<html><body><P align=center><STRONG>Receivership Powers: What Are They and Should Fannie and Freddie's Regulator Have Them?</STRONG></P> <P align=center>February 3, 2005</P> <P align=center>Unedited transcript prepared from a taped recording</P> <P> <TABLE width="100%" border=0> <TBODY> <TR> <TD vAlign=top align=left width="20%"> <P>1:45 p.m.</P></TD> <TD vAlign=top align=left width="80%" colSpan=2> <P>Registration</P></TD></TR> <TR> <TD vAlign=top align=left width="20%"> <P>2:00</P></TD> <TD vAlign=top align=left width="20%"> <P><I>Introduction:</I></P></TD> <TD vAlign=top align=left width="60%"> <P>Peter J. Wallison, AEI</P></TD></TR> <TR> <TD vAlign=top align=left width="20%"> <P>2:15</P></TD> <TD vAlign=top align=left width="20%"> <P><I>Presenters:</I></P></TD> <TD vAlign=top align=left width="60%"> <P>Richard S. Carnell, Fordham Law School</P></TD></TR> <TR> <TD vAlign=top align=left width="20%"> <P>&nbsp;</P></TD> <TD vAlign=top align=left width="20%"> <P>&nbsp;</P></TD> <TD vAlign=top align=left width="60%"> <P>Robert Eisenbeis,&nbsp;Federal Reserve Bank of Atlanta</P></TD></TR> <TR> <TD vAlign=top align=left width="20%"> <P>&nbsp;</P></TD> <TD vAlign=top align=left width="20%"> <P><I>Discussants:</I></P></TD> <TD vAlign=top align=left width="60%"> <P>Michael DeStefano, Standard &amp; Poor's</P></TD></TR> <TR> <TD vAlign=top align=left width="20%"> <P>&nbsp;</P></TD> <TD vAlign=top align=left width="20%"> <P>&nbsp;</P></TD> <TD vAlign=top align=left width="60%"> <P>Patrick Lawler, Office of Federal Housing Enterprise Oversight</P></TD></TR> <TR> <TD vAlign=top align=left width="20%"> <P>&nbsp;</P></TD> <TD vAlign=top align=left width="20%"> <P><I>Moderator:</I></P></TD> <TD vAlign=top align=left width="60%"> <P>Peter J. Wallison</P></TD></TR> <TR> <TD vAlign=top align=left width="20%"> <P>4:00</P></TD> <TD vAlign=top align=left width="80%" colSpan=2> <P>Adjournment</P></TD></TR></TBODY></TABLE></P> <P><STRONG>Proceedings:</STRONG><BR>MR. WALLISON:&nbsp; I'm Peter Wallison.&nbsp; I'm a Resident Fellow here at the American Enterprise Institute, and I would like to thank all of you for coming.</P> <P>I can see the topic of today's discussion is one of interest in the Washington community, and I would have expected nothing else.&nbsp; I'll introduce the panel; introduce the subject a little bit.&nbsp; And we have an unusual statement by someone who's not on today's list, and then we'll proceed with the conference.</P> <P>When the Senate Banking Committee attempted last year to strengthen the oversight of Fannie and Freddie, no issue was more contentious than whether the GSEs new regulator should have receivership powers.&nbsp; Although, the Shelby Bill contained provisions that would have allowed the regulator to adjust the GSEs capital and their non-mission activities--and those could be limited to some degree--both matters which could have affected their earnings very substantially, the companies chose to fight most tenaciously on the receivership issue.</P> <P>Ultimately, they were successful in limiting receivership powers, and it was on this basis that the Administration finally opposed a bill that it had worked very hard to move through committee.</P> <P>There is no Senate Committee bill yet this year.&nbsp; But three members of the Banking Committee--Senators Hagel, Sununu, and Dole--have co-sponsored a new bill for tighter regulation of Fannie and Freddie, as well as the Federal Home Loan banks, and that bill empowers the new regulator to act as a receiver.&nbsp; Senator Shelby and Congressmen Oxley and Baker--two of the principal people in the House concerned with this matter--have all indicated that they will have receivership powers in their legislation, and they think it's necessary in order to appropriately tighten the regulation of GSEs.&nbsp; Accordingly, we can expect another major fight over this issue this year.</P> <P>What is receivership and why is it so feared by Fannie and Freddie?&nbsp; In today's conference, we'll review the basic elements of receivership and how they differ from conservatorship, the authority that OFHEO already has.</P> <P>We'll also discuss the principal issues that have to be addressed in framing receivership powers and managing a receivership.&nbsp; These matters are relatively straightforward, but why are Fannie and Freddie so alarmed about receivership?</P> <P>Most observers in Washington think they know the answer.&nbsp; A receiver, as distinguished from a conservator, has the authority to marshal a company's assets, pay off its creditors, and close it down.&nbsp; In other words, if Fannie and Freddie should encounter financial difficulties at some point in the future, their regulator would have the authority to terminate their activities, just as a bank regulator can now close down a failing bank.</P> <P>Without such a mechanism, the thinking goes, they would have to be resolved by Congress itself and that would assure that their creditors are bailed out.