OF SENATOR TIM JOHNSON

    Mr. Chairman, thank you for holding today's hearing. We had hoped 
to complete action on Mr. Gilleran's nomination to head up the Office 
of Thrift Supervision last Thursday, and while events conspired against 
us, I do appreciate the rapid rescheduling for today.
    I am very pleased to welcome you, Mr. Gilleran, to Washington, and 
I look forward to working with you on a variety of issues. You bring a 
wealth of experience with you to this position, and I am particularly 
intrigued by your initiative in going to law school after an extremely 
distinguished business career.
    I would be remiss if I did not thank you for your willingness to 
leave your private sector career behind and join us here in Washington, 
DC, especially during these troubled times. I understand that you and 
your wife arrived in the District on September 10, and closed on your 
house on September 12. I am sure that did not feel like the most 
auspicious timing, and I just hope that you will begin to feel at home 
as we continue to conduct the Nation's business.
    Mr. Gilleran, I do not want to spend too much time talking about 
issues that you will no doubt become familiar with in the near future, 
but I did want to touch on one matter briefly.
    As many of my colleagues remember, during the financial 
modernization discussions, I introduced an amendment that ultimately 
closed the so-called unitary thrift loophole--a loophole that 
permitted, in my view, an unacceptable mixing of banking and commerce.
    Mr. Gilleran, as you know, the U.S. affiliate of Toronto-Dominion 
Bank has a proposal at the OTS to set up a joint venture offering its 
banking services in Wal-Mart stores. The representatives of these 
companies have made statements, including remarks to my staff, about 
the possible use of Wal-Mart employees and checkout terminals to 
perform bank functions.
    While this ``business modification plan'' is not publicly 
available, I believe the plan must be scrutinized carefully to ensure 
that it does not circumvent Section 401 of the Gramm-Leach-Bliley Act 
or the banking and commerce separation. I would be very pleased to work 
with you to ensure that both the letter and spirit of Gramm-Leach-
Bliley is implemented properly.
    Once again, thank you for your willingness to serve, Mr. Gilleran, 
and thank you, Mr. Chairman, for working hard to ensure that we act as 
quickly as possible on banking nominations.
                               ----------
                PREPARED STATEMENT OF JAMES E. GILLERAN
            Director-Designate, Office of Thrift Supervision
                            October 23, 2001

    Chairman Sarbanes, Senator Gramm, and Members of the Committee, I 
am very honored that President Bush has nominated me to serve as 
Director of the Office of Thrift Supervision and I am grateful to have 
the privilege of your consideration. I would like to introduce those 
members of my family who are present today.
    The thrift industry is composed of approximately 1,000 
organizations, which operate in all States with approximately $1 
trillion in assets. Many of the organizations are small, some are owned 
by mutual thrift depositors, and several are very large with leadership 
roles in the financial services industry.
    If confirmed, I would bring to the role of Director a unique range 
of experiences. I was the banking regulator for our most populous and 
diverse State during one of the most challenging periods in our 
economy's history. For 25 years, I served the banking industry as 
auditor and consultant. Most recently, I led the successful turnaround 
of a historic San Francisco bank. The diversity of my professional 
background has enabled me to understand and value the perspectives of 
both great and small financial institutions, the challenges implied in 
providing for their safe and sound operation, and the importance of 
protecting the consumer and taxpayer.
    As California's banking superintendent during an economically 
volatile period, I led the California liquidation of the Bank of Credit 
and Commerce International and was able, after liquidating all debts, 
to contribute in excess of $100 million to aid others in the worldwide 
liquidation.
    In connection with the closure of another institution where 
investors in trust certificates were facing a total loss of investment, 
we were pleased to be able to resolve all matters and return in excess 
of 100 percent of investment to all parties, many of whom were retired 
and would have lost their entire life savings.
    As a regional managing partner with the worldwide accounting firm 
of KPMG, I directed all bank practice in the Western Region, including 
recruitment and training of financial institutions specialists.
    In 1994, I became Chairman and CEO of the Bank of San Francisco, an 
institution facing closure by the FDIC. When we sold it in December 
2000, it was one of the most profitable in its size in the country. 
Leading the Bank of San Francisco through this challenge granted me the 
invaluable opportunity to experience firsthand those factors that 
contribute to a financial institution's deterioration, as well as those 
which lead to its reclamation.
    I am enthusiastic about the opportunity to serve our county during 
this demanding time. If confirmed, I will dedicate myself to the 
preservation of stability in our Nation's diverse thrift organizations. 
I thank each of you for your time and your consideration.

                            NOMINATIONS OF:
                  ALLAN I. MENDELOWITZ, OF CONNECTICUT
                     FRANZ S. LEICHTER, OF NEW YORK
                    JOHN T. KORSMO, OF NORTH DAKOTA
                         TO BE DIRECTORS OF THE
                     FEDERAL HOUSING FINANCE BOARD
                     EDUARDO AGUIRRE, JR., OF TEXAS
                     TO BE FIRST VICE PRESIDENT AND
                          VICE CHAIRMAN OF THE
                       EXPORT-IMPORT BANK OF THE
                             UNITED STATES
                                  AND
                    RANDALL S. KROSZNER, OF ILLINOIS
                         TO BE A MEMBER OF THE
                      COUNCIL OF ECONOMIC ADVISERS

                              ----------                              

                      THURSDAY, NOVEMBER 15, 2001

                                       U.S. Senate,
          Committee on Banking, Housing, and Urban Affairs,
                                                    Washington, DC.

    The Committee met at 10:12 a.m., in room SD-538 of the 
Dirksen Senate Office Building, Senator Paul S. Sarbanes 
(Chairman of the Committee) presiding.

         OPENING STATEMENT OF CHAIRMAN PAUL S. SARBANES

    Chairman Sarbanes. The hearing will come to order.
    This morning, the Committee on Banking, Housing, and Urban 
Affairs will consider the nominations of Allan Mendelowitz, 
Franz Leichter, and John Korsmo, to be Directors of the Federal 
Housing Finance Board.
    We will also consider the nominations of Eduardo Aguirre, 
to be First Vice President and Vice Chairman of the Export-
Import Bank, and Randall Scott Kroszner, to be a Member of the 
President's Council of Economic Advisers.
    We will do a lead-off panel with the three nominees to be 
the Directors of the Federal Housing Finance Board. If they can 
come forward and take their places at the table, we would 
appreciate that. And then we will follow with Mr. Aguirre and 
Mr. Kroszner.
    We want to welcome the nominees to the Committee today. We 
are glad they are able to be with us. In addition, when we 
obtain a quorum, or if not, we may do it after a vote, I would 
like to be able to vote to report out the nominations of Mark 
Olson and Susan Schmidt Bies, to be Members of the Board of 
Governors of the Federal Reserve System, and the nomination of 
James Gilleran, to be Director of the Office of Thrift 
Supervision.
    Our first panel consists of the nominees to the Federal 
Housing Finance Board, which regulates the Federal Home Loan 
Bank System, a System of 12 regional banks created by Congress 
in 1932, to assure the availability of funds for home mortgage 
lenders. These banks are cooperatively owned by their members, 
which currently include almost 7,800 commercial banks, thrifts 
and credit unions, and also insurance companies.
    As of June 30 of this year, the Federal Home Loan Bank 
System's assets totaled almost $667 billion. In other words, 
two-thirds of a trillion, making it one of the largest 
Government sponsored enterprises.
    The System provides low-cost loans, called advances, to its 
members to support housing finance. At the end of June, 
outstanding advanced totaled $450 billion--that is an increase 
of 170 percent since the end of 1996.
    The System also supports an affordable housing program 
mandated by statute through which the banks make grants 
available to support construction purchased in rehabilitation 
of housing for very-low-, low-, and moderate-income families.
    Since that program was created in 1989, the banks have 
granted nearly a billion dollars to help create over 200,000 
housing units.
    The Finance Board is charged with overseeing this extensive 
system to ensure that it continues to fulfill its mission of 
supporting affordable housing. I believe that the 
responsibility of the Finance Board is of particular 
importance.
    I am pleased to welcome to the Committee the three nominees 
who are before us.
    Allan Mendelowitz is currently serving as a Director of the 
Finance Board and served as its Chairman from his appointment 
last December until June of this year. Mr. Mendelowitz has had 
a very distinguished career in Government service. Amongst 
other things, he has been the Executive Director of the U.S. 
Trade Deficit Review Commission, Executive Vice President of 
the Export-Import Bank of the United States, and was the 
Managing Director for International Trade, Finance and 
Competitiveness in the General Accounting Office, where he 
directed a number of studies of the Nation's finance and 
economic development policies. Prior to that, he was a 
Professor in Urban and Regional Economics, including also 
housing economics, local public finance, and urban economic 
development.
    Franz Leichter is also currently serving as a Director of 
the Finance Board. He brought to the Board extensive experience 
in housing and financial services, a distinguished Member of 
the New York State Senate from 1975 to 1998, where he was a 
Member of the New York State Senate Banking Committee.
    Mr. Leichter has published a guide to banking services in 
New York, engaged in providing funding for a number of 
community organizations aimed at conserving affordable housing, 
and sponsoring community improvement, and was really one of the 
leading public policymakers in the State of New York in his 
tenure in the State Senate with respect to housing and 
financial services issues.
    John Korsmo has had extensive experience in real estate 
business. His commitment to public service is reflected in his 
membership of the Small Business Administration Advisory 
Council, the North Dakota State Banking Board, and the North 
Dakota Board of Higher Education. And he also served as Policy 
Director in the Office of Governor Ed Schafer of the State of 
North Dakota.
    We regard oversight of the Federal Home Loan Bank System as 
of high importance and we are looking forward to hearing your 
statements.
    Now before I swear the witnesses in, I will turn to my 
colleagues and see if they have any statements.
    Senator Bunning.

                 COMMENT OF SENATOR JIM BUNNING

    Senator Bunning. No statement, Mr. Chairman.
    Chairman Sarbanes. Senator Reed.

                  COMMENT OF SENATOR JACK REED

    Senator Reed. No statement, Mr. Chairman.
    Chairman Sarbanes. Would you all please stand?
    Do you swear or affirm that the testimony that you are 
about to give is the truth, the whole truth, and nothing but 
the truth, so help you God?
    Mr. Mendelowitz. I do.
    Mr. Leichter. I do.
    Mr. Korsmo. I do.
    Chairman Sarbanes. Do you agree to appear and testify 
before any duly-constituted committee of the U.S. Senate?
    Mr. Mendelowitz. I do.
    Mr. Leichter. I do.
    Mr. Korsmo. I do.
    Chairman Sarbanes. Thank you very much. We are prepared to 
hear your statements. If you have members of your family you 
want to introduce, we would be quite happy to recognize them.
    Mr. Mendelowitz, we will begin with you and go to Mr. 
Leichter and then over here to Mr. Korsmo.

               STATEMENT OF ALLAN I. MENDELOWITZ

            OF CONNECTICUT, TO BE A DIRECTOR OF THE

                 FEDERAL HOUSING FINANCE BOARD

    Mr. Mendelowitz. Chairman Sarbanes, Senator Reed, Senator 
Bunning, it is really a great honor to appear before you today 
to testify on my nomination to be a Member of the Board of 
Directors of the Federal Housing Finance Board. I would like to 
thank President Bush for nominating me and I would like to 
thank you, Senator Sarbanes, and Senator Daschle for your 
encouragement and support.
    I would also like to introduce my wife, Shereen, who is 
right here. I also want to thank her. We have been married 
almost 35 years now and without her support and encouragement, 
I do not think I could have gotten to this point. She has been 
a bottomless reservoir of patience for all the evenings I came 
home late from the office, the weekends I was in the office, 
and the long absences when I was on travel.
    I really appreciate it, and obviously, I love her because 
she has put up with me for 35 years.
    Last, on a personal note, I have had the opportunity to 
work with this Committee over the past two decades in several 
different capacities and on a number of diverse issues. It has 
been a privilege to work with the staff of this Committee 
because they stand out for their integrity, their commitment, 
and their talents.
    I would like to take this opportunity to recognize the 
staff who I have worked with over these many years--Steve 
Harris, Marty Gruenberg, and Pat Malloy--who used to be on the 
staff of the Majority--and Wayne Abernathy of the Minority 
staff.
    This is a time of great challenge and change for the 
Federal Home Loan Bank System. Some of the changes are mandated 
by statute and some of the changes are a direct result of the 
changes that are taking place in financial markets and in the 
membership of the Home Loan Bank System.
    The Gramm-Leach-Bliley legislation mandated a new, modern, 
risk-based capital rule for the Home Loan Bank System. I have 
to say that before I arrived at the Finance Board, they took on 
this challenge and within the very tight timeframe mandated in 
the statute, they completed the rule, published on time, and 
subsequently, as provided in the statute, all of the Home Loan 
Banks have submitted their plans for review and approval by the 
Finance Board.
    I have to say, with respect to the new legislative mandates 
that the Finance Board has received, that the Home Loan Bank 
System and the Finance Board itself I think are performing 
quite well to this point.
    The second big challenge, of course, is how to grapple with 
the changes that are taking place in the underlying membership 
of the Federal Home Loan Banks and their implications for the 
System.
    We are, in a sense, forced to address these issues because 
the Finance Board has received three petitions for an 
unprecedented action, which would be to permit a member 
institution to belong to more than one Federal Home Loan Bank.
    It is clear that these petitions are symptomatic of the 
broad changes and challenges to the System that are being 
caused by changes in financial markets and the membership base. 
In order to respond to these petitions, rather than trying to 
review them on a case-by-case basis, we issued a broad-ranging 
request for comments in September in an effort to more fully 
understand the full depth and dimensions of the changes and of 
their implications for the System.
    I am looking forward to receiving good, creative, 
thoughtful comments and information and I look forward to 
working with this Committee and others in the Congress on this 
important issue.
    The resolution of these complex issues will require good 
information and analysis and very careful and thoughtful 
deliberation.
    In closing, I have to say again how honored I am to be 
here. If confirmed, I pledge to work closely with this 
Committee and to continue the long-standing spirit of 
cooperation that has existed between the Federal Housing 
Finance Board and the Congress.
    I will pledge to work hard to ensure the safety and 
soundness of the System and ensure that the Federal Home Loan 
Banks fulfill their public mission.
    I have submitted my full statement for the record and with 
this, I conclude my oral comments. Obviously, if any of the 
Senators on the Committee have questions, I will be more than 
happy to try to answer them.
    Thank you.
    Chairman Sarbanes. Thank you very much.
    Mr. Leichter.

