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Hearing of the House Commitee on Financial Services Subject: Recent Events in the Credit and Mortgage Markets

Statement

By:
Date:
Location: Washington, DC

HEARING OF THE HOUSE COMMITTEE ON FINANCIAL SERVICES
SUBJECT: RECENT EVENTS IN THE CREDIT AND MORTGAGE MARKETS AND POSSIBLE IMPLICATIONS FOR U.S. CONSUMERS AND THE GLOBAL ECONOMY

REP. BAKER: Thank you, Mr. Chairman.

Mr. Steel, I read with great interest your narrative about the process which has led us to the current circumstance. And with regard to regulated financial institutions, there appears to have been guidance issued by regulators, and apparent exposure and actual losses are significantly less than other sectors of the market that were nontraditional lenders.

But now we see the contagion moving over to the commercial paper side because of much of the collateral being provided by real property, and we're not sure how far the liquidity squeeze will actually go, thereby denying people access to credit -- not even mortgage borrowers, just traditional businesses. I read with some concern a vacuum cleaner company withdrew its intended plans for a debt issuance because of market conditions, and it's one after another that are now reining in their expected growth plans. And that will have another layer of effect with lack of jobs that would have been created, construction opportunities. And so this will continue to have some effect, unknown to what extent.

My question is: Isn't it generally true that market operatives are going to act on bad information much more quickly than a regulatory regime? And the regulator's role is to observe, watch, advise, but it's to stem the contagion as best we can once it starts, because the guys who are putting their money up and writing the check who are looking across the table at the guy who's selling them the product are the ones to be asking the right questions before the contractual obligation is entered into.

My observation is there's very little I think that the United States Congress could put into effect to keep people from making bad business judgments unless we're going to require federal government representatives on corporate boards. I mean, where are we going with this?

I understand that businesses make money. I also understand businesses lose money. Our job is to just watch and make sure it doesn't get into innocent third parties who had no participation, no judgment, did not condone, have knowledge of, and make sure they're not hurt. But as to gains or losses within the normal world of business, is there a role, in your view, for the federal government to step beyond where we are today?

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REP. BAKER: But in the world of lending, if you wish to come to my institution and you have a poor credit history and you're buying a modest home and I choose to make you the loan and you sign the deal, there's not a governmental role in prohibiting that activity.

Certainly we should make the borrower aware of what he's getting into. We should condone professional conduct by the lender. But we can't prohibit somebody from entering into an ill-advised deal.

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REP. BAKER: Is there anything we could require in the way of disclosure between business participants in the mortgage world because of the significant implications to the broader economy that is now not "discloseable" to the parties to transactions?

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REP. BAKER: Well, I just hope we will use our best financial judgment in moving forward with such recommendations.

I want to join with my colleague from Pennsylvania with regard to the expression of concern about the expansion of responsibility of Fannie and Freddie, and Federal Home Loan Bank, for that matter.

I would add on to his observation about the S&L crisis. The next step in resolution was to create the RTC, the Resolution Trust Corporation, whose mission in life was to take a dollar's worth of assets and sell them for 13 cents. It was a heck of a job. And it only ensured that we had inordinately larger taxpayer losses than we would have had had we used -- I would call common sense asset disposition methodologies.

And this is bad stuff. People are losing money. Homeowners will be denied access to credit. Businesses are going to be adversely impacted. And I think it is a business lesson learned that when you go too far out on the risk curve chasing rate of return, there are consequences. And unfortunately, I think that's what this episode is teaching us.

All right, one last thing. From the early identification of defaults -- which I think you alluded in your testimony was October, November of last year -- until the time the broad market liquidity crunch occurred, how quickly did one follow the other?


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