&nbsp; This may certainly be true, but there is another way of looking at it.</P> <P>Both the Shelby Bill and the Hagel-Sununu-Dole Bill would allow the receiver to take them over and liquidate them before they become insolvent, much as a bank regulator can take control of and resolve a failing, but insolvent, bank.</P> <P>Now why would the GSE regulator need this power?&nbsp; The obvious answer is similar to the reason bank regulators have this kind of receivership power, and that is continuing to allow the failing GSE to operate would ultimately impose costs on the taxpayers, just as allowing a failing bank to continue in operation, might impose costs on the Deposit Insurance Fund.</P> <P>But there's an obvious conceptual problem here.&nbsp; If, as the Treasury keeps reminding us and as the GSEs' charters state, the government does not stand behind the debt of Fannie and Freddie, why should the receiver worry about protecting the taxpayers?</P> <P>The answer unfortunately is that no one really believes that Congress won't bail out Fannie and Freddie if they get into financial trouble.</P> <P>But if this is true--just as a sidelight--why are Fannie and Freddie opposed to receivership?&nbsp; If, as seems to be signaled by the existence of receivership powers, Congress is likely to bail them out, they should favor receivership.&nbsp; This kind of receivership should give their creditors more confidence rather than less that they will be fully paid.&nbsp; After all, if the government is going to bail out the creditors anyway, all well and good; but if there's not going to be a bail out, they can tell the creditors surely it's better to have a regulator who will stop the losses before the company's assets are worth less than their liabilities.</P> <P>It appears that the Administration and Congress, however, want to give the new regulator receivership powers because they believe that will signal to the market that the government does not stand behind Fannie and Freddie; that he holders of GSE debt actually have some risk of loss if the receiver acts after Fannie or Freddie is actually insolvent, even though logically there is no government interest in invoking receivership unless there is a likelihood that it will actually--that is the government--will actually bail them out.</P> <P>Nevertheless, Fannie and Freddie are acting as if they also believe that the markets will be spooked by receivership powers.</P> <P>But if this is correct, would the existence of receivership powers change the markets' perception?&nbsp; That certainly isn't obvious from past experience.&nbsp; The Farm Credit Administration Board currently has authority to appoint a receiver for Farm Credit Banks, all of which are GSEs, just like Fannie and Freddie, and the government has no liability by statute for their obligations.</P> <P>Yet, the debt of the Farm Credit Banks trades at a rate that is comparable to Fannie and Freddie's debt.&nbsp; In other words, the market is looking through the legalities and the formalisms to something else.&nbsp; In addition and probably even more to the point, the regulator of the Farm Credit System had receivership powers in the 1980s, but the system was still bailed out by Congress, to the tune of $4 billion.</P> <P>Accordingly, if it is the minds of some that simply adopting receivership provisions will make a decisive difference in how the capital markets view Fannie and Freddie, they should think again.</P> <P>While Fannie and Freddie may have chosen to fight on this ground, that does mean that they have correctly assessed whether a receivership provision would adversely affect them.&nbsp; It is all guesswork at this point.</P> <P>My concern is that there will be a huge fight in Congress over the receivership question, and, in the end, receivership will pass.&nbsp; At that point, many people will congratulate themselves thinking that they have achieved some kind of significant separation between the government and the GSEs, but the real effect will be at best minimal and at worst counterproductive.&nbsp; It may only signal to the capital markets that Fannie and Freddie are more likely than ever to be bailed out.</P> <P>If there is a real concern about the risks that Fannie and Freddie are creating for the taxpayers--and I think there should be--the only sensible course is to move toward privatization or to create an environment in which it makes more sense for Fannie and Freddie to give up their government charters than to remain as GSEs.&nbsp; I'm afraid that receivership powers may not be the key to achieving this objective.</P> <P>Now we're going to do something unusual here today, because there has been a development during this day, and I wanted to bring it to your attention, the National Taxpayers Union has assembled a group of 37 taxpayer, consumer, and public interest groups to sign a letter favoring privatization.