                 STATEMENT OF FRANZ S. LEICHTER

              OF NEW YORK, TO BE A DIRECTOR OF THE

                 FEDERAL HOUSING FINANCE BOARD

    Mr. Leichter. Good morning, Mr. Chairman, Senator Reed.
    Chairman Sarbanes. I think you need to pull that microphone 
a little closer to you.
    Mr. Leichter. Okay. I'm sorry. Good morning, Mr. Chairman, 
Senator Reed, and Senator Bunning. Thank you very much for the 
opportunity to appear before the Committee. I am honored and 
privileged to be before you as President Bush's nominee to one 
of the positions on the Board of Directors of the Federal 
Housing Finance Board.
    I want to first express my appreciation to you, Mr. 
Chairman, and to Senator Daschle, and to the Senator from my 
home State, Senator Charles Schumer. Also, I am pleased that my 
wife, Melody Anderson, is here with me today and it gives me a 
chance to thank her publicly for her support and encouragement.
    Chairman Sarbanes. I am glad we hold these hearings. The 
wives get recognition that they do not otherwise perhaps get.
    [Laughter.]
    Mr. Leichter. We appreciate the fact that the Committee 
gives us this opportunity.
    [Laughter.]
    I have had the distinct pleasure of serving on the Federal 
Housing Finance Board since August 2000. It has been a very 
productive and rewarding experience. My primary concern at the 
Finance Board has been to ensure the safety and soundness of 
the Federal Home Loan Bank System. And if confirmed, this will 
continue to be my top priority.
    I have taken a special interest in the System's mission of 
supporting housing in this country. I think we can all take 
pride in the affordable housing program which Congress had the 
foresight to enact as part of FIRREA in 1989.
    As you pointed out, Mr. Chairman, this year, the affordable 
housing program topped the $1 billion mark, more than 200,000 
units of affordable housing that have been produced under this 
program. Other Federal Home Loan Bank System community cash 
advance programs have invested $2 billion in our communities.
    The Federal Home Loan Bank System is uniquely positioned as 
a key source of liquidity for small community financial 
institutions in meeting the credit needs of the Nation's 
communities, big and small, urban and rural. Although the 
Federal Home Loan Bank System is economically sound, it must 
continue to evolve to meet the needs of the financial services 
sector.
    In the upcoming year, the System will face two primary 
challenges. First is dealing with the ramifications of the 
ever-consolidating financial services industry, in particular, 
its effects on Federal Home Loan Bank System membership. Second 
is overseeing the implementation of a new risk-based capital 
system.
    The System also faces the crucial question of how it will 
adapt to the dramatic changes that have occurred as a result of 
a rapidly consolidating financial sector in which national 
financial institutions are organized in a variety of ways under 
a single or multiple charter.
    Several institutions have now petitioned the Finance Board 
to address directly the issue of membership changes as a result 
of mergers and acquisitions across the boundaries of different 
Federal Home Loan Bank districts. The Board has chosen to deal 
with this issue on a system-wide basis by issuing a 
solicitation for comments in September 2001, that focused on 
the range of issues raised by these petitions.
    Any solution must take into account that the financial 
markets have changed significantly since the System was created 
in 1932 to serve small savings institutions.
    The Finance Board looks forward to working with all of our 
core constituencies, including this Committee and the Congress, 
to guide us in taking the appropriate action within the present 
statutory framework.
    Although I believe that the resolution of these complex 
issues will require a great deal of careful reflection and 
analysis, I am confident that they can be resolved in a way 
that continues the continued viability of the Federal Home Loan 
Bank System and maintains its cooperative character.
    The Finance Board is presently in the process of 
implementing a new risk-based capital structure to implement 
the provisions of the Gramm-Leach-Bliley Financial 
Modernization Act. And I am pleased to say that the Finance 
Board met the timeframe set forth by the Congress and approved 
the final capital rule in December 2000, after a process in 
which we received input from those interested in the Federal 
Home Loan Bank System, including, of course, the Congress.
    As required by statute, each Federal Home Loan Bank has now 
submitted a proposed capital plan by the end of the October 
2001. These are now being reviewed by the Finance Board and I 
think they will be approved and in place shortly.
    The staff of the Finance Board deserves a great deal of 
credit for the professional and expeditious manner in which it 
has handled this capital process.
    In closing, I would like to reiterate again what an honor 
it is to appear before this Committee. I look forward to 
continuing the spirit of cooperation between the Federal 
Housing Finance Board and the Congress.
    I have submitted a formal statement for the record.
    This concludes my oral presentation. I would be very 
pleased to answer any questions you or the Committee may have.
    Thank you.
    Chairman Sarbanes. Thank you very much. The full statement 
will be included in the record as submitted.
    Mr. Korsmo.

                  STATEMENT OF JOHN T. KORSMO

            OF NORTH DAKOTA, TO BE A DIRECTOR OF THE

                 FEDERAL HOUSING FINANCE BOARD

    Mr. Korsmo. Thank you, Mr. Chairman, and distinguished 
Members of the Committee. Thank you very much for the 
opportunity to appear before you today as a nominee for 
Director of the Federal Housing Finance Board. I am deeply 
honored to have been chosen by President Bush to serve the 
people of the United States in this capacity, and I would 
sincerely appreciate your support in confirming his decision.
    If I may, Mr. Chairman, let me introduce a couple members 
of my family. The love of my life, Michelle Larson, and one of 
my three sons, Charlie. There are four people who are my life 
and I am certainly happy that two of them could be here to 
support me today.
    Chairman Sarbanes. Very good.
    Mr. Korsmo. I literally grew up in the housing industry. In 
junior high and high school, I did filing and deliveries and 
learned the basics of real estate title abstracting working in 
a title plant in my hometown of Fargo, North Dakota. Thirty 
years later, I owned the company.
    Along the way, I became a lawyer and a licensed real estate 
title abstracter and title insurance agent in both North Dakota 
and Minnesota. I founded the first independent closing and 
escrow company in North Dakota and northwestern Minnesota; and 
I came to appreciate the important role that mortgage loan 
officers, homebuilders, and realtors play in helping people 
achieve the American Dream of homeownership.
    Those mortgage loan officers, homebuilders, and realtors, 
and the homebuyers they served, were my customers for over 20 
years. My guess is that, if I have the privilege of being 
confirmed, I will be the first Federal Housing Finance Board 
Director who has actually closed a home mortgage package.
    [Laughter.]
    And I have closed hundreds of them. As a result, I think I 
understand the real-world implications of fluctuations in the 
availability of adequate mortgage loan funds and mortgage 
interest rates, and the importance of simplifying accessibility 
to affordable housing and community investment programs.
    I know we were all pleased recently to read that 
homeownership in this country has hit a modern-day high. As of 
last quarter, 68.1 percent of American homes were owner-
occupied. This is an enviable record. But, unfortunately, among 
some families--minority families, families of low- and 
moderate-income, women-headed families, and new American 
families--and in some communities, including my home community, 
homeownership rates remain below 50 percent. Don't get me 
wrong, I believe the Federal Home Loan Banks are doing an 
excellent job in this regard now. But I assume we can always do 
better. And if I become a Finance Board Member, a continuing 
emphasis on affordable housing will be one of my highest 
priorities.
    I also want to mention that I do have previous experience 
as a bank regulator, having served 4 years as the public 
interest member of the North Dakota State Banking Board. The 
Banking Board is responsible for supervising and ensuring the 
safety and soundness of State-chartered financial institutions 
in North Dakota, a role directly comparable to that of the 
Federal Housing Finance Board. While I certainly recognize that 
the scale of responsibility is different, the fundamental 
safety and soundness principles are the same.
    Chairman Sarbanes, let me say again how honored I am to 
appear before you today. If confirmed, I, like Dr. Mendelowitz 
and Mr. Leichter, pledge to work closely with the Members of 
this Committee and the Congress to ensure the safety and 
soundness of the Federal Home Loan Bank System and the 
fulfillment of the System's critical public policy mission.
    Thank you, again, Mr. Chairman. I look forward to 
addressing any questions you or the Members of the Committee 
may have.
    Chairman Sarbanes. Thank you. We appreciate the statements 
from all three of the nominees who constitute this panel.
    I think we will do 5 minute rounds and we can do another 
round if Members wish to do so.
    As I understand the mission regulations issued in July 
2000, the Finance Board discouraged banks from funding or 
requiring loans with predatory characteristics, but did not 
actually issue a regulation on the subject.
    Individual banks have apparently developed their own 
policies for avoiding involvement with predatory loans. For 
example, the Atlanta bank requires that members certify that 
none of the collateral they are using to get advances has 
predatory characteristics.
    Why wouldn't the Board take steps certainly to encourage, 
and perhaps even require, other banks to follow the example set 
by the Atlanta bank?
    I would like to hear from each of you on that question.
    Mr. Mendelowitz. Senator, I think you have identified one 
of the serious problems in financial markets and in the lending 
sector. We take concerns over this issue quite seriously.
    At the current time, there is an interagency task force 
that is deliberating on the issue of predatory lending. The 
Finance Board has representation on that interagency task 
force. I would characterize our current position as collecting 
information and trying to understand what is being done 
Government-wide, so that when the Finance Board moves forward 
on this issue, we do it in the best way possible.
    Mr. Leichter. Mr. Chairman, I think this is an important 
issue and one that the Finance Board has to take a look at and 
the System has to respond to.
    And as Mr. Mendelowitz says, we are working together with 
other regulators as part of the predatory lending task force 
and would want to work together with these other regulators to 
try to come up with a uniform policy. So, I think it is 
something that the Board very definitely will look at and would 
be willing to address.
    Chairman Sarbanes. Mr. Korsmo.
    Mr. Korsmo. Mr. Chairman, it may be presumptuous on my part 
to talk about what has gone on in the past. I guess I can say 
that I certainly share the concern you express about this 
issue, particularly at a time when we may be looking at 
increasing rates of delinquency and particularly for first-time 
homebuyers. They tend to be the kind of people who would be 
involved in this kind of a loan.
    Again, I certainly share your concern. I am looking forward 
to working with the other Members of the Board on addressing 
those kinds of issues.
    Chairman Sarbanes. Well, some of the other regulators are 
moving. The Federal Reserve has a proposal out that they are 
about to act on for comment. Of course, some of the Members of 
your System have moved on it. This is an issue that we will 
continue to follow closely.
    The Finance Board has authority under the statute to set 
the compensation of its staff, provided, ``In directing and 
fixing such compensation, the Board shall consult with and 
maintain comparability with the compensation at the Federal 
Bank Regulatory Agencies.''
    I am a strong supporter of public service, but there is a 
problem because the Finance Board has set salaries 
significantly higher than the other Federal Bank Regulatory 
Agencies. How do we justify this disparity?
    Mr. Mendelowitz. I would say that you have identified an 
issue which the Finance Board going forward will need to look 
at very carefully.
    If you look at the span of responsibilities that the 
Finance Board has, compared to the span of responsibilities at 
the FDIC or the span of responsibilities at the OCC, I think 
that their span of responsibilities are broader and quite 
significant.
    I think that we as an agency would have a very hard time 
justifying compensation going forward that significantly 
exceeded those of other FIRREA agencies.
    Mr. Leichter. Mr. Chairman, just recently we did look at 
this issue and we asked that we be provided with figures to 
show whether the compensation of the staff of the Federal 
Housing Finance Board was comparable to that of other 
regulators. We will look at that. But as you properly pointed 
out, the statute does say that these salaries should be 
comparable and I think that we are required to implement that 
provision of the law.
    Mr. Korsmo. Mr. Chairman, I had the privilege of talking 
with you earlier about this issue. I was surprised when I got 
there to find out I am about the lowest-paid guy in the System 
over there.
    [Laughter.]
    Which is fine. I have a history of serving on boards where 
I received no compensation. I believe public service means 
exactly that. But I am sensitive to your comments on this issue 
and, believe me, I am looking forward to looking into exactly 
that issue.
    Chairman Sarbanes. Well, my time is expired. Let me just 
add one further dimension to this.
    The Financial Services Modernization bill repealed the 
requirement that the Finance Board approve compensation for the 
Federal Home Loan Bank Presidents. In 2000, the Bank 
Presidents' salaries across the country increased by an average 
of 43 percent over the previous year's level. These Bank 
Presidents' salaries now are significantly higher. In fact, the 
disparity compared, for instance, with the Regional Presidents 
of the Federal Reserve Banks, is far greater than the staff 
disparity we just talked about, it exists, this disparity is 
just enormous.
    Senator Bennett. What is the disparity with the Members of 
the U.S. Senate?
    Chairman Sarbanes. Even greater.
    [Laughter.]
    Even greater. And I think this is an issue that we will 
have to revisit at some point. I just put it out there.
    Now, Senator Bunning was here at the very outset. In fact, 
even before I arrived here.
    Senator Bunning. Thank you, Mr. Chairman.
    I would like to follow up on the Chairman's inquiry about 
staff compensation, not only your present compensation, but 
also future consideration. I want to ask all of you--the 
Federal Home Loan Bank Chairmen's salaries, and what they were 
and what they are now, since the cap came off. What is the 
current compensation for a Member of your Board?
    Mr. Mendelowitz. The compensation for a Board Member 
currently is $125,700, which is the compensation of Executive 
Level 4. The Chairman's compensation is $133,000, which is 
Executive Level 3.
    Senator Bunning. Compared to the Federal Reserve Board, 
what would that be?
    Mr. Mendelowitz. I do not remember exactly, but I think 
that the Chairman of the Board of Governors of the Fed is an 
Executive Level 2. So, I would say the Chairman of the Board of 
Governors is maybe paid slightly more. The Board of Governors I 
would assume would be paid slightly more.
    Senator Bunning. Okay. Then I would like the comparison, 
since you have both been on the Board, of the Bank Presidents 
in your System, approximately where they were and where they 
are now, since the cap came off.
    Mr. Leichter. The Bank Presidents, sir, I would say, on 
average, their salary is between $500,000 and $600,000 a year. 
Some are somewhat higher and some are somewhat lower.
    Senator Bunning. That is now, not what it was.
    Mr. Leichter. I would say that is their current salary, 
2001.
    Senator Bunning. Currently.
    Mr. Leichter. As the Chairman pointed out, there has been a 
significant increase in their salaries. But the Board no longer 
has any authority to set the compensation of the Bank 
Presidents.
    Senator Bunning. Just the Board of the Bank itself.
    Mr. Leichter. Yes, that is right.
    Senator Bunning. Would you please give me your definition 
of predatory lending? Any and all.
    Mr. Mendelowitz. I cannot say I am an expert on it, but 
from the perspective of an economist, any time that lending 
activity takes place and the market works efficiently, one 
would expect to find a rate of interest on a loan equal to some 
sort of pure rate of interest plus a spread to represent the 
risk, which should be the expected loss on the transaction. In 
other words, the spread represents the creditworthiness of the 
borrower.
    A borrower who has absolutely zero-risk, such as the U.S. 
Government, gets in effect a pure rate of interest. Any other 
borrower who represents higher risk pays more.
    And the extent to which, because of a lack of information 
or a lack of efficiency within the market, a lender winds up 
lending to a borrower at a spread over the pure rate of 
interest that is substantially higher than the risk associated 
with that borrower, and is able to do that because of lack of 
asymmetries in information, or lack of understanding on the 
part of the borrower, I guess you could call that predatory.
    Senator Bunning. So, then, the knowledge of the borrower 
would be part of the consideration. In other words, whether he 
knows or she knows that they are getting a fair and equitable 
deal and does it also depend on the ability of the borrower to 
borrow money? In other words, the credit risk?
    Mr. Mendelowitz. Yes, that was the point I was trying to 
make.
    Senator Bunning. I understand that. But there are people 
who have really bad credit ratings and sometimes they wind up 
with the borrower of last resort, so to speak. And you could 
see where there would be a higher rate of interest.
    I am trying to get at the handle of what is predatory 
lending and what is not. The law of supply and demand takes 
over here. If you are hurting and you have had a bad credit 
rating, you usually pay 1, 2, 3 percentage points higher for 
the money. Obviously, I would be more at risk if I were the 
lender in making a loan to you if you had a bad credit risk. Is 
that considered predatory lending?
    Mr. Mendelowitz. I think that what you have described is 
the sort of fine distinction I was trying to make between 
interest rates that represent compensation to the lender for 
the risk of the borrower versus interest rates that go well 
over and above compensation for that risk.
    Senator Bunning. Over and above. Okay. You said something 
about a task force on predatory lending. Are you a member of 
that task force?
    Mr. Mendelowitz. No, it is a staff member.
    Senator Bunning. Staff member. Have they come out with 
their report and do they have a definition of what predatory 
lending is? Would that be included in the task force?
    Mr. Mendelowitz. I actually do not know the answer to your 
question. But if I were organizing the task force, coming up 
with a definition would be one of the first things that I would 
try to do because you have to know what it is that you are 
dealing with when you are trying to prepare a response.
    Senator Bunning. Thank you very much. My time has expired.
    Chairman Sarbanes. Thank you, Senator Bunning.
    Senator Corzine.

