Panel II of a Hearing of the Capital Markets Subcommittee of the House Committee on Financial Services - The OFHEO Report

Federal News Service October 6, 2004 Wednesday

HEADLINE: PANEL II OF A HEARING OF THE CAPITAL MARKETS SUBCOMMITTEE OF THE HOUSE COMMITTEE ON FINANCIAL SERVICES SUBJECT: THE OFHEO REPORT: ALLEGATIONS OF ACCOUNTING AND MANAGEMENT FAILURE AT FANNIE MAE

CHAIRED BY: REPRESENTATIVE RICHARD H. BAKER (R-LA)

WITNESS: FRANKLIN D. RAINES, CHAIRMAN AND CHIEF EXECUTIVE OFFICER, FANNIE MAE; JIM HOWARD, EXECUTIVE VICE PRESIDENT AND CHIEF FINANCIAL OFFICER, FANNIE MAE

BODY:

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REP. CLAY: Thank you, Mr. Chairman, and thank you, Mr. Raines, and Mr. Howard, for being here.

Mr. Raines, in May of this year Dow Jones International News reported that Senator Kit Bond, Republican from Missouri, was so critical of OFHEO's leaks to the Wall Street Journal, that he asked HUD's inspector general to examine OFHEO's practice of handling confidential information with the media. This morning I asked Mr. Falcon questions, such as, Why didn't the examiners discuss preliminary concern of possible findings with Fannie Mae? Why was Fannie Mae not provided a draft report, and why did Fannie Mae not have the opportunity to respond to findings? I question why the process for handling these findings was altered and done different for Fannie Mae. I find this to be inconsistent and a rush to judgment. In informal conversations with executives from Wall Street and individual large brokerage houses I get the feeling that the markets are not worried about the safety and soundness of Fannie Mae as OFHEO says that it is, but of course the markets are not political. I do not see due process being carried out with respect to Fannie Mae. Do you have an opinion on this, Mr. Raines?

MR. RAINES: Well, Mr. Clay, as I testified, we're a regulated company, we recognize we're a regulated company, and we everything we can to work cooperatively with our regulator. And this-and we will continue to do that regardless of what has happened with regard to this special examination. They have a job to do, we have a job to do. By the same token, I don't believe that because we're a corporation that we're not due due process, and I think we have a long tradition in this country of providing due process, even to people who have done the most heinous things. They've been accorded due process. And that's all we've really asked for thus far, is give us the opportunity to state our case, and let's take these issues to someone who can resolve them. There have been many issues like this resolved by other regulators, banking regulators, without newspaper headlines. The issues that relate to FAS 91 and 133 we can discuss forever, but the SEC is going to decide. And in my view there was no reason the issues couldn't have just been taken directly to the SEC before any examination was completed, and just ask them what's the answer-then we wouldn't be having a debate here about whether or not regulations embodied in this book is-you know, the regulation that has 172 interpretations that have come out since it was-and we wouldn't be having that debate if we had done the simple step of going to the SEC, which we would have joined in and said, What's the answer? Then we would have all known what to do going forward.

REP. CLAY: I-oh, excuse me-I know that Fannie Mae has agreed to increase in capital. And how much in dollar is that increase?

MR. RAINES: We don't have an exact estimate, but if you look back at the most recent periods, it would require something in excess of $3 billion.

REP. CLAY: I commend the company for this, and for agreeing to other changes that will make for better transparency. Nevertheless, how would this almost $3 billion have been used were it not required for capital? I mean, will the housing mission be affected adversely by this increase, and will it help the housing mission?

MR. RAINES: Congressman, the honest answer is I don't know yet. We have 45 days to come up with a capital plan, but we don't have a lot of choices. And it could require us to reduce our activities, because we have only 270 days to come up with $300 billion. And that's just one of the issues we're going to have to struggle through. So it is possible it could require us to reduce our market activities to achieve the goal.

REP. CLAY: I thank you for your response. Mr. Chairman, that's all for me. I yield the balance.

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