&nbsp; A copy of that letter I believe is in all of your packets.</P> <P>And I'd like to introduce John who will just speak very briefly.&nbsp; You all know John from the National Taxpayers Union--John Berthoud.&nbsp; And he will just talk about how this letter was developed and then we'll proceed with the panel.&nbsp; John?</P> <P>MR. BERTHOUD:&nbsp; Peter, thank you.&nbsp; Thank you very much.&nbsp; And thank you for the great work that you and AEI are doing on this important issue.</P> <P>As Peter said, I'm John Berthoud, President of the National Taxpayers Union.&nbsp; You should all have in your packets a copy of our Coalition Letter, and Sam, of our offices, has been very kind to pass out press releases.&nbsp; If you don't have either, see either Sam, who's around here somewhere, or myself, and we'd be happy to get them for you.</P> <P>I will not take much time from our program.&nbsp; Just give you a little bit about what our letter is about.</P> <P>Taxpayer groups both and policy groups here and across the country have really, especially in the last year, taken notice of the problems and the threats to taxpayers posed by Fannie and Freddie.&nbsp; And this is a letter today from a very, very broad coalition of taxpayer and policy groups calling on Congress to reform or even better privatize Fannie and Freddie.</P> <P>Let me read a little bit from the letter, which you have--some of the highlights; talk a little bit about our Coalition; and then turn it back to Peter.</P> <P>The letter says:&nbsp;  The past year has offered story after story of financial mismanagement and accounting scandals at the two government-backed lending giants.&nbsp; Of even greater concern to taxpayers, however, is the potential cost if either of these entities faces bankruptcy or default. </P> <P>Now I should note again that this is a letter that you have hopefully in front of you is a Coalition of taxpayer groups, policy groups.&nbsp; There's national groups--Citizens Against Government Waste, the Competitive Enterprise Institute, Consumer Alert, of course, National Taxpayers Union--but also grassroots groups, whose members are going to be dialoguing with elected leaders from their states.&nbsp; We've got groups from 19 different states; from California to New York to Arizonan and others.&nbsp; And their organizations and members are going to be engaged in this as we go along.</P> <P>The letter concludes that in the 1980s, some of us warned about potential problems with America's Savings and Loans.&nbsp;&nbsp; But many Members of Congress chose to simply ignore the situation.&nbsp; The history books, we believe, will record their lack of leadership ended up costing Americans hundreds of billions of dollars.&nbsp;&nbsp; We urge the 109th Congress to act decisively to avert another financial disaster, and we all look forward to working with you in this endeavor.</P> <P>And, again, there should be copies of that letter, copies of the release and NTU is going to be very engaged on this issue, as will these other groups.</P> <P>And we look forward, of course, to working with Peter and Congress as this issue moves forward.</P> <P>And, Peter, again thank you for the couple minutes.</P> <P>MR. WALLISON:&nbsp; Thank you, John.</P> <P>Okay, we'll proceed now with our panel, and I will introduce the two presenters and then after they have made their presentations, we'll have the discussants talk, and I will introduce them at that time.</P> <P>Our first presenter will be Rick Carnell, known probably to all of you.&nbsp; He's been on this panel--these kinds of panels before on GSE subjects.&nbsp; He's an Associate Professor at Fordham University Law School, where he teaches banking law and corporations.&nbsp; After graduating from Yale University and Harvard Law School, he worked for a San Francisco law firm, then for the Federal Reserve Board, then for the Senate Committee on Banking; and helped draft the Financial Institutions Reform, Recovery, and Enforcement Act of 1989, as well some other important legislation.&nbsp; Finally, in government, he served as Assistant Secretary of the Treasury for Financial Institutions between 1993 and 1999.</P> <P>Together with John Macy and Jeff Miller, he is the author of a leading textbook, Banking Law and Regulation, which was published in 2001.</P> <P>Rick will make the first presentation.&nbsp; Then after he does, we are pleased to welcome for the first time to this podium Bob Eisenbeis, who is the Executive Vice President and Director of Research of the Federal Reserve Bank of Atlanta.&nbsp; In addition to advising the bank president on monetary policy and related matters, Bob oversees research, public affairs, and the statistical reports departments of the bank.&nbsp; He also serves as a member of the bank's Management and Discount Committees.</P> <P>So we'll start with Rick.&nbsp; And I should mention as to Rick that in your packets there is a summary of Rick's paper.