               COMMENTS OF SENATOR JON S. CORZINE

    Senator Corzine. Yes. Thank you, Mr. Chairman. And I 
welcome the nominees.
    I have a particularly parochial issue that I would like to 
hear your comments on. I think it actually is more than 
parochial given the events of September 11. And this is the 
multidistricting issue, dual membership that gets at the 
application of----
    Senator Gramm. Jon, pull your mike a little closer.
    Senator Corzine. --what some people might argue is the 
crown jewel of the System. And that is the affordable housing 
program and the matching programs that exist and the likelihood 
that if, through the mergers, a number of the institutions are 
not able to be recognized at least for this purpose. In the 
multiple districts, you are going to see a diminution of 
application of matching funds from the Federal Home Loan Bank 
profits scenario.
    I consider this one of the more important roles of 
fulfilling the mission of the Federal Home Loan Bank and I 
would love to hear your views on the multidistricting issue. Or 
are there other solutions outside of dealing with allowing for 
the multiple application that you are considering or you think 
should be considered, so that we do not lose the economic 
participation of the Home Loan Banks because of the 
consolidation of the industry?
    Any of you would be fine.
    Mr. Leichter. Senator, you certainly identified what is 
probably the most difficult issue that the Board is going to 
face in the coming year, and that is the issue that we call the 
multidistrict membership, whether a member may belong to more 
than one bank.
    The Federal Home Loan Bank System was set up 1932, at a 
time when there were small thrifts. Most of them were located 
in one community and at the most, they may have had one or two 
branches throughout the county.
    Now, we have national banks and what has occurred 
particularly recently in the consolidation is that you have 
national banks under one unitary charter carry on business 
throughout the whole country and through more than one Home 
Loan Bank district. In fact, we currently have over a hundred 
financial institutions that through holding companies have 
banks that belong to or that are members of various Home Loan 
banks.
    We now have the situation in New York that you pointed out, 
you and Senator Schumer----
    Senator Corzine. And New Jersey.
    Mr. Leichter. And New Jersey. The New York Bank, which 
covers New Jersey and New York, where there has been an 
application to allow Washington Mutual to become a member of 
that Bank and to waive the regulations in regard to single 
membership.
    I want to assure you that we are paying very careful 
attention to that application and trying to deal with it in a 
prompt manner. But there are some extremely complex issues--
legal, policy issues. We hope to be able to come up with some 
resolution.
    Senator Corzine. There may be other solutions than just 
multiple memberships and it may be going back and rewriting 
either statutory or regulatory structures that recognize a 
changed world from the world that you described in 1932.
    Clearly, the depository base of the institutions is still 
reflective of the communities and where they are doing their 
business. And Dime may not have the same logo in front of the 
branches, but it is still working in the community. And so, 
some of the benefits associated with the fees to the Home Loan 
Bank and therefore, their profits certainly I think need to 
reside in either dealing with it by different multidistrict 
memberships or some other solution, which I would be more than 
happy to work with folks on to try to accomplish--I think 
address a need that is real.
    Mr. Leichter. Well, we would very much like to work with 
you and other Members of this Committee in dealing, first of 
all, with a system-wide solution and second, addressing the 
particular problem now of the New York Bank.
    I would just add that the New York Bank lost its 
headquarters. They were in the World Financial Center in 
Building 7, which collapsed. So there is every intention on 
behalf of the Board, to the extent we can, to be helpful to 
that Bank.
    Senator Corzine. Right. My time has expired.
    Chairman Sarbanes. I want to comment at this point. I think 
the issue of multidistrict membership raises some very 
important questions for the Board. As I understand it, the 
Board has issued a solicitation for comment and is proceeding 
in the regular order to address this issue and reach some 
decisions.
    Now, I am concerned about the affordable housing program 
and the questions which have been raised. But as I understand 
it, the advances by the Home Loan Bank in New York were $52 
billion at the end of 2000--$52 billion. Is that correct, or do 
you have reason to differ with that?
    Mr. Mendelowitz. That sounds like about the right ballpark.
    Chairman Sarbanes. The affordable housing program of the 
Federal Home Loan Bank of New York in 2000 was $22 million--$52 
billion advances, $22 million on the affordable housing 
program. Is that correct?
    Mr. Leichter. That sounds correct.
    Chairman Sarbanes. Now, we are told that the Dime merger 
might reduce funding by 20 percent. Of course, I think the 
affordable housing aspect of that could be dealt with in some 
other way. It is not quite clear to me why it should be used to 
make a fundamental change in the System. But even if it were 
not, 20 percent of $22 million is $4\1/2\ million. Correct?
    Mr. Leichter. Right.
    Mr. Mendelowitz. I think, Senator, what you have identified 
is that this Board must be very careful to make decisions based 
on good data. Asserting a problem to get an issue on the table 
is okay. But as a Board Member, in order to make a decision, I 
would have to see the data that establishes there is a problem 
that requires some extraordinary action, and the case has not 
been made yet.
    Chairman Sarbanes. You have 7,800 members. I understand 2 
percent of the members account for 40 percent of the advances. 
Is that correct?
    Mr. Mendelowitz. Yes.
    Chairman Sarbanes. Senator Gramm.
    Senator Gramm. Mr. Chairman, let me say, I rejoice. I think 
that there are five members on this Board. We have, if we 
confirm them, three of them here.
    [Laughter.]
    So, we have the right people here to talk to.
    Let me say, without overstating the case, that with the 
great success and I think the very positive service of Freddie 
and Fannie and their growth in the last 25 years, I am not sure 
what the Federal Housing Finance Board does.
    I think this is a renegade agency under Chairman Morrison. 
They took actions in my opinion that are absolutely 
indefensible.
    First of all, I believe each of you are qualified for the 
position and I intend to support each of your nominations. But 
I think we have to take a long, sober look at exactly what this 
Government agency is doing, what its mission is, whose interest 
it is serving.
    And look, I am a strong believer in paying people who work 
for the Federal Government. I do not love Government, but I 
believe you should have the best people in Government that you 
can get, and I think paying competitive salaries is critically 
important.
    I have grieved over how little we pay the people on the 
Federal Reserve Bank Board. I have had trouble getting people 
who are Regional Presidents to let themselves be considered to 
be members of the Board because of the big pay cuts involved.
    I am not someone who is concerned that somebody was making 
a lot more money than I was making. I would think you would 
have a hard time hiring a good person for the salary of a U.S. 
Senator to run one of the regional banks.
    But I do not think the kind of salaries we are talking 
about now, unless you all are doing something of such great 
importance that it has missed my attention, I do not think 
those salaries can be justified. And I think it creates a very 
real problem when you have people working who are Regional 
Presidents of the Federal Reserve banks and they are making a 
third what your people are making in what would be a parallel 
job.
    So, Mr. Chairman, I want to thank each of you for your 
willingness to serve. I look forward to working with you. I do 
believe it is time for this Committee to take a long, hard look 
at exactly what the Federal Housing Finance Board is doing.
    We need to look at its lending function with commercial 
banks. I would have to say that I was never in love with that 
policy, even though it was one of the compromises that helped 
put together a major piece of legislation that we dealt with 
several years ago.
    I think we are in for a comprehensive review. I would just 
like to ask each of you, when you are confirmed, and I believe, 
based on your qualifications, you will be, to really sit down 
and go back and look at the mission of this agency, look at 
what has happened over its lifetime in terms of other ways of 
doing the same thing, and that is Freddie and Fannie, for 
example.
    We really need to decide what it is that we set the agency 
up to do and then compare it with what it is doing. I think if 
there is a difference, that we should take a long, hard look at 
what was Congress' intent? Is that intent still valid?
    Now part of this is our job. But I think part of it, as 
Members of the Board, is your job. I just commend each of you 
to that task. And again, I want to thank each of you for being 
willing to serve.
    The only way you are ever going to get your name in the 
paper as a Member of the Federal Housing Finance Board is to 
screw something up.
    [Laughter.]
    Nobody is ever going to write an article saying that, after 
a distinguished career at GAO, that you did something brilliant 
on this Board, or after a career as a member of the banking 
committee in New York. Nobody is going to write an article in 
The New York Times talking about what a great job you are doing 
on this Board. But if you screw something up, you can get your 
picture on the front page of The New York Times.
    [Laughter.]
    And so, I understand the sacrifice that is involved in 
public service. I just want to thank each of you for being 
willing to serve. I think part of the greatness of our system 
is that we do have people that are willing to serve in 
positions that do not carry any great glory, but often carry 
great responsibility and provide tremendous public service.
    I look forward to working with each of you, and thank you 
very much.
    Mr. Leichter. Thank you, Senator.
    Chairman Sarbanes. Senator Bunning, do you have any further 
questions?
    Senator Bunning. No, thank you, Mr. Chairman.
    Chairman Sarbanes. I just have a couple and then we will 
move on to the next panel.
    One of the responsibilities of the Finance Board is to 
appoint the public interest directors to the individual Home 
Loan Bank Boards. I think there are some 75 or 80 of them 
around the country in the various individual Home Loan Banks. 
Of course, Mr. Korsmo was a public interest member of the Bank 
Board in North Dakota, as I understand it.
    Mr. Korsmo. Yes, sir.
    Chairman Sarbanes. He presumably has some sensitivity to 
the role of the public interest directors.
    One of the things we have been concerned about is the 
feeling on the part of minorities, and women, although they are 
a different minority because they are really a majority. But in 
any event, that they have been left out of the financial 
system, that they really are not in it, they do not play any 
role in it, and so forth.
    Now one relatively minor step, that can be done to sort of 
address that, and some efforts have been made, is in the 
appointment and selection of public interest directors to pay 
some attention to this issue.
    Obviously, there are some very qualified people in those 
segments of the population who are not part of the ``good old 
boys network.'' For that reason, they do not get looked at, 
they do not get drawn.
    I would be interested in your view of this issue.
    Mr. Leichter. If I may just say, Mr. Chairman, I think you 
are absolutely correct, that we can get greater and better 
diversity on our Board of Directors of the 12 Home Loan Banks, 
and the best way of doing that is through the public interest 
directors.
    I hope that we will be able to choose competent people. I 
just want to say that I have served, in the 1 year I have been 
there, under two Democratic and one Republican chairmen, and I 
found that the Board acted in a very nonpartisan, nonpolitical 
fashion, and I hope that will continue.
    I have every expectation it will be if we are confirmed and 
that we will keep in mind your admonition that we do need to 
have greater diversity on our boards.
    Chairman Sarbanes. Mr. Korsmo.
    Mr. Korsmo. As I said, Mr. Chairman, I think you are 
absolutely right. I think the two keys to being public interest 
members of any board, and certainly this one is no different, 
first is that the people have a strong history of community 
involvement; and, second, a real, genuine interest in the 
mission of this board.
    I can say that at least in the market with which I am most 
familiar, the most successful, the most effective, the most 
talented mortgage loan originators now are all women. The same 
is true of the realtors in the community I am most familiar 
with. And so, it seems to me that there certainly is the 
opportunity to improve the diversity of the boards as they 
exist.
    With that caveat, the people that we appoint must all have 
a strong history of community involvement and a real interest 
in the mission of this organization.
    Chairman Sarbanes. Mr. Mendelowitz.
    Mr. Mendelowitz. Over the course of the past year, I have 
had the chance to meet with every Board of Directors in the 
System. And it was clear to me that past efforts to promote 
greater participation in the Board of Directors by women and by 
minorities has, in fact, made progress. And I think going 
forward, the goal is to make sure that we do not backslide.
    Chairman Sarbanes. Thank you all very much. We appreciate 
your appearance before the Committee and we hope that we will 
be able to act on your nominations in the very near future.
    Mr. Mendelowitz. Thank you.
    Mr. Korsmo. Thank you.
    Mr. Leichter. Thank you, Mr. Chairman.
    We will now move on to the next panel. Mr. Aguirre, if you 
would come forward.
    [Pause.]
    Chairman Sarbanes. Eduardo Aguirre has been nominated by 
the President to be First Vice President and Vice Chairman of 
the Export-Import Bank. Mr. Aguirre was born in Havana, came to 
this country as a youth. His personal story is notable in terms 
of starting out in very difficult circumstances and then moving 
up, utilizing the opportunities that the American system 
offers. He has had a very distinguished banking career and 
rendered a very significant public service to his community.
    It is not an uncommon story in America, but it is always 
worth noting, and I want to recognize it here today and I think 
it is one of the great strengths of America.
    Mr. Aguirre is a graduate of the Holy Cross High School in 
New Orleans, received a B.S. from Louisiana State University. 
Started his financial career as a banking officer in Mexico 
City for Texas Commerce Bank. Worked for First Union National 
Bank as Vice President and Manager of the Latin America area. 
And since 1977, he has worked for the Bank of America, 
eventually becoming President of its International Private 
Bank. He also headed its export finance business.
    He has held a number of important community positions--
Board of Regents of the University of Houston System, by 
appointment of then-Governor Bush, and served as the Chairman 
of that Board in 1996 to 1998.
    Appointed by the President as a Member of the National 
Commission on Employment Policy in the early 1990's. He served 
as Trustee and Chair-Elect of the Texas Bar Foundation. 
Director of Texas Children's Hospital. President of the 
Hispanic Political Action Committee. All of which I think is a 
highly commendable record of community involvement and public 
service.
    As First Vice President of the Export-Import Bank, Mr. 
Aguirre would be responsible for much of the day-to-day 
management of the Bank, as well as, of course, to play a very 
important role in its policy decisions.
    He brings very significant qualifications for this 
position. We look forward to hearing from him this morning.
    Senator Gramm.

