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79–899 PDF 2002

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

(

COMMITTEE ON BANKING, HOUSING, AND URBAN AFFAIRS

PAUL S. SARBANES, Maryland, Chairman

CHRISTOPHER J. DODD, Connecticut

TIM JOHNSON, South Dakota

JACK REED, Rhode Island

CHARLES E. SCHUMER, New York

EVAN BAYH, Indiana

ZELL MILLER, Georgia

THOMAS R. CARPER, Delaware

DEBBIE STABENOW, Michigan

JON S. CORZINE, New Jersey

DANIEL K. AKAKA, Hawaii

PHIL GRAMM, Texas

RICHARD C. SHELBY, Alabama

ROBERT F. BENNETT, Utah

WAYNE ALLARD, Colorado

MICHAEL B. ENZI, Wyoming

CHUCK HAGEL, Nebraska

RICK SANTORUM, Pennsylvania

JIM BUNNING, Kentucky

MIKE CRAPO, Idaho

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)

(III)

CONTENTS

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

Page

IV

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

(1)

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

2

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.

3

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.

4

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

5

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.

6

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.

7

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 wellbeing 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 longterm 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 shortterm 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

8

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.

9

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

71⁄2 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?

10

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

11

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 dayto-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.

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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

13

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.

14

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

15

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?

16

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.

17

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.

18

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

601⁄2 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

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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 writeoff 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

20

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.

21

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 longterm 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:]

22

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 supVerDate 11-MAY-2000 14:37 Jun 24, 2002 Jkt 000000 PO 00000 Frm 00026 Fmt 6621 Sfmt 6621 79899.TXT SBANK4 PsN: SBANK4
23

port 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.

24

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(45)

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

46

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.

47

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.

48

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 priVerDate 11-MAY-2000 14:37 Jun 24, 2002 Jkt 000000 PO 00000 Frm 00052 Fmt 6601 Sfmt 6601 79899.TXT SBANK4 PsN: SBANK4
49

mary 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.

50

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

51

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

52

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 interagency 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

53

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.

54

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:]

55

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.

56

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.

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(73)

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.

74

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 orVerDate 11-MAY-2000 14:37 Jun 24, 2002 Jkt 000000 PO 00000 Frm 00078 Fmt 6601 Sfmt 6601 79899.TXT SBANK4 PsN: SBANK4
75

ganizations 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

76

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 conVerDate 11-MAY-2000 14:37 Jun 24, 2002 Jkt 000000 PO 00000 Frm 00080 Fmt 6601 Sfmt 6601 79899.TXT SBANK4 PsN: SBANK4
77

tinue 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

78

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.

79

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,

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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.

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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

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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

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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

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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

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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 $41⁄2 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

86

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

87

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.

88

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.

89

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.

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[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 AmerVerDate 11-MAY-2000 14:37 Jun 24, 2002 Jkt 000000 PO 00000 Frm 00094 Fmt 6601 Sfmt 6601 79899.TXT SBANK4 PsN: SBANK4
91

ican 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.

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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, socalled 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.

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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.

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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.

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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,

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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

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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:]

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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,

Operacio ́n 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.

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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.

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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.

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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.

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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

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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 shortterm 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.

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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

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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 postcompletion 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

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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

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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

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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

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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

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the FHLBNY ($6.698 billion out of $57.190 billion). In addition,

The Dime holds 11.1 percent of FHLBNY’s capital stock ($404 mil- lion 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

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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

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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.