&nbsp; It happens that the summary of Rick's paper is about as long as Bob's, but you will find that very helpful.&nbsp; But if you want the entire paper, it is going to be on our web site.&nbsp; I'd like to do one more thing before we proceed, and that is introduce Bob's colleagues--Scott Frame and Larry Wall, who worked with him on this paper.&nbsp; They will not be speaking today, although they may be available to answer questions.&nbsp; But I just wanted to put their names in front of you.&nbsp; That's all in your packets.&nbsp; But I'd like to just take a moment to single them out, especially.</P> <P>Scott Frame is a financial economist and associate policy advisor on the financial team in the research department of the Federal Reserve Bank of Atlanta.&nbsp; Prior to joining the bank in 2001, he was a senior financial economist at the Treasury Department.&nbsp; He has published in several journals, including the Journal of Money, Credit, and Banking; the Journal of Economic Literature; and the Journal of Financial Services Research.</P> <P>Larry Wall, another of Bob's colleagues at the bank, is a financial economist and a policy advisor in the research department of the Atlanta bank.&nbsp; He's also an Adjunct Professor of Finance at Emory University.&nbsp; He's published a number of papers in leading financial economics journals and currently serves on the editorial board of the Journal of Banking and Finance, the Journal of Financial Stability, and the Financial Review.</P> <P>I want to welcome all of them here and thank them for the extraordinary work that went into all of their papers.&nbsp; And we'll start with Rick.<BR>PRESENTATION</P> <P>MR. CARNELL:&nbsp; Thank you, Peter.&nbsp; I have been speaking about the need for a GSE receivership mechanism since 1999, when I left the Treasury.&nbsp; And I'm glad to have such eminent company--the Bush Administration, the Federal Reserve, OFHEO, and Peter Wallison--in emphasizing the need for Congress to act on this issue.</P> <P>So since there's a fair amount of common ground in the Atlanta Federal Reserve paper and my own.&nbsp; So what we've done is we've divided it up.&nbsp; And what I'm going to do is I'm going to introduce the problem, explain why the Bankruptcy Code as it now stands does not solve the problem; explain why current law governing Fannie Mae and Freddie Mac doesn't solve the problem; and then, at the appropriate point in the program, tell you how I would solve the problem.</P> <P>Okay, so going to a starting point for the issues here.&nbsp; Investors and other financial market participants believe that the government implicitly backs Fannie Mae and Freddie Mac in the sense that the government would make sure that Fannie and Freddie's creditors got paid.</P> <P>So investors lend Fannie and Freddie and other GSEs trillions of dollars based on that belief, even though the government insists it doesn't guarantee the GSEs.</P> <P>But, in any event, Fannie and Freddie are no more infallible than the rest of us.&nbsp; Even with very smart people and very smart regulators, they can lose money.&nbsp; They can fail.</P> <P>So the question is what safeguards should the government have in place in case worse comes to worst and a GSE falters or fails?</P> <P>So I just want to list some of the issues that the panel will be touching on in the course of the afternoon.&nbsp; Just to sort of lay them out in something of a logical order.</P> <P>Is there any possibility at all that Fannie Mae and Freddie Mac could ever get into financial trouble so serious that the firm would default on its debts?&nbsp; I've already expressed a view on that point.</P> <P>And then another issue:&nbsp; if Fannie and Freddie were in danger of defaulting on their debts, what should the Federal Government do?&nbsp; How seriously would default harm the financial system?&nbsp; How seriously would it harm housing finance?&nbsp; Does current law give GSE regulators adequate tools to resolve the problem or do regulators need additional tools?</P> <P>More broadly, if a GSE were to in danger of defaulting on its debts, what's the best way to deal with the GSE?&nbsp; Should the government let nature take its course?&nbsp; Should it liquidate the firm?&nbsp; Should it try to keep the firm in operation?</P> <P>If the government does keep the firm in operation, should the firm's shareholders retain their ownership interest in the firm, or should the firm's failure extinguish that interest?</P> <P>And then what about different classes of creditors of the firm?&nbsp; Should holders of the firm's subordinated debt lose their interest?&nbsp; After all, they have agreed by contract to stand in line behind the firm's other creditors and to get paid only if the other creditors have been paid in full?</P> <P>And then what about other creditors, like bondholders and counter parties to derivatives contracts?&nbsp; Should we treat them all equally or should one type of creditor be paid before another?