                 COMMENTS OF SENATOR PHIL GRAMM

    Senator Gramm. Well, Mr. Chairman, thank you. I think that 
you have a statement from Senator Hutchison which we want to 
put in the record.
    Chairman Sarbanes. I do.
    Senator Gramm. I know Eduardo Aguirre. He is an outstanding 
person. He has had much success as a citizen, as a business 
person. It obviously represents some sacrifice on the part of 
his family, with two college-age children, to be coming to 
Washington, DC, to take a job which probably pays maybe a 
quarter of what he was making, or less.
    Eduardo, I want to thank you for your willingness to serve.
    The Export-Import Bank is a very important agency that 
performs a vital function in world commerce. Your position is 
one that has to do with day-to-day management of the bank and 
its functions. I think you are eminently qualified to do the 
job. And I would just like to thank you for your willingness to 
stay.
    Mr. Aguirre. Thank you, Senator.
    Chairman Sarbanes. Senator Bennett.

              COMMENT OF SENATOR ROBERT F. BENNETT

    Senator Bennett. No opening statement, Mr. Chairman.
    Chairman Sarbanes. Before I swear you in, I will include 
Senator Kay Bailey Hutchison's statement in the record. She had 
hoped to be able to actually be here with us and to present you 
to the Committee, but we are in the closing days of the session 
and the demands are pretty great and she was not able to join 
us.
    I want to quote two short paragraphs from her statement. 
She was assuming she would be here. She says: ``It is such an 
honor to be here today to introduce Eduardo Aguirre, Jr. to be 
the First Vice President and Vice Chairman of the Export-Import 
Bank. Of course, it is always an honor to introduce yet another 
Texan for an important role.''
    We noticed that in these days.
    [Laughter.]
    Senator Gramm. I do not draw attention to it any more.
    [Laughter.]
    Chairman Sarbanes. ``And, the Ranking Member will be very 
pleased to hear, this Texan has a daughter at Texas A&M!''
    Mr. Aguirre. Yes, sir.
    Senator Gramm. Don't get behind on your tuition, now.
    [Laughter.]
    They are getting ready to go up, as I understand.
    Chairman Sarbanes. Then next to the closing paragraph she 
says, and she is putting a heavy burden on you here: ``Known as 
a brilliant thinker and an effective and hard worker, as well 
as an important spokesman and advocate, he is known to have the 
right touch to create solutions through research and 
principle.''
    The whole statement will be included in the record.
    I would ask you to stand, sir, so that I could administer 
the oath.
    Do you swear or affirm that the testimony that you are 
about to give is the truth, the whole truth, and nothing but 
the truth, so help you God?
    Mr. Aguirre. I do.
    Chairman Sarbanes. Do you agree to appear and testify 
before any duly-constituted committee of the U.S. Senate?
    Mr. Aguirre. I do.
    Chairman Sarbanes. Thank you very much. We would be very 
happy to hear your statement, and if any of your family members 
are here that you would like to present, we would be happy for 
you to do that as well.

               STATEMENT OF EDUARDO AGUIRRE, JR.

