Feb 07 2004

SPEECH TO THE AMERICAN BANKERS ASSOCIATION’S LEGISLATIVE LIAISON ADVISORY COMMITTEE

Good morning. Thank you for the invitation to speak today. I welcome this opportunity to share with you the priorities of the Banking Committee for the second session of the 108th Congress. Particularly this year, the Committee’s agenda and the overall health of our national economy are closely intertwined. The issues the Committee will consider will affect tens of millions of investors and the continued strength of our housing market. They also blend seamlessly into what has become the overarching theme of my tenure as Chairman of the Banking Committee: restoring the confidence of investors in our capital markets. Today, I would like to speak specifically of the Committee’s efforts to improve the regulation of our housing government sponsored enterprises. I will also touch upon another top priority, the Committee’s review of abuses in the mutual fund industry. First, however, I would like to review some of last year’s accomplishments.

It was a very busy year on the Committee, and we managed to successfully address the key priorities that loomed as we began the session. We quickly confirmed a new Chairman of the Securities and Exchange Commission, and held hearings on several initiatives, including internet gambling and comprehensive deposit insurance reform. The Committee remained active in its oversight responsibilities, with hearings on the so-called Global settlement, the state of the securities industry, a review of the Basel Capital Accords, the implementation of Sarbanes-Oxley and improving corporate governance at the New York Stock Exchange. A number of bills that were reported from Committee were enacted into law, including the Check-21 Act. This legislation creates a framework for electronic check truncation and should greatly simplify the check clearing process for our nation’s financial institutions. I am particularly proud of the Committee’s work on the Fair Credit Reporting Act. The deliberative process worked as it should, resulting in a bill that was voted unanimously out of the Committee and ultimately passed the Senate with 98 votes. The FACT Act struck a balance between consumer protection and the operational needs of a strong national credit granting system. I would be remiss if I did not take this opportunity to acknowledge the insight and contributions of Sen. Sarbanes on the Fair Credit legislation and all of our work over the course of the year.

Looking forward, it promises to be an interesting and active year, both in the political arena and on the legislative front. With the pending Presidential and Congressional elections in November, it will be critical that the Committee complete its work as early in the year as possible, before the inevitable adjournment for conventions and campaigning. As a result of this, the Committee’s schedule is front loaded, to accommodate early legislative action on critical reauthorizations and extensions, including transit, which the Committee marked up this week, and flood insurance. We will continue our comprehensive series of hearings on terror finance, continuing our examination of every aspect of the global fight to starve terrorists of their funding. We will maintain our oversight responsibilities, with separate hearings on the state of the banking industry, Gramm-Leach-Bliley and Sarbanes-Oxley. We will hold our traditional semi-annual hearings on monetary policy, featuring testimony from Chairman Greenspan. We must also move several of the President’s nominees, including Alfonso Jackson, the nominee to be the new Secretary for the Department of Housing and Urban Development. Needless to say, it will again be a full agenda.

There are obviously two issues that will receive a great deal of attention from the Committee: the creation of a new and credible regulator for the housing GSEs, and the examination of abuses in the mutual fund industry. The Banking Committee held hearings on both of these issues at the end of last year, and our work is now focused on taking the incumbent action. It is clear that a threshold has been breached on both of these fronts, and this coming year provides Congress with a unique opportunity to heighten the level of protection to investors and the U.S. taxpayer by acting in these areas that are within the jurisdiction of the Banking Committee.

I want to be clear today about one thing today: I support the housing GSEs’ mission. They play a vital role in expanding homeownership. Critics argue that the GSEs enjoy an unfair advantage in the marketplace. Many of these same critics hope to limit their growth and unduly restrict GSE activities. That is certainly not my intent. We cannot, however, ignore the events of last year. The accounting irregularities at Freddie and Fannie and the subsequent fallout from the events of last year has made one thing perfectly clear: OFHEO is not equipped to properly supervise the GSEs. I do not mean to slight OFHEO’s personnel. The agency was, in many regards, designed to fail in its mission. We cannot tolerate inadequate and ineffective regulation of entities as important to the U. S. home mortgage market as Fannie Mae and Freddie Mac. That is why I have announced my intention to move legislation to create a strong, independent regulator for both Fannie Mae and Freddie Mac, as well as the Federal Home Loan Banks. It is my intention to mark-up this legislation during the month of March. Clearly, this will require cooperation and compromise across the Committee. It is my hope to achieve this kind of consensus, through an open and inclusive process.

Over the past year, I have talked at length about establishing a new regulator that has the independence, strength and credibility to carry out its mandate. These characteristics mean different things to different people when they are put into practical application.

Independence means that the new regulator should be able to operate with a clear focus on its mandate, free of any political influence. A strong regulator must possess the supervisory and enforcement powers available to other safety and soundness regulators. I believe that this could be best accomplished by creating a stand-alone regulator outside of Treasury and HUD.

This regulator should have jurisdiction over safety and soundness and the housing mission. This new regulator should have the power to quickly and forcefully remedy any problems that are detected. Such a structure would provide the independence and regulatory unity missing at OFHEO.

Authority to set appropriate capital levels is an essential safety-and-soundness tool. The new regulator should possess the necessary flexibility to adjust both minimum and risk-based capital standards. Bank regulators have discretion in establishing both the statutory minimum standard and the risk-based capital standards, and I see no compelling reason for the new regulator not to have the same authority.

Program review has also been the focus of attention. I appreciate that many critics of the GSEs focus on stringent program review as a means to address competitive concerns. As policymakers, we must take a broader view of program authority oversight, with the goal of striking a balance between diligence and regulatory micro-management. This is no easy matter. Knowledge is power, and a strong regulator must understand the business model that it is charged with overseeing. I strongly believe that there must be freer flow of information between the GSEs and their regulator, and that program authority oversight must be taken seriously. These changes would lead to the credibility that has been lacking at OFHEO. Our goal is to create an independent and expert regulator for the GSEs, and making these necessary reforms will produce regulatory credibility that will ultimately benefit the government sponsored enterprises.

I would also like to briefly touch on the Committee’s work to curb abuses in the mutual fund industry. For close to one hundred million Americans, mutual funds provide an opportunity to participate in the stock market. These funds are essential components of financial security and retirement planning. Recent revelations of market timing, late trading and exorbitant management fees have led to an erosion in the trust that investors have naturally given their mutual fund operators. These practices in a defined contributions world seem to have permeated a significant part of the industry. The current state of affairs is unacceptable, and the Banking Committee will be at the forefront of finding a remedy. We will continue our series of hearings regarding the industry to determine what course of action is necessary to ensure that mutual funds are conforming to the highest level of integrity. The SEC has already issued preliminary rules designed to address many of the abuses we have observed. It is my hope that the Committee’s deliberations will be informed by these regulatory and legislative initiatives, as we consider whether a legislative remedy is necessary.

I feel fortunate to lend my experience and expertise to the broad array of issues that are pending before the Committee. We have set forth an aggressive agenda, particularly for an election year. I often say that my overriding philosophy is to first, do no harm. But where others may do harm, then you must take action. This year I believe we have the opportunity to act strongly in a number of areas, and it is incumbent upon us to make every effort to do so. Thank you for the opportunity to be here, and I would be happy to entertain a few questions.