</P> <P>So these are examples of the kinds of issues that arise here.&nbsp; And then for those who are not familiar with bank insolvency law, let me just say a word of background about the terms receiver and conservator.</P> <P>The basic distinction is that a conservator operates a firm as a going concern and has no authority to liquidate the firm.&nbsp; A receiver winds up a firm's affairs.&nbsp; Now there's a lot of different ways that a receiver could do that.</P> <P>One way would be to have a straight liquidation of the firm, where you sell off the firm's assets and you use the proceeds to pay creditors.</P> <P>But there are variations on that, and, for example, the FDIC as receiver has power when a bank fails to establish a so-called bridge bank, which will carry on the business of the failed bank.&nbsp; So it's an example of how receivership can be consistent with continuing a firm's business.</P> <P>Okay.&nbsp; So the first major thing I'm going to talk about here is the Bankruptcy Code, and this is part of the larger question about what could and should the government do if Fannie and Freddie were to stumble or fail.</P> <P>Now most businesses can be liquidated or reorganized under the Bankruptcy Code.&nbsp; The Bankruptcy Code is the norm in this country in terms of the legal framework you use to deal with a firm that fails or that is going to fail if something isn't done.</P> <P>So most firms can be liquidated or reorganized under the Bankruptcy Code.&nbsp; With liquidation, you'd sell off the firm's assets and pay creditors, and you pay them in an order of priority established by law.</P> <P>Now reorganizing the firm means that you restructure the firm's finances.&nbsp; So some examples of how you could reorganize a firm would be you stretch out payments on the firm's debt to give the firm some breathing space or you turn some of the debt into equity.&nbsp; So instead of having just debt claims against the firm, the people who used to be the creditors of the firm have a debt claim, but they also have stock in the firm, say.&nbsp; So that--Chapter 11 is the vehicle for reorganizing firms under the Bankruptcy Code.</P> <P>So since bankruptcy is the norm for business firms in this country, the question arises can Fannie Mae or Freddie Mac be liquidated or reorganized under the Bankruptcy Code?</P> <P>Now let me emphasize that the question I'm dealing with at this stage is not what the law should allow, but simply what current law does allow.&nbsp; And I conclude that Fannie and Freddie cannot be liquidated or reorganized under the Bankruptcy Code.&nbsp; This argument is spelled out in full in my paper.&nbsp; But here's a telescoped version of it.</P> <P>The statutory argument is a bit complicated.&nbsp; I'll return to it in a moment, but the basic idea is simple:&nbsp; Fannie Mae and Freddie Mac are federal instrumentalities.&nbsp; And because they're federal instrumentalities they can't be liquidated or reorganized under the Bankruptcy Code.</P> <P>Federal instrumentalities are not part of the government, but they're something the government uses for public purposes.</P> <P>Fannie and Freddie are federal instrumentalities.&nbsp; There are plenty of court decisions saying that.&nbsp; National banks are federal instrumentalities.&nbsp; So are federal credit unions; so are federally chartered thrift institutions.</P> <P>Now here briefly is an explanation, as a statutory matter, of why Fannie or Freddie can't be liquidated or reorganized under the Bankruptcy Code.&nbsp; If they're federal instrumentalities, then the fall within the definition of governmental units in the Bankruptcy Code.&nbsp; If they're governmental units, then they don't count as persons under the code.&nbsp; There is a sort of interesting admission there; isn't it?&nbsp; That a governmental unit is not a person.&nbsp; Okay.&nbsp; But if they're not persons, then they can't be liquidated or reorganized under the Code.</P> <P>So the Bankruptcy Code will not help us because Fannie and Freddie are federal instrumentalities.&nbsp; They can't be the subject of a bankruptcy proceeding.&nbsp; To handle Fannie and Freddie under the Bankruptcy Code, Congress would need to change current law.</P> <P>So then what are we left with in terms of a body of law to deal with Fannie and Freddie if they were to get into serious financial trouble?</P> <P>Well, there is a specialized body of law.&nbsp; The Office of Federal Housing Enterprise Oversight, or OFHEO for short, which regulates Fannie and Freddie, can appoint a conservator under some circumstances.&nbsp; So the conservator, which could be OFHEO itself, would take control of the firm.&nbsp; By law, the conservator has all the powers of the firm's shareholders, directors, and officers, and it has somewhat more.&nbsp; How much more it has than the firm's old management is a question, but their basic powers are the powers that the firm's management had.