              OF TEXAS, TO BE FIRST VICE PRESIDENT

                    AND VICE CHAIRMAN OF THE

            EXPORT-IMPORT BANK OF THE UNITED STATES

    Mr. Aguirre. Thank you, Senator.
    Chairman Sarbanes, Ranking Member Gramm, Senator Bennett, I 
am very pleased to come before you today as you consider my 
nomination to be the First Vice President and Vice Chairman of 
the Export-Import Bank of the United States.
    Thank you for allowing me the opportunity to introduce my 
family, my wife, Maria Teresa Avila, and my son Eddy. Of 
course, my daughter Tessie is at A&M studying--hopefully hard.
    [Laughter.]
    Should the Senate act favorably on my nomination, this will 
mark my first full-time service to my adopted country. Almost 
40 years ago, I came to this land of freedom and opportunity as 
a 15-year-old Cuban refugee with no family, no money, and no 
working knowledge of the English language. Along the way, I was 
sheltered and taught by Catholic Charities, cared for by the 
United Way, and helped by many, many others. Later, a very 
affordable U.S. Government student loan program allowed me to 
attend college and eventually earn a degree from Louisiana 
State University. I have overcome real and imagined obstacles 
on my quest to realize my version of the American Dream, and I 
am grateful beyond words.
    I am extremely proud and humble to have been nominated by 
President George W. Bush to serve the United States.
    The Export-Import Bank is the official export-financing 
agency of the U.S. Government. It supports U.S. exports and 
sustains American jobs. If confirmed, I look forward to the 
opportunity to work with Chairman Robson, the rest of Ex-Im's 
leadership and staff, plus others in the Administration to 
advance our country's export financing agenda. Also, I will 
welcome the opportunity to work with the Senate and the House 
of Representatives.
    Thirty-four years in banking have prepared me to accept 
this challenge. I hope to bring to the job my broad risk 
analysis experience, my management and leadership skills, a 
healthy respect for the trust placed on me, an open mind, and 
some measure of common sense.
    In closing, I want to acknowledge my family as the bedrock 
of my value system. We are hard-working, God-fearing people who 
strive to give back some of the many blessings that have come 
our way.
    Mr. Chairman, Senator Gramm, Senator Bennett, I 
respectfully ask for your favorable consideration of my 
nomination and stand ready to respond to any questions that you 
may have.
    Thank you for your attention.
    Chairman Sarbanes. Thank you very much, sir.
    I have a very simple question to start off with. You have 
been nominated for a term that expires on January 20, 2005.
    Mr. Aguirre. Yes, sir.
    Chairman Sarbanes. Is it your intention to serve the full 
term if you are confirmed?
    Mr. Aguirre. Yes, Senator. My family and I are committed to 
fulfill this obligation.
    Chairman Sarbanes. All right. I am pleased to hear that. I 
am increasingly concerned by people who take these appointments 
for a term and then they serve a couple of years and the next 
thing you know, they are gone, often off to some sort of 
lucrative opportunity, in part based on that service. So, I am 
very pleased by that statement.
    You headed up the export finance business for Bank of 
America at one point in your career?
    Mr. Aguirre. At one point in my career, yes, Senator.
    Chairman Sarbanes. What in your view are the key obstacles 
to U.S. exporters seeking export finance from U.S. banks?
    Mr. Aguirre. There are many issues in trying to level the 
playing field, I think, not the least of which is the fact that 
there are other competing export financing agencies throughout 
the world, and certainly in Europe and in Asia and in our own 
continent which are prepared to support their exporters.
    Therefore, one of the obstacles that I think the U.S. 
exporters find is trying to level the playing field as 
organizations that are similar to the Export-Import Bank enter 
the fray. We have to stay in that competitive arena.
    About a quarter of our economy really is dealing with 
exports and it is a very important element in this economy. In 
a perfect world, I think we would find buyers and sellers and 
prices would be set. This is not a perfect world. There are 
economic implications. There are political implications. There 
are exchange implications and so many other things.
    So, I think the Export-Import Bank would come in to try and 
add value where value is needed and not where we are not.
    Chairman Sarbanes. I think that is a very realistic answer. 
This Committee, actually, with Senator Heinz's leadership, our 
former colleague, enacted the Tied Aid War Chest for the 
Export-Import Bank. The theory was not that we would move ahead 
because, obviously, our preference is that they compete on 
price and quality and that is that. But where other countries 
were providing really such a break for their exporters, that 
it, in effect, pretty well dictated where the business went.
    We thought that the Export-Import Bank ought to be able to 
counter that. In fact, if it is known that we are going counter 
it, it is less likely that others will do it because they 
appreciate the competition. Do you have any view on the use of 
the Tied Aid War Chest?
    Mr. Aguirre. I think it is a tool that is there, hopefully 
more as a deterrent than one to be used. In looking at the 
history of that particular issue, I think it has been invoked 
maybe five or seven times in its history.
    It is not one that Ex-Im Bank has chosen to use without a 
lot of thought. I believe it is something that is good to have 
and perhaps other countries, particularly the Japanese, and 
sometimes the Spaniards, may think twice before they put their 
efforts in that.
    But I think it is a tool that I am glad we have and should 
the time come, I can assure you, we will be very judicious in 
weighing all the implications before we make a decision.
    Chairman Sarbanes. We were able to negotiate these rules at 
OECD limiting export credit terms and get other countries to 
join in doing that. So, we placed some restraints upon its 
indiscriminate use and the favorable terms of it. But now, some 
countries--Germany and Canada, for example--have set up private 
government sponsored enterprises to supplement the official 
export credits, so-called market windows. Now the 
nongovernmental credits thus far are exempt from the OECD 
rules. So what happens is the combined private official credits 
result in financing terms that are significantly more 
attractive than what the OECD rules allow.
    This is a matter of grave concern to our exporters. I see 
my time is expired. I will just leave this thought with you. It 
seems to me that the Ex-Im Bank has to pursue a policy that 
counters these market windows that are being used by some of 
our major competitors, in effect, to so sweeten the terms, that 
they completely unbalance the playing field.
    I am in favor of a level playing field. If I could achieve 
the situation, I wouldn't have any favorable credits on 
anyone's part, and then I think that our people can do 
perfectly fine on a price and quality competition.
    Unfortunately, that is not the situation we face, and I 
think we have to counter it. Obviously, they have found another 
way to go about it. And unless we make it clear that we are 
going to counter it, they are just going to continue, I think, 
to go down this path, much to the disadvantage of our 
exporters.
    So, I really leave that with you. It is an issue that the 
Board is wrestling with right now.
    Mr. Aguirre. Thank you, Senator.
    Chairman Sarbanes. Senator Gramm.
    Senator Gramm. Well, Mr. Chairman, first of all, Eduardo, 
again, I want to thank you and your family for your willingness 
to serve.
    I am struck when I look at all the great Cuban Americans at 
how Castro turned out to be such a great public benefactor for 
America.
    [Laughter.]
    It is an amazing thing that a person who wished us no good, 
who imposed a reign of terror in his own country, and who 
clearly hates America and everything it stands for, helped send 
so many people to our shores that have turned out to be such 
great citizens. It just shows you the law of unintended 
consequences.
    Again, I am so grateful that you are willing to take this 
job. I do not know, Mr. Chairman, whether people come here and 
they get a credential and they go out to do something that pays 
better, or whether they get caught up in the idea that they 
have been appointed to a position by the President and they 
cannot say no, and then they get to Washington and decide, this 
is not such a great deal. I do not know what it is.
    But here is the point I want to make, and I would like to 
get your response to it.
    I agree with everything that Chairman Sarbanes said about 
export financing. It is an irrational economic policy for 
nations to subsidize exports. It is roughly equivalent to me 
just simply saying, every time I go to the grocery store, well, 
let me just add 10 percent to what you are charging. It makes 
no sense whatsoever.
    The problem is that our individual producers are 
disadvantaged relative to people doing the same business if we 
do not have a similar policy.
    Now, I never know whether we are leading this thing or we 
are following it, and it is very hard to tell from where I am 
sitting. But I am convinced that if we could have the Bank of 
America financing exports and other nations, other exporters in 
other countries were getting their financing from private 
institutions, that we would be much better off.
    I would just like to ask your response to that thesis, and 
simply ask you, in your capacity, that if there is ever an 
opportunity for the Ex-Im Bank to become involved in these 
negotiations and sort of have a multilateral disarmament, if 
you would be willing to help lead that effort?
    Mr. Aguirre. Senator, I am sure that we will all enjoy 
getting to utopia one day. But I do not know that that day is 
going to come in my lifetime.
    The way I look at this, and I do not know if my memory is 
going to serve me right, but I think there is about a trillion 
dollars of U.S. exports going on year-in, year-out. The Export-
Import Bank probably gets involved in about 3 percent of that. 
It is a very small amount, maybe less. I think where we come 
into play is really where exports are difficult to be 
transacted, perhaps in countries where we as a government know 
more than the average bear in the private sector in terms of 
dealings with their own treasuries, and so forth and so on, 
where we understand issues of foreign exchange availability 
better than the private sector would. I think that is where the 
Ex-Im Bank really adds value and an additional element in that 
transaction.
    Most of the exports that are leaving this country are 
really on open account--letters of credit financed by the 
private sector or some of them are actually inter-company 
transactions between perhaps Ford or General Motors or IBM and 
so on, and they are all subsidiaries abroad. So, we do not get 
involved in that. I think we come in where it is a little more 
difficult. And I think there is a role for an Export-Import 
Bank or a similar organization in another country to actually 
bridge that gap that would otherwise not be bridged.
    Senator Gramm. Thank you.
    Thank you, Mr. Chairman.
    Chairman Sarbanes. Senator Bennett.
    Senator Bennett. Thank you, Mr. Chairman.
    I am sitting here thinking I cannot remember a witness who 
has been appointed to a position who has as comprehensive a 
knowledge of what he is going into as you have displayed here 
this morning. Usually, the questions are, well, I will 
understand that, or I will get back to you, or so on. I am very 
impressed.
    Now let me follow up a little on what I thought I heard in 
your answer to Senator Gramm, that your services are not just 
financial, there is information, there is hand-holding through 
the bureaucratic maze. There are other services besides just 
the loan that comes to an exporter who says, I really want to 
deal with this opportunity overseas and I am not quite sure how 
to do it. And you say, well, this is how you do it. Am I right 
in that response to what I heard you say to Senator Gramm?
    Mr. Aguirre. Yes, Senator. I think the typical perception 
of the Export-Import Bank, also any bank, is the financing, 
follow the dollars. But we must recognize that over 90 percent 
of U.S. exports are actually coming out of small- and medium-
sized businesses. And the Export-Import Bank has been 
instructed by the Congress to pay particular attention to 
small, medium, and new types of businesses. Those particular 
businesses really need an outreach on our part. They need us to 
hand-hold at times, to facilitate at others, to work through 
the maze of red tape, et cetera.
    I think that is a fulfillment that we have in our mission.
    To that effect, there are a number of offices that Export-
Import Bank has throughout the country that reaches those 
small- and medium-sized exporters to make them comfortable with 
that transaction and to assist them.
    I do not know if that answers your question.
    Senator Bennett. Yes. I just wanted to be sure that I had 
understood that correctly.
    Thank you, Mr. Chairman. I have no further questions.
    Chairman Sarbanes. Thank you.
    Mr. Aguirre, thank you very much. We appreciate your 
appearance here this morning.
    Mr. Aguirre. Thank you, Mr. Chairman, and Senators.
    Chairman Sarbanes. Mr. Kroszner, if you could come forward. 
There is a vote on, but I think we may be able to get your 
appearance in quickly here.
    As you are coming forward, let me say that Randall Kroszner 
has been nominated by the President to be a Member of the 
Council of Economic Advisers, a three-member council.
    He is a graduate of Brown, an M.A. and Ph.D. from Harvard. 
He served as a Junior Staff Economist for a year with the 
Council of Economic Advisers and he has been on the faculty of 
the Graduate School of Business at the University of Chicago 
since 1990, now a full professor. And he was the Associate 
Director of the George Stigler Center for the study of the 
economy in the State at the University of Chicago.
    He has had an extensive publication performance, much of it 
on financial regulation and similar things. We are pleased to 
welcome him before the Committee.
    Senator Gramm, do you have a statement?
    Senator Gramm. He looks too young to me.
    [Laughter.]
    Chairman Sarbanes. If you would stand, sir, and take the 
oath.
    Do you swear or affirm that the testimony that you are 
about to give is the truth, the whole truth, and nothing but 
the truth, so help you God?
    Mr. Kroszner. I do.
    Chairman Sarbanes. Do you agree to appear and testify 
before any duly-constituted committee of the U.S. Senate?
    Mr. Kroszner. I do.
    Chairman Sarbanes. We would be happy to hear any statement 
you have. If it is lengthy, we will include it in the record 
and you can summarize. And if you have anyone you want to 
introduce, we would be happy for you to do that.

                STATEMENT OF RANDALL S. KROSZNER

                 OF ILLINOIS, TO BE A MEMBER OF

                THE COUNCIL OF ECONOMIC ADVISERS

    Mr. Kroszner. Thank you very much.
    I have a short written statement for the record. I will 
provide a very short summary of that now.
    Mr. Chairman, other distinguished Members of the Committee, 
I am very pleased and honored to appear before you today as 
President Bush's nominee to be a Member of the Council of 
Economic Advisers.
    One person who I do want to recognize from my family is my 
mother, who is sitting here right behind me, who has been 
providing me with support for 39 years.
    I am a little bit older than I might look.
    Chairman Sarbanes. He is older than he looks, right?
    Mr. Kroszner. Exactly as the Chairman has said, should I be 
confirmed, this would actually be my second opportunity to 
serve as part of the Council of Economic Advisers. Fourteen 
years ago, I took a year leave from graduate school to serve on 
the staff of the Council and there I learned the valuable role 
that the Council plays in providing advice and analysis in 
economic policy.
    If confirmed, I will have the privilege of working with an 
absolutely superb staff who come to Government for a year or 
two to provide empirically grounded, theoretically grounded 
advice and analysis of important economic issues that are 
before us.
    Mr. Chairman, you have summarized my background quite well. 
I just also wanted to mention that I have worked with a lot of 
international financial institutions, such as the IMF, World 
Bank, and the Inter-American Development Bank, as well as the 
Federal Reserve Board and regional Federal Reserve banks on 
numerous macroeconomic and regulatory policies.
    I have also been a Visiting Professor at the Stockholm 
School of Economics and the Free University of Berlin.
    The United States and the world economy obviously faces 
many challenges, but also many opportunities. As part of my 
portfolio at the Council, I will be looking at international 
economics, macroeconomic issues, and a variety of regulatory 
issues.
    So, I would like to thank you very much, Mr. Chairman, and 
the Committee, for the prompt consideration of my nomination 
and I would be delighted to answer any questions that you might 
have.
    Chairman Sarbanes. When you say the issues that you would 
be looking at, I take it you engaged in a discussion with 
Chairman Hubbard and presumably McClellan as well.
    Mr. Kroszner. Yes.
    Chairman Sarbanes. To work out the allocation of 
responsibility.
    Mr. Kroszner. Yes.
    Chairman Sarbanes. Your portfolio, then, is to be what, 
now?
    Mr. Kroszner. Primarily international economic issues, 
macroeconomic issues, and certain regulatory issues, depending 
as they come up.
    Chairman Sarbanes. Senator Gramm.
    Senator Gramm. Mr. Chairman, let me say that I think that, 
with this confirmation, we will have three outstanding Members 
of the President's Council of Economic Advisers.
    I said during the Clinton Administration that I thought his 
appointments were excellent people. I think that is true during 
the Bush Administration.
    Certainly, the nominee before us has excellent credentials. 
Any department of economics in any college or university in 
America would be happy to have the nominee on their faculty.
    Are you going to remain the editor of the Journal of Law 
and Economics?
    Mr. Kroszner. No. I have already resigned from being 
editor, so that I can devote full time to the Council of 
Economic Advisers.
    Senator Gramm. I was going to urge you to do something 
about your backlog in consideration, but I won't. Thank you.
    [Laughter.]
    Chairman Sarbanes. Senator Bennett.
    Senator Bennett. Thank you, Mr. Chairman.
    Mr. Kroszner was courteous enough to come by my office, and 
I visited with him. And like the rest of you, I am impressed 
with him and will be happy to vote for his nomination.
    Chairman Sarbanes. I understand that you have a leave of 
absence from the University of Chicago for 2 years. Is that 
correct?
    Mr. Kroszner. That is correct.
    Chairman Sarbanes. And is there a possibility of its 
extension at the end of that time?
    Mr. Kroszner. In certain extraordinary circumstances, one 
can request an additional year's leave. But that is something 
that I was not able to negotiate up front.
    Chairman Sarbanes. Well, I would say, given the comments I 
made earlier about serving out your term and everything, 
although you do not exactly have a term--we realize this 
limitation that most universities place on their people leaving 
and then returning and we just have to, in a sense, I think, 
accommodate in order to be able to draw highly qualified people 
into public service.
    We do not really expect someone to give up a tenured 
faculty position. Sometimes it happens because they stay on. 
But in any event, you are certainly committed for the 2 year 
period. Is that correct?
    Mr. Kroszner. Yes.
    Chairman Sarbanes. I have no further questions. In a sense, 
I do not want to say saved by the vote because I do not think 
there was anything to save you from.
    [Laughter.]
    Ordinarily, I think we would have had a somewhat longer 
hearing with you and explored some of the economic issues. But 
since we have a vote, I am going to bring this hearing to a 
close.
    Thank you very much, sir.
    Mr. Kroszner. Thank you very much.
    Chairman Sarbanes. The hearing stands adjourned. We will 
try to figure out when we can vote on the nominees.
    [Whereupon, at 11:37 a.m., the hearing was adjourned.]
    [Prepared statements, biographical sketches of the 
nominees, response to written questions, and additional 
material supplied for the record follow:]
           PREPARED STATEMENT OF SENATOR KAY BAILEY HUTCHISON
    It is such an honor to be here today to introduce Eduardo Aguirre, 
Jr. to be the First Vice President and Vice Chairman of the Export-
Import Bank of the United States. Of course, it is always an honor to 
introduce yet another Texan for an important role--and, the Ranking 
Member will be very pleased to hear, this Texan has a daughter at Texas 
A&M.
    At this time, as our war against terrorism heats up, and as America 
faces a struggling economic situation, it is critical that we have a 
highly qualified person in charge of keeping our economy robust. By 
facilitating U.S. exports through financing that supplements private 
capital, the so-called Ex-Im Bank will be a pivotal part of our 
Nation's recovery.
    This is a decisive time for our Nation as we engage many nations 
both as our enemies and as our allies in our fight against terrorism--
and as we engage them not just on a war level, but on a monetary one as 
well. Mr. Aguirre's wealth of knowledge and experience, especially in 
international finance, as well as his vision and character more than 
qualifies him for this position.
    Mr. Aguirre retired from Bank of America, one of the largest banks 
in the United States, in September, where he was the President of its 
International Private Bank. He currently serves on the National 
Commission for Employment Policy, on the Board of Regents of the 
University of Houston System, and as the Chairman of the Board of 
Trustees of the Texas Bar Foundation. In addition, he serves on 
numerous other professional and civic Boards, including the Texas 
Children's Hospital, Operacion Pedro Pan Group Inc., and Houston 
Livestock Show and Rodeo--many of you may have heard me tell the story 
of when I took Senator Mikulski to this Rodeo. Trust me, it is an 
experience!
    A recipient of many honors, Mr. Aguirre is a graduate of Louisiana 
State University, and of the American Bankers Association National 
Commercial Lending Graduate School. Most important, he and his wife 
have lived in Houston for 27 years, and raised their two children 
there.
    Known as a brilliant thinker and an effective and hard worker, as 
well as an important spokesman and advocate, he is known to have the 
right touch to create solutions through research and principle.
    I cannot think of anyone better to fill the position of the First 
Vice President and Vice Chairman of the Export-Import Bank, and 
therefore it is my honor to introduce my friend Eduardo Aguirre, and to 
encourage all of you to support his nomination.

