PARLIAMENTARY INQUIRY -- (House of Representatives - May 17, 2007)
BREAK IN TRANSCRIPT
Mr. BAKER. Mr. Chairman, I move to strike the last word.
Mr. Chairman, reluctantly, I must speak with concern about the gentleman's underlying proposed amendment. There are more than sufficient reasons for me to express these concerns in my opinion.
Going back briefly into the record of the difficulties of Fannie Mae and Freddie Mac of their derivatives portfolio, I bring to the House's attention this OFHEO special report issued in 2003 in which they determined that senior management and the board were quite aware that the skills and systems in corporate accounting were at the least challenged, and that the derivatives group lacked sufficient knowledge and training to administer the risk.
Nonetheless, they chose to move forward with an approach to FAS 133 hedging that was complicated requiring huge volume of monthly accounting events as hedges were designated, and chose to structure some very complicated securitization transactions without proper guidance.
In looking at the annual shareholder report, under their derivatives disclosure, they state: ``We principally used the following types of derivatives: Euro Interbank offered rate interest rate swaps; LIBOR based options including swaptions; LIBOR exchange traded futures and foreign currency swaps.
If we go further and look to the counterparties with which the enterprises now must engage hedging strategies, we find that Deutsche Bank holds $38.952 billion of Freddie's; BNP Paribas, $28.156 billion; Barclays, $22 billion; Dresdner Bank, $4 billion; and please excuse me because my German is poor, Kreditanstalt fur Wiederaufbau holds $2.5 billion.
Now in understanding why we should have concern about the restraint of a regulator's authority to analyze the portfolio, the underlying safety and soundness conditions, and the elements of world economy that surround their hedging strategies, one only has to remember for a short moment the days surrounding LTCM when there was a Russian currency liquidity crisis, and people who had no expectation across several different currency transactions and swaps, were called upon to liquidate their positions and make cash available and were unable to do so.
It led the Federal Reserve to meet an emergency session in the New York Fed office, and they were surprised to see who was sitting around the table holding these positions, including many commercial banks of whom they had no knowledge were participants.
Let me say it this way, if you don't care about any of that, of our insured depository institutions in this country, almost 8,000, of the tier one capital requirement, that is money you have to have by law in your sock drawer. That says if it rains, you have money to mop up the floor. Almost 50 percent of them meet their tier one capital requirement by holding GSE securities. My goodness, if there were to be the slightest of stumble, it goes to the core of our financial depository institution's safety and soundness.
There are foreign central banks invested in Fannies and Freddies, and if you don't care about that, at least think about your pensioners. There are billions of dollars of Fannies and Freddies spread across this economic fabric woven together in an extrinsically complicated matter, and we are going to tell this regulator you can only look through the keyhole, you can't look at the room? It makes no sense.
Now I know I will probably lose on this position. The home builders are a powerful enterprise. But for the record, I want to be loud and clear, this is a mistake.
Mr. Chairman, I would be happy to yield to the gentleman from Massachusetts.
BREAK IN TRANSCRIPT
Mr. BAKER. I certainly appreciate the chairman's comments and his recognition that the posture of the bill, if this amendment is adopted, may need further examination. I look forward to working with him on it.
On a broader matter, let me say as to the construction of the bill generally, the chairman has done an extraordinary job of giving the regulator the powers and tools that he needs, save in this one area. I hope in moving forward, we can construct a box that makes appropriate regulatory sense. The Treasury has expressed these concerns to me tonight, and I am expressing those views on their behalf as well.
BREAK IN TRANSCRIPT