</P> <P>So think about what a firm's management can and cannot do.&nbsp; A firm can sell more stock, but it can't unilaterally reschedule its debts.&nbsp; For a firm to stretch out payment of its debts, it needs consent from its creditors.</P> <P>Also a firm can't unilaterally turn debt into equity.&nbsp; Again, if you're going to turn debt into stock, you need consent of all the debt holders affected.</P> <P>So, if you then apply the points I've just made in terms of what a firm's management can and cannot do, here's something of what it boils down to.&nbsp; If a GSE has good prospects, good business prospects for the future, then a conservator should be able to recapitalize the firm by selling more stock.&nbsp; But then think about it.&nbsp; If the firm were in good enough shape so it could recapitalize by selling stock, the old management would probably have done that already; right?&nbsp; They would have done it before the firm got down into such a precarious position that OFHEO could appoint a conservator and throw management out.</P> <P>In any event, though a conservator can issue more stock for the firm, a conservator has not statutory authority to turn debt into equity.&nbsp; So that means the conservator can't carry out a reorganization that would create enough equity to make the firm viable.&nbsp; And so if you got a firm and it's low on capital or maybe it has run through all its capital or maybe it's actually insolvent in the sense that its liabilities exceed its assets, at some point, investors are going to balk at lending the firm money without collateral.</P> <P>So to avoid default and failure in those circumstances, a firm will need a miracle or at least the kind of unholy secular magic, known as a congressional bailout.</P> <P>Conservatorship does not provide adequate tools to turn around a firm that's in serious financial trouble.&nbsp; By the time OFHEO could appoint a conservator under current law, it might well be too late for conservatorship to save the firm.</P> <P>Consider the case of a GSE that has suffered a series of major accounting scandals.&nbsp; I am, of course, referring only to a hypothetical GSE.&nbsp; Let us make two assumptions about this firm:&nbsp; first, that the firm's assets equal its liabilities.&nbsp; Specifically, if we took the firm's assets and liabilities and marked them to market value, the assets would exactly equal the liability.&nbsp; So there's no black hole here.&nbsp; In fact, there's no hole at all.&nbsp; The assets are worth as much as the liabilities.</P> <P>The second assumption is that the firm has a good business franchise and excellent prospects for future profits.&nbsp; So, surely, we might think, this firm can sell all the stock it needs to recapitalize.&nbsp; After all, the assets equal the liabilities right now and so if you just put in enough money to recapitalize stock:&nbsp; you buy the stock; you get the whole upside of the firm.&nbsp; That sounds irresistible; right?&nbsp; But not necessarily.</P> <P>And that's because prospective investors in the firm do not have perfect information.&nbsp; We knew that the firm's assets equaled its liabilities because I told you they did.&nbsp; I told you to assume that.</P> <P>But in the real world, financial accounting scandals could leave investors wary about the reliability of a firm's accounting and reporting.&nbsp; Prospective investors couldn't be sure there wasn't a black hole there.&nbsp; So they're going to have to worry that the firm is still overstating its assets and understating its liabilities.&nbsp; So they may refuse to buy stock until they're convinced otherwise, by which time it may be too late.</P> <P>Now consider the difference it would make if OFHEO could appoint a receiver who could carry out a reorganization.&nbsp; The receiver could convert some of the firm's debt into stock.&nbsp; And in the paper that's in your folders, you'll see some numerical examples of such a reorganization, between pages 25 and 26.</P> <P>In the first example, the GSE bond holders would receive a hundred cents on the dollar.&nbsp; They'd receive it mostly in bonds, but one percent of it would be in subordinated debt, and one and a half percent would be in stock.&nbsp; And also in a transaction like this, the receiver might also extend the maturity of the bonds to give the GSE more breathing space until it could win investors' confidence.</P> <P>So with the ability to do a reorganization like this, the GSE could--or more specifically, if the receiver can reorganize the GSE in this manner, the GSE can avoid failure. It could emerge the next business day with a credible capital structure, with an adequate equity cushion, and with a less onerous debt burden.&nbsp; This would be good for financial markets.&nbsp; It would be good for housing finance.&nbsp; And, of course, it would also be good for the taxpayers, 'cause then there would be no need for a congressional bailout.