               PREPARED STATEMENT OF ALLAN I. MENDELOWITZ

         Board Member-Designate, Federal Housing Finance Board
                           November 15, 2001

    Mr. Chairman, Senator Gramm, Members of the Committee, it is an 
honor to appear before you today to testify on my nomination to be a 
Member of the Board of Directors of the Federal Housing Finance Board 
(Finance Board). I would like to thank President Bush for nominating me 
and I would like to thank you, Senator Sarbanes, and Senator Daschle 
for your encouragement and support.
    I would also like to thank my wife of almost 35 years, Shereen, who 
is here today. Without her support and encouragement I never would have 
been able to arrive at this point. She has been a reservoir of unending 
patience over the years in the face of many evenings when--unplanned--I 
stayed late in the office, weekends spent at work, and long absences 
when on travel.
    Last, I have had the opportunity to work with your Committee over 
the past two decades in several different capacities and on a number of 
diverse issues. It has been a privilege to work with the staff of this 
Committee because they stand out for their integrity, dedication, and 
talent. I would like to take this opportunity to express my 
appreciation, in particular, to Steve Harris, Marty Gruenberg, and Pat 
Malloy (who served the Committee for many years in the past) of the 
Majority staff, and Wayne Abernathy of the Minority staff.
    The Federal Home Loan Bank (FHLBank) System plays an important role 
in promoting homeownership and lending by community financial 
institutions. In a time of rising direct capital market intermediation, 
the FHLBanks provide small community financial institutions access to 
the liquidity needed to meet the demand for creditworthy loans in their 
communities. The role of the Finance Board is to assure both the safety 
and soundness of the FHLBank System and the achievement of the public 
purposes for which the System was created.
    This is a time of great change and complex challenges for the 
FHLBank System. Some changes have been mandated by statute and others 
are the result of the rapidly evolving state of financial institutions 
and markets in this country.
    The Gramm-Leach-Bliley Financial Services Modernization Act 
mandated the Finance Board to develop a modern risk-based capital rule 
for the FHLBanks. That mandate included a very tight timeframe under 
which the rule had to be completed. The Finance Board received broad-
based substantive input, including comments and suggestions, from 
FHLBank members, the Congress, Executive Branch agencies, trade 
associations, and the FHLBanks themselves. The final capital rule 
received widespread support and was completed within the timeframe 
mandated by Congress. As required by statute, every FHLBank submitted a 
proposed capital plan to the Finance Board by the end of October and we 
are in the process of reviewing them. This could not have been achieved 
without the hard work and skills of the Finance Board's staff, which I 
have found to be some of the most capable and committed professionals 
with whom I have had the opportunity to work.
    Another important matter with which we are grappling is how to 
respond to the implications for the FHLBank System of the dramatic 
changes that are taking place in the financial markets, in general, and 
the membership of the FHLBanks, in particular. The Finance Board has 
received several unprecedented petitions that have prompted 
consideration of these issues. These petitions, which have been 
received from three FHLBanks, request that some FHLBank members be 
allowed to join more than one FHLBank. These applications were the 
result of changes in the membership of the FHLBank System that followed 
from mergers and acquisitions that cut across the boundaries of 
different FHLBank districts.
    To respond to the broad ranging and complex issues raised by these 
petitions, the Finance Board on September 26, 2001, issued a 
Solicitation for Comments that addresses the full range of issues 
raised by these petitions. I look forward to receiving good, creative, 
and thoughtful comments from all interested parties. I also look 
forward to working with this Committee, and others in the Congress, on 
this important issue. The resolution of these complex issues will 
require good information and analysis, and careful and thoughtful 
deliberation.
    In closing, I would like to say again that I am honored to appear 
before you. If confirmed, I pledge to work closely with the Committee 
and continue the longstanding spirit of cooperation that has existed 
between the Federal Housing Finance Board and the Congress. I would 
also like to pledge to you today that I will work hard to ensure the 
safety and the soundness of the System and to ensure that the FHLBanks 
fulfill their public mission.
    Mr. Chairman, this concludes my statement and I will be happy to 
try to answer any questions you or the Committee may have.

                PREPARED STATEMENT OF FRANZ S. LEICHTER

         Board Member-Designate, Federal Housing Finance Board
                           November 15, 2001

    Mr. Chairman, Senator Gramm, and distinguished Members of this 
Committee, thank you very much for the opportunity to appear before 
your Committee. It is a great honor and privilege to be here as 
President Bush's nominee to the Board of Directors of the Federal 
Housing Finance Board.
    I want to express my appreciation to you, Mr. Chairman, Senator 
Daschle, and to my Senator who sits on this Committee and who I call a 
friend, Senator Schumer. I want to acknowledge the presence of my wife 
Melody Anderson and thank her for her support and encouragement.
    I have had the distinct pleasure of serving on the Federal Housing 
Finance Board (Finance Board) since August 2000. It has been a 
productive and stimulating experience. The Federal Home Loan Bank 
(FHLBank) System plays an important role in promoting affordable 
homeownership in America. The FHLBank System is a key source of 
liquidity for small community financial institutions to meet the credit 
needs in their communities. The role of the Finance Board is to ensure 
both the safety and soundness of the FHLBank System and the achievement 
of the public policy mission for which the System has been created.
    I think we can all take pride in the System's Affordable Housing 
Program (AHP), which the Congress had the foresight to enact as part of 
FIRREA in 1989. This year the AHP topped the billion-dollar mark.
    The System continues to evolve to meet the needs of a rapidly 
changing financial sector. Some changes have been mandated by statute 
and others are the result of consolidation in the financial services 
industry.
    The Finance Board is presently in the process of implementing a new 
risk-based capital structure to implement the provisions of the Gramm-
Leach-Bliley Financial Modernization Act. I am pleased to say that the 
Finance Board met the timeframe set forth by the Congress and approved 
the final capital rule in December 2000 after a process in which we 
received input from key constituencies of the FHLBank System, including 
FHLBanks, its members, Congress, the Executive Branch, and trade 
groups. As required by statute, each FHLBank submitted a proposed 
capital plan by the end of October 2001. At this time, the Finance 
Board staff is reviewing the plans and we expect that the capital plans 
will be approved and in place shortly. The staff of the Finance Board 
deserves great credit for the professional and expeditious manner in 
which they have handled this capital process.
    A crucial issue facing the System is how to respond to the dramatic 
changes that are taking place in financial markets and the implications 
of these changes on membership in the FHLBanks. Several institutions 
have petitioned the Finance Board to address directly the issue of 
membership changes as a result of mergers and of acquisitions across 
the boundaries of different FHLBank districts.
    In order to address the issues raised in these petitions in a 
System-wide manner, the Finance Board issued a Solicitation for 
Comments in September 2001 that focuses on the range of issues raised 
by the petitions. Any solutions must take into account that the 
financial markets have changed significantly since the System was 
created in 1932 to serve small savings institutions. The Finance Board 
looks forward to receiving comments from all interested parties to help 
guide us in taking appropriate action within the present statutory 
framework. I look forward to working with the Committee, and others in 
the Congress, on this important issue. The resolution of these complex 
issues will require a great deal of careful reflection and analysis.
    In closing, if confirmed, I promise to work hard to ensure the 
safety and soundness of the System and to ensure that it meets its 
public policy mission. I would like to reiterate that it is an honor to 
appear before this Committee. I will continue the tradition of 
cooperation that has existed between the Federal Housing Finance Board 
and the Congress.
    Mr. Chairman, this concludes my statement and I will be pleased to 
try to answer any questions you or the Committee may have.

               PREPARED STATEMENT OF RANDALL S. KROSZNER

          Board Member-Designate, Council of Economic Advisers
                           November 15, 2001

    Mr. Chairman and other distinguished Members of the Committee, I am 
pleased and honored to appear before you today as the President's 
nominee to be a Member of the Council of Economic Advisers.
    Should I be confirmed, this would be my second opportunity to be 
part of the Council. Fourteen years ago, I took a year leave from 
graduate school to serve on the staff of the Council. There I learned 
about the valuable role that the Council plays in providing advice and 
analysis of economic policy. If confirmed, I will have the privilege of 
working with a superb group of economists who are at the Council.
    I am on leave from the Graduate School of Business of the 
University of Chicago where I am Professor of Economics. I have also 
been a Research Associate of the National Bureau of Economic Research 
and Associate Director of the Center for the Study of the Economy and 
the State at the University of Chicago. I have worked with 
International Monetary Fund, World Bank, and Inter-American Development 
Bank, the Federal Reserve Board, and regional Federal Reserve Banks on 
numerous policy issues. In addition, I have held visiting 
professorships at the Stockholm School of Economics and the Free 
University of Berlin.
    The United States and world economies face many opportunities and 
challenges. The portfolio of issues that I will focus on will include 
international and macroeconomic issues, as well as a number of 
regulatory issues. I look forward to having your input and advice on 
these issues.
    In closing, I would like to take this opportunity to thank you, Mr. 
Chairman, and the Committee for the prompt consideration of my 
nomination. Mr. Chairman, I would be delighted to answer any questions 
you and the other Members of the Committee may have.

RESPONSE TO WRITTEN QUESTIONS OF SENATOR SARBANES FROM ALLAN I. 
                          MENDELOWITZ

Q.1. Several of my colleagues on the Senate Banking Committee 
have expressed concern over the possible adverse impact to the 
Federal Home Loan Bank of New York and its programs resulting 
from the acquisition of The Dime Bank by Washington Mutual. 
There is a concern that the departure of The Dime Bank from the 
Federal Home Loan Bank of New York would have adverse 
consequences for the viability of the Bank and its funding of 
the Affordable Housing Program. It is my understanding, that at 
the last meeting of the Federal Housing Finance Board of 
Directors, the Chairman directed the staff to develop 
alternative solutions that would enable Washington Mutual to 
continue to do business with the Federal Home Loan Bank of New 
York in place of The Dime.
    In order to better understand the implications of such an 
action, I would like to know to what extent would the departure 
of The Dime's business affect the stability and viability of 
the Federal Home Loan Bank of New York?

A.1. The departure of a large member like The Dime will reduce 
the assets, capital, and profits of the Federal Home Loan Bank 
of New York (FHLBNY). I believe, however, that the departure of 
The Dime will not have a material adverse impact on the 
viability and stability of FHLBNY. I reached this conclusion 
for a couple of reasons. The first reason is that the relative 
size and profitability of FHLBNY is not diminished by the 
departure of The Dime Bank. For example, FHLBNY is the third 
largest of the 12 FHLBanks both before and after The Dime's 
departure. The second reason is that the departure of The Dime 
does not adversely affect the ability of FHLBNY to pay 
competitive dividends or provide other services to the 
remaining member institutions of FHLBNY.
    I used financial data from midyear 2001, which was about 
the time that Washington Mutual (WAMU) announced its intended 
acquisition of The Dime Bank, to try and understand the impact 
of The Dime's departure on FHLBNY. In doing the analysis, I 
used the most conservative assumptions possible. That is, all 
possible impacts were estimated using assumptions that would 
yield the most adverse impact on the financial condition of 
FHLBNY. Therefore, all other things being equal, it is likely 
that FHLBNY will fare better than the conclusions I reached in 
my assessment of the impact of The Dime's departure, and it is 
highly unlikely that it will fare worse.
    For example, in assessing the impact of The Dime departure 
on operating costs, the analysis used the assumption that there 
would be no reduction in the operating costs of the FHLBNY. 
That is, FHLBNY is assumed to have the same number of staff, 
administrative costs, rent, etc., whether or not FHLBNY has or 
does not have The Dime book of business. The treatment of the 
profitability of the advances held by The Dime is treated in 
the same conservative approach. The profitability of FHLBNY's 
advances to The Dime is assumed to be the average profitability 
for all of FHLBNY's advances. This assumption is used even 
though it is my understanding that all of The Dime's advances 
are very short and such advances tend to be less profitable 
than longer term advances for an FHLBank. The Dime's advances 
typically have only a few days maturity because they are used 
to fund mortgages held by The Dime for the very short period of 
time that passes between when the mortgages are closed and when 
they are subsequently resold to the secondary market. The 
spread on advances--the source of profits earned on advances--
tends to be much narrower for very short-term advances than it 
is for medium- and long-term advances. (A reasonable estimate 
is that the spread earned on very short-term advances is in the 
8 to 10 basis points range, while the spread on longer term 
advances tends to be in the 18 to 20 basis point range.)
    As regards the relative size and profitability of FHLBNY, 
as compared to other FHLBanks in the Federal Home Loan Bank 
System (FHLBank System), they are not adversely affected by The 
Dime's departure.

    In addition, FHLBNY, after the departure of The Dime, will 
continue to be significantly larger than it was in the recent 
past. Using the midyear 2001 financial data as the point of 
comparison, FHLBNY's total assets without The Dime would still 
be 6 percent to 9 percent larger than they were with The Dime 
only 1 year before, that is, at midyear 2000. This result 
reflects the fact that FHLBNY has grown rapidly in recent 
years. However, new advances extended to The Dime did not cause 
that growth. As the following graph shows, advances to The Dime 
were fairly level over the past half-decade.

    The financial analysis also demonstrates that the Return on 
Equity of FHLBNY may actually increase slightly with the 
departure of The Dime. This outcome results from the fact that 
the departure of The Dime will likely reduce the equity of 
FHLBNY by more than it will reduce profits. Each of the 
remaining shareholders may have an absolutely larger share of 
the remaining profits of the FHLBNY after The Dime's departure. 
As a result, the ability of FHLBNY to pay competitive dividends 
and to preserve the value proposition for other members will be 
maintained--or even enhanced--after The Dime's membership 
ceases.
    This particular consequence of The Dime departure on FHLBNY 
should not come as a surprise. It is a reflection of the basic 
structure of the FHLBank System. As a cooperative system, the 
capital stock of an FHLBank is designed to expand and contract 
as members are added or lost. There are a number of examples, 
over the past decade, of FHLBanks that have successfully 
expanded and contracted in response to gaining or losing 
members. The issues surrounding The Dime departure form FHLBNY 
are not unique in the System.
    Therefore, the departure of The Dime will neither 
negatively affect the viability or stability of the FHLBNY nor 
will it adversely affect the ability of FHLBNY to meet the 
needs of its other members. Consequently, the departure of The 
Dime will not affect the ability of FHLBNY to fulfill its 
housing finance and community development responsibilities.

Q.2. How would the departure of The Dime affect the Affordable 
Housing Program at the Federal Home Loan Bank of New York?

A.2. There are two ways to look at the impact of The Dime's 
departure from FHLBNY on the Affordable Housing Program. The 
first is the impact of The Dime's departure on the available 
funding for AHP. The second is the impact of The Dime's 
departure on the ability of FHLBNY member institutions to 
effectively use AHP funds. I believe that the departure of The 
Dime will not have a large impact on the availability of AHP 
funds in the FHLBNY district, nor will The Dime's departure 
adversely affect the ability of FHLBNY members to effectively 
use AHP funds.
    Availability of AHP Funds at FHLBNY: The departure of The 
Dime Bank from FHLBNY will lower funding of AHP at FHLBNY. For 
the year 2001, FHLBNY had $31 million available for AHP. The 
departure of The Dime will likely have a maximum adverse impact 
on funds available for AHP of about $3 million per year, or 
about 10 percent of FHLBNY's AHP funds available for allocation 
in 2001.
    The FHLBNY district currently has 11.0 percent of the U.S. 
population. At the funding level for AHP in 2001, the FHLBNY 
district had 12.6 percent of the FHLBank System's total funding 
for AHP. In other words, its share of AHP funds was 1.6 percent 
more than its district's share of the U.S. population. With the 
departure of The Dime, the FHLBNY district will have about 11.4 
percent of the FHLBank System's AHP funds (assuming that the 
New York AHP funds decline by $3 million, but the total FHLBank 
System's funds remain the same). That is, after the departure 
of The Dime, FHLBNY will still have a larger share of the total 
AHP funds than its district's share of the U.S. population. 
Therefore, while the departure of The Dime will reduce FHLBNY 
AHP funds, everything else equal, the AHP program in the New 
York district would not be subjected to a large absolute or 
relative reduction in the annual AHP funds.
    Effective Utilization of AHP Funds: Different member banks 
make greater or lesser use of the AHP. Some member banks make 
very good use of the funds, while others make very little use 
of the program. As a general rule, larger institutions tend to 
be more active users of the AHP relative to smaller 
institutions. This tends to be the case because the AHP 
requires members to make a significant commitment of resources 
to a potential beneficiary project: Preparing applications, 
monitoring of compliance with rules and regulations during a 
project's development, and additional post-completion 
monitoring and certification that may stretch a decade into the 
future. Because The Dime is a relatively large member, with 
approximately 15 percent of the advances outstanding from 
FHLBNY, the loss of The Dime Bank could represent the loss of 
an active AHP supporter from the program. If this were true, 
the effective utilization of AHP funds could be adversely 
affected. However, this does not appear to be the case. In the 
first 12 years of the program, The Dime successfully applied 
for AHP funding for beneficiary projects in only 7 of those 
years. Over the life of the program, the nine successful Dime 
initiated applications accounted for only 3.9 percent of all 
AHP funds that were allocated competitively by FHLBNY. 
Therefore, the loss of The Dime is not likely to represent a 
material reduction in the ability of FHLBNY member institutions 
to support the AHP and effectively use the available AHP funds. 
In fact, over the life of the program more than 120 different 
FHLBNY member institutions have successfully applied for AHP 
funds.
    If there is still a concern that some sort of temporary 
action is needed during the interval of time during which the 
FHFB will be deliberating on the complex implications of the 
rise of interstate banking and the cross-district mergers, WAMU 
has within its own capacity the ability to resolve this matter 
without any extraordinary action by the Finance Board. If a 
member bank ceases to exist because it is absorbed in a merger 
or acquisition, the outstanding advances do not become due and 
payable on the cessation of membership. The outstanding 
advances are permitted to mature and roll off the books of the 
FHLBank based on their original terms. If WAMU were to instruct 
The Dime to roll over its existing advances (before the 
acquisition closes) into new ones with a longer term, these 
advances would remain on the books of FHLBNY until they come 
due. For example, if The Dime were to extend its book of 
advances for a period of 2 years, The Dime advances--and their 
associated profits and AHP funding--would remain on the books 
of FHLBNY for 2 years, irrespective of the end of The Dime 
charter and its membership in FHLBNY. In a similar case, FHLBNY 
has advances taken out by Summit (a member which was merged 
into Fleet Bank in March 2001) that do not mature for 15 years 
and will remain on the books of FHLBNY until 2016.

 RESPONSE TO WRITTEN QUESTIONS OF SENATOR BENNETT AND SENATOR 
                CRAPO FROM ALLAN I. MENDELOWITZ

Q.1. Although the Finance Board has complied with the Gramm-
Leach-Bliley Act of 1999 and capital plans have been submitted 
by the twelve Federal Home Loan Banks, there is concern the 
Finance Board may not act to approve these new capital plans 
for some time. In fact, some industry representatives claim the 
Finance Board has stated it may be until next spring until 
capital plans are approved. It is very important to approve the 
capital plans soon to assure a permanent capital base that is 
stable and will enhance safety and soundness for the System. 
When can you estimate that the Finance Board will be starting 
to approve the capital plans and will they approve all the 
plans simultaneously or on an individual basis?

A.1. I am pleased to report that the approval process is 
currently underway. The staff of the Finance Board is 
evaluating each plan in terms of its internal consistency and 
examining how it affects the System as a whole. We are also 
evaluating the technical capabilities of the FHLBanks to 
fulfill their responsibilities under the plans. It is my hope 
that we can finish this process quickly. My preference is to 
start approving individual plans sooner rather than later. When 
we find that the capital plan of any individual FHLBank is 
complete and meets the requirements of the capital rule, that 
the FHLBank has the technical capability to implement all 
aspects of the plan, and that the proposed capital plan does 
not adversely affect the System as a whole, if confirmed, I 
would be prepared to promptly consider a Board recommendation 
for the approval of that plan.

Q.2. As consolidation of the financial arena continues we will 
continue to see merging across FHLBank districts. As we know 
the financial world is changing and the System itself rests on 
the ability of the Finance Board to change with the times. 
Rules and regulations restricting membership when financial 
institutions merge from neighboring districts are outdated and 
are hampering the ability of the FHLBank System to adapt to the 
times and market fluctuations. When do you see the Finance 
Board addressing the multidistrict membership issue and 
specifically do you see the Finance Board ruling to allowing 
member banks to become members in adjoining FHLBank districts?

A.2. The Finance Board is actively addressing this issue. In 
September 2001, the Finance Board issued a request for comments 
to address the dramatic changes taking place in financial 
markets and the membership of the FHLBanks. The breadth and 
quality of the responses to this request for comments are very 
important because the Finance Board does not yet have all of 
the information and analysis needed to reach a conclusion on 
the full implications of these changes, including the issue of 
multidistrict membership. I will continue to maintain an open 
mind on this issue predicated on the expectation that I will 
receive the necessary legal, financial, and public policy data 
and analysis on which to make a sound decision. I see no reason 
why the Finance Board will not be in a position to resolve 
these issues next spring. Any action the Finance Board may 
consider will, of course, be limited to the authority provided 
in our statute.

RESPONSE TO WRITTEN QUESTIONS OF SENATOR SARBANES FROM FRANZ S. 
                            LEICHTER

Q.1. Several of my colleagues on the Senate Banking Committee 
have expressed concern over the possible adverse impact to the 
Federal Home Loan Bank of New York and its programs resulting 
from the acquisition of The Dime Bank by Washington Mutual. 
There is a concern that the departure of The Dime Bank from the 
Federal Home Loan Bank of New York would have adverse 
consequences for the viability of the Bank and its funding of 
the Affordable Housing Program. It is my understanding, that at 
the last meeting of the Federal Housing Finance Board of 
Directors, the Chairman directed the staff to develop 
alternative solutions that would enable Washington Mutual to 
continue to do business with the Federal Home Loan Bank of New 
York in place of The Dime.
    In order to better understand the implications of such an 
action, I would like to know to what extent would the departure 
of The Dime's business affect the stability and viability of 
the Federal Home Loan Bank of New York?