</P> <P>Giving GSE regulators receivership powers to deal with the GSEs' insolvency makes sense, and that's why there are receivership laws for all the other GSEs, but not for Fannie and Freddie.</P> <P>Fannie and Freddie would have you believe that doing the same for them as we already do for the other GSEs would somehow be an act of insanity--something that's so crazy you'd only do it because you hated housing and hated yourself at the same time.&nbsp; They insist that they could never get into serious financial trouble.&nbsp; Then they turn around and tell us that if Congress passes this reform, mortgages will cost more--and mortgages will cost more if you can get one.&nbsp; They tell us 30-year, fixed-rate mortgages may disappear.&nbsp; That's an interesting statement.&nbsp; You can a 30-year, fixed-rate mortgage in the jumbo market right now that Fannie Mae and Freddie Mac cannot even go into.&nbsp; But they're telling us 30-year, fixed-rate mortgages will go the way of the passenger pigeon possibly--if you can get a mortgage at all.</P> <P>And all because of a safeguard enacted to take care of problems that they say can never occur.</P> <P>Isn't this a remarkable set of arguments from the GSEs.&nbsp; See they're used to winning without actually making rigorous arguments.&nbsp; They're used to winning by saying these old arguments about well, if you disagree with us, you must hate housing.&nbsp; And then they pull strings, and then they win.&nbsp; That's what they're used to.</P> <P>So making real arguments and winning a battle of ideas is an unaccustomed thing.&nbsp; I'm sure they'll get better at it with practice.</P> <P>Okay.&nbsp; So should I speak now, Peter, briefly about correcting deficiencies of current law?</P> <P>MR. WALLISON:&nbsp; Yeah, if you can do it three minutes.</P> <P>MR. CARNELL:&nbsp; We'll do it.&nbsp; Okay.</P> <P>So now my Atlanta colleagues are going to speak to you at considerably more length about a solution here.&nbsp; But I'm just going to briefly outline how I would deal with this in general principal, and then I'll also talk about a different approach, which would be dealing with it under the Bankruptcy Code.</P> <P>I think that a GSE insolvency statute should, at a minimum, do six things:&nbsp; first, authorize a GSE's regulator to appoint either a conservator or a receiver through a process that permits timely action the same way as it works with banks.</P> <P>Second, the statute should specify the grounds for receivership and conservatorship.</P> <P>Third, it should afford the GSE a prompt hearing after the conservatorship takes effect.&nbsp; Again, that's exactly the system we have for 10,000 banks in this country right now.</P> <P>Fourth, it should let the receiver establish a bridge institution to carry on the business of the old firm.&nbsp; And it should also let the receiver carry out a reorganization in the way I've outlined, for example, between pages 25 and 26 there.</P> <P>Fifth, it should specify priorities among claims, so we're clear in terms of who gets paid first.</P> <P>And sixth, it should allow the regulator to prescribe implementing regulations.</P> <P>Chairman Shelby's proposal last year--that is the proposal before the Bennett Amendment--did these things in a way that made good sense.&nbsp; And I think that's the best way to approach the problem here.</P> <P>But I do want to acknowledge that there's another approach you could take and that would be dealing with Fannie Mae and Freddie Mac under the Bankruptcy Code.&nbsp; So Congress could make it clear that Fannie and Freddie would be eligible to be the subjects of a bankruptcy case.&nbsp; There would be some issues to decide there, like are we going to follow the usual bankruptcy rule, where creditors of a firm start a case because the firm isn't paying its debts; or should we do it somewhat differently?&nbsp; Should it be only the regulator who could start the case or should it be either regulators or creditors?</P> <P>In any event, I think that as a legal matter, applying the Bankruptcy Code to Fannie Mae and Freddie Mac could work just fine.&nbsp; I have a preference, consistent with the Shelby proposal, for using bank insolvency law, but that preference is largely pragmatic.&nbsp; I think that it's more feasible from a legislative standpoint, and I think it actually would be more workable in practice.</P> <P>On the legislative front, the two banking committees are not necessarily familiar with the Bankruptcy Code; whereas, they do have confidence in the FDIC and some familiarity with the system the FDIC administers.</P> <P>In addition, if the banking committees enacted a GSE insolvency statute, and they wanted to make some changes in it down the road, they have just as much jurisdiction as they do now.&nbsp; Whereas, if you put it into the Bankruptcy Code, the committee jurisdiction could be more complicated.</P> <P>In addition, I think regulatory control over the insolvency regime--that is it would just be the regulator that could start the bankruptcy case--should offer some comfort to skeptical members of Congress.&nbsp; Most importantly, from my standpoint--or at least there are two things that I think are most important here.</P> <P>First, it has advantages from a planning standpoint.&nbsp; Other things being equal, an administrative agency can plan for a one-time mass disaster better than a court can.&nbsp; Courts are okay for planning recurring case load.&nbsp; But here we have a one-time case.&nbsp; I want to note, by the way, that Fannie and Freddie aren't even in the same judicial districts, so it would be different bankruptcy courts that would get cases from one versus the other.&nbsp; A particular bankruptcy judge wouldn't even know in advance that the case would be assigned to him or her.&nbsp; It makes it tough to plan.&nbsp; And I think a court would find if awkward--if people were saying, oh, my goodness, the bankruptcy court is planning for the possible failure of so and so.&nbsp; That's really awkward for a court.</P> <P>Now a second advantage that I see to an administrative--yeah, I'll just--is that the standard for commencing a bankruptcy is that a firm is not paying its debts.&nbsp; And by the time a GSE gets to that point, it's going to be pretty far gone.&nbsp; And it would be better to key receivership to a specified level of capital, so you can intervene at a time when you may not need to do creditor haircuts or where the haircuts can be small.&nbsp; That's good for creditors.&nbsp; Good all the way around.</P> <P>MR. WALLISON:&nbsp; Thank you very much, Rick.&nbsp; Okay.&nbsp; We'll turn right to Bob Eisenbeis, and, Bob, why don't you proceed with your presentation, and then we'll have some questions afterward, for both.</P> <P>MR. EISENBEIS:&nbsp; [Off mike.]&nbsp; Thank you very much, Peter.</P> <P>MR. WALLISON:&nbsp; Press the button.</P> <P>MR. EISENBEIS:&nbsp; Thank you very much.&nbsp; Can everybody hear me now?&nbsp; Great.&nbsp; Okay.</P> <P>Larry Scott and I are especially pleased to have received the invitation [inaudible] and participate in this conference and panel.&nbsp; And we hope that this will have the effect of stimulating a number of interesting questions and dialogue.</P> <P>I must indicate at the very beginning that the views that we express are those of our own and not the Federal Reserve Bank of Atlanta or the Federal Reserve System.&nbsp; This is something we're required to do.</P> <P>With these preliminaries over, let me make a few brief overview remarks about what we have included in the paper.&nbsp; First, we discussed some general resolution issues for banks and housing enterprises.&nbsp; And in this regard, there's a lot of similarities and complementarities between the approach and the discussion that Rick has already led, and what we do in our paper.</P> <P>And one of the things we do is we attempt to assess both the strengths and weaknesses of not only the procedures for dealing with problem and troubled large commercial banking organizations, but also housing enterprises as well.</P> <P>The next thing we do is attempt to consider the problems that would occur if one of the housing enterprises were to experience very severe financial distress, and we observed that there are many similarities between the kinds of problems that would arise in that particular situation and the difficulties that arise with large commercial banks.</P> <P>And given this similarity, we feel it's quite reasonable to attempt to apply a lot of the lessons that we've learned from dealing with the commercial banks to the housing enterprises themselves, not dissimilar from the kinds of observations that Rick has already made.</P> <P>Now in the interest of time, I'm going to sort of set aside the issues related to large banking organizations that we've developed in our paper and concentrate mainly on the issues related to the large housing enterprises.&nbsp; However, we do have recommendations with regards to how large banking organizations should be dealt with.</P> <P>The present procedures lead in the right direction but aren't perfect.&nbsp; We identify that there are a number of flaws there, and we have specific recommendations in that area as well.</P> <P>Okay.&nbsp; With that out of the way, let me give you a brief outline of the paper and the kinds of things that we want to talk about.</P> <P>We essentially try to address the kind of questions that we think a regulator today might be facing in dealing with the problem of resolving a failure of one of these large GSEs.&nbsp; And we sort of try to explore what we think are some of the practical problems that would be involved with dealing with these kinds of failures.</P> <P>And we ask a number of questions.&nbsp; Are such institutions really too large to fail?&nbsp; What powers should the regulator or