A.1. Chairman Sarbanes, I would like to thank you for voting to 
confirm my nomination to the Board of Directors of the Federal 
Housing Finance Board (Finance Board). Your help in shepherding 
my nomination through this process has been invaluable and I am 
most grateful.
    In response to your inquiry regarding The Dime Savings 
Bank's (The Dime) acquisition by Washington Mutual, there would 
be some adverse impact on the New York Federal Home Loan Bank 
(NYFHLB) should the business of The Dime leave the New York 
district. An analysis based on the current Dime's activity with 
the NYFHLB indicates that the NYFHLB would lose annually 
approximately $27 million in net income and its assets would be 
reduced by $8 billion. The NYFHLB's Affordable Housing Program 
(AHP) allocation would be reduced by approximately $3 million, 
or 10 percent of the AHP funds available for allocation in 
2001. The Dime represents 11 percent of the total advances of 
the NYFHLB and 10.9 percent of capital. In terms of the AHP, 
The Dime currently has projects totaling approximately $7.5 
million and could be expected to produce similar volume in the 
future. While this AHP amount is not a huge share of total AHP 
projects at the New York Bank, it does represent a sizable 
investment of 1,479 units--vital housing needed in this period 
of economic difficulty in New York.
    Another issue for the Finance Board to consider if The 
Dime's activities were transferred to the San Francisco Federal 
Home Loan Bank (SFFHLB), where Washington Mutual is a member, 
is that it would increase Washington Mutual's advances in the 
SFFHLB to $115 billion, 48 percent of the SFFHLB's total 
advances.
    The NYFHLB has asked that a waiver be granted permitting 
Washington Mutual to continue with the activities of The Dime 
even though it is a member of the SFFHLB. This raises the issue 
of multidistrict membership. As you know, the Finance Board has 
issued a Solicitation of Comments dealing with the wide variety 
of complex issues surrounding multidistrict membership.
    In resolving the multidistrict membership issue, my goal is 
to first ensure the safety and soundness of the Federal Home 
Loan Bank System and to maintain its cooperative character. I 
would like to see multidistrict membership resolved in a way 
that ensures the continued viability of the System, treats all 
members fairly but takes into account the differing needs of 
members of various sizes.
    The Finance Board is now considering whether it is 
appropriate to maintain the status quo in the NYFHLB by 
permitting The Dime activity to be continued by Washington 
Mutual while the Finance Board acts on a system-wide resolution 
of the multidistrict membership issue. The Finance Board must 
determine whether the immediate termination of the business 
relationship between The Dime and the NYFHLB upon the merger 
with Washington Mutual could prove to be an unnecessary 
disruption in the business operations of the NYFHLB if the 
Finance Board ultimately determines that an institution may be 
admitted to membership in more than one FHLBank. In making this 
decision, we are considering the views of all interested 
parties and maintaining close communications with Members of 
Congress and your staff.
    I look forward to working with you on this and other issues 
facing the Federal Home Loan Bank System in the foreseeable 
future. If you have any questions, please contact me.

 RESPONSE TO WRITTEN QUESTIONS OF SENATOR BENNETT AND SENATOR 
                  CRAPO FROM FRANZ S. LEICHTER

    Senator Bennett and Senator Crapo, I would like to express 
my gratitude for your consideration of my nomination for 
Director of the Federal Housing Finance Board. I offer the 
following response to your follow-up questions:
    Capital. The Federal Home Loan Banks submitted final 
capital plans in October 2001. Prior to the submission of those 
final plans, the Finance Board gave the Banks feedback on their 
draft capital plans. Accordingly, much progress has already 
been made in reviewing the capital plans of the Federal Home 
Loan Banks.
    If confirmed, I would urge the Federal Housing Finance 
Board to move expeditiously to approve the capital plans. 
Throughout this approval process, I have sought to ensure the 
safety and soundness of the Federal Home Loan Bank System. This 
involves a complex analysis of both policy and technical 
issues. In addition, we must work toward commonality among the 
plans, to make sure that no one Federal Home Loan Bank has the 
advantage over another.
    Multiple-District Membership. The issue of the 
multidistrict membership for members of the Federal Home Loan 
Bank System poses a great challenge to the System. In 
September, the Finance Board issued a Solicitation of Comments 
to address this issue. I have urged an open process with input 
from the Federal Home Loan Banks, its members, community and 
trade groups, as well as Congress. Multidistrict membership 
requires the consideration of numerous legal and policy issues. 
Upon confirmation, I would seek a solution that preserves the 
safety and soundness and the cooperative nature of the System. 
It is my hope that this issue will be dealt with expeditiously.
    Again, I would like to thank you for the confirmation 
hearing graciously afforded to me last week. I look forward to 
working with you on capital and multidistrict membership, as 
well as other important issues facing the Federal Home Loan 
Bank System. If you have any further questions, please feel 
free to contact me.

RESPONSE TO WRITTEN QUESTIONS OF SENATOR SARBANES FROM JOHN T. 
                             KORSMO

Q.1. Several of my colleagues on the Senate Banking Committee 
have expressed concern over the possible adverse impact to the 
Federal Home Loan Bank of New York and its programs resulting 
from the acquisition of The Dime Bank by Washington Mutual. 
There is a concern that the departure of The Dime from the 
Federal Home Loan Bank of New York would have adverse 
consequences for the viability of the Bank and its funding of 
the Affordable Housing Program. It is my understanding, that at 
the last meeting of the Federal Housing Finance Board of 
Directors, the Chairman directed the staff to develop 
alternative solutions that would enable Washington Mutual to 
continue to do business with the Federal Home Loan Bank of New 
York in place of The Dime.
    In order to better understand the implications of such an 
action, I would like to know to what extent would the departure 
of The Dime's business affect the stability and viability of 
the Federal Home Loan Bank of New York? How would the departure 
of The Dime affect the Affordable Housing Program at the 
Federal Home Loan Bank of New York?

A.1. As I have only recently been confirmed to become a 
Director of the Federal Housing Finance Board, I have not had 
an opportunity to fully explore the extent of the effect on the 
Federal Home Loan Bank of New York (FHLBNY) of the departure 
from membership of The Dime Savings Bank of New York. It is my 
understanding, however, based on information provided by 
Finance Board staff, that the loss of The Dime Bank would, to 
some extent, have a negative impact on FHLBNY's book of 
business and operating income and diminish the resources 
available for FHLBNY's Affordable Housing Program (AHP).
    According to the Finance Board staff, as of November 30, 
2001, The Dime held 11.7 percent of the total outstanding 
advances of the FHLBNY ($6.698 billion out of $57.190 billion). 
In addition, The Dime holds 11.1 percent of FHLBNY's capital 
stock ($404 million out of a total of $3.644 billion). The 
reduction in revenue and income that would result from the 
withdrawal of The Dime's capital stock is, of course, 
proportional to The Dime's share of the total. While I believe 
it would be too strong a statement to suggest that these 
reductions would ``affect the stability and viability of the 
Federal Home Loan Bank of New York,'' I think there is little 
question there would be an adverse effect on the Bank's 
Affordable Housing Program. Given this year's estimated AHP 
set-aside of $30.3 million, the reduction in AHP funds in the 
first year without The Dime would be $3.37 million, again using 
estimates provided by the Finance Board staff. Because each 
dollar of AHP ``seed'' money is leveraged at a ratio of around 
16 to 1, that $3.37 million may, in reality, translate to a 
potential loss of approximately $50 million in development 
funds. Subsequent years' AHP amounts would also be reduced 
proportionately. Given the competitive nature of the AHP 
process and the large number of applicants, this year as in the 
past, The Dime is not currently likely to sponsor winning AHP 
projects that claim 11 percent of total AHP funds. The loss of 
the funding generated by The Dime's business, however, would 
have a negative impact on other FHLBNY member lenders by 
reducing the pool of already-scarce funding available for 
community investment and affordable housing in the New York / 
New Jersey region, and, in the wake of the September 11 
attacks, the need for these subsidies may be even greater than 
in more normal years.
    Loss of The Dime's activity has an additional impact on the 
remaining member lenders of FHLBNY. Given the cooperative 
nature of the Federal Home Loan Bank System, participation in 
the System by large members, including The Dime, helps reduce 
the cost of products and services made available to all Federal 
Home Loan Bank members, including the smallest members. This 
allows members to better serve the financial needs of their 
communities with lower-cost products. The large-volume FHLBank 
customers carry more of the overhead and contribute more to the 
bottom line than some of the smaller members and, in so doing, 
help produce more reasonable dividends on the member lenders' 
capital investment and make liquidity, lower-cost funding, and 
technical assistance more readily available to all FHLBank 
members.
    Financial services consolidation is likely to continue, 
and, as it does, we will be required of necessity to consider 
its impact on the Federal Home Loan Bank System. For that 
reason, the Federal Housing Finance Board on September 26, 
2001, approved a Notice and Solicitation of Comments 
specifically seeking to identify the issues surrounding 
multiple FHLBank membership and the implications of such 
membership on the System as a whole. The notice solicits public 
comment on a series of policy questions relating to whether a 
single financial institution should be permitted to become a 
member concurrently of more than one FHLBank, with particular 
attention given to the situation in which a member of one 
FHLBank acquires or merges with a member institution in a 
different FHLBank district.
    The assumption at this point is that Washington Mutual's 
acquisition of The Dime will be completed before the Federal 
Housing Finance Board has had an opportunity to review the 
results of the solicitation for public comment and, if needed, 
to promulgate appropriate regulations. (The comment period, in 
fact, has recently been extended until March 4, 2002.) In 
anticipation of a near-term closing of the Washington Mutual-
Dime deal, Senators Schumer and Clinton, of New York, and 
Senators Toricelli and Corzine, of New Jersey, have in a letter 
requested that the Federal Housing Finance Board conditionally 
``approve individual applications (such as FHLBNY's waiver 
request) on one track and on another track thoughtfully draft 
and implement the regulations necessary to maintain an 
efficient and balanced FHLBank System.''
    The management and staff of the Federal Home Loan Bank of 
New York are to be commended, not only for the successful 
evacuation of their facility on September 11 without any loss 
of life, but also for the speed and efficiency with which they 
were back up and running, despite the complete destruction of 
their headquarters and the inconvenience of operating from 
temporary quarters. But the reality is that the full effect of 
the attack on the operation of the Bank and on the economy of 
the region is yet to be fully felt and measured. What is clear 
even from the fragmentary data is that the area has taken a 
terrible ``hit,'' and perhaps thousands of jobs have been lost. 
Given the surrounding circumstances and the timing of the 
Washington Mutual-Dime transaction, I believe that the request 
of the FHLBank of New York for some form of ``status quo'' 
relief, narrow in scope, limited in time, and consistent with 
the need not to prejudice or impair the full and careful review 
of the underlying issue of multidistrict membership, should be 
considered. Action aimed at holding the FHLBank of New York's 
largest customer ``in place'' while the Federal Housing Finance 
Board addresses the multidistrict membership issue does not 
strike me as unreasonable, particularly when we recognize the 
added imperative of providing the New York bank a measure of 
stability and continuity at a time of extraordinary stress on 
the New York / New Jersey regional economy. As has been 
suggested by the four New York and New Jersey Senators, we 
should not fail to acknowledge the value to the morale of the 
region that even such a limited show of support by a Federal 
agency could provide.

 RESPONSE TO WRITTEN QUESTIONS OF SENATOR BENNETT AND SENATOR 
                   CRAPO FROM JOHN T. KORSMO

Q.1. Although the Finance Board has complied with the Gramm-
Leach-Bliley Act of 1999 and capital plans have been submitted 
by the twelve Federal Home Loan Banks, there is concern the 
Finance Board may not act to approve these new capital plans 
for some time. In fact, some industry representatives claim the 
Finance Board has stated it may be until next spring until 
capital plans are approved. It is very important to approve the 
capital plans soon to assure a permanent capital base that is 
stable and will enhance safety and soundness for the System. 
When can you estimate that the Finance Board will be starting 
to approve the capital plans and will they approve all the 
plans simultaneously or on an individual basis?

A.1. As a nonincumbent nominee to the Federal Housing Finance 
Board, I have not been involved to date, of course, in the 
Board's capital plan review process. I am aware, however, that 
the Finance Board worked closely with the Federal Home Loan 
Banks throughout the period of capital plan development and, as 
a result, the Finance Board staff does not anticipate any major 
problems in approving the plans as submitted. My assumption is 
that, once it is assured that the plans meet the requirements 
of the capital rule and, taken together, do not adversely 
affect the safety and soundness of the Federal Home Loan Bank 
System as a whole, the Finance Board will act expeditiously to 
approve the individual plans. I can assure you that, if 
confirmed, that will be my intention.

Q.2. As consolidation of the financial arena continues we will 
continue to see merging across FHLBank districts. As we know 
the financial world is changing and the System itself rests on 
the ability of the Finance Board to change with the times. 
Rules and regulations restricting membership when financial 
institutions merge from neighboring districts are outdated and 
are hampering the ability of the FHLBank System to adapt to the 
times and market fluctuations. When do you see the Finance 
Board addressing the multidistrict membership issue and 
specifically do you see the Finance Board ruling to allow 
member banks to become members in adjoining FHLBank districts?

A.2. As you know, the Finance Board has issued a Notice and 
Solicitation of Comments on the question of multiple Federal 
Home Loan Bank memberships. The solicitation seeks comments on 
the implications for the Federal Home Loan Bank System of 
precisely the type of structural changes occurring in its 
membership base that you cite. Comments are due by January 2, 
2002. I believe the issue is broader, however, than simply 
allowing member banks to become members in adjoining Federal 
Home Loan Bank districts. I appreciated Senator Gramm's remarks 
at the November 15 hearing for Finance Board nominees when he 
said, ``I think it is time for a comprehensive review, and I 
would just like to ask each of you when you are confirmed to 
sit down and look at the mission of this agency.'' It thus 
appears that consideration of the multiple membership question, 
by affording the Finance Board the opportunity to conduct a 
comprehensive review of its form and function, could not have 
come at a more opportune time. I have not prejudged the 
multiple district membership issue. There may be a number of 
methods, for example, by which changes in the membership 
structure of individual banks can be accommodated without 
jeopardizing either their safety and soundness or their 
participation levels in their affordable housing programs. Once 
all the comments are in and the data has been carefully 
evaluated, however, I believe the Finance Board, working with 
members of the Congress, should, again, move expeditiously to 
answer the policy questions raised by changes in the nature and 
structure of the Nation's financial markets. If confirmed, I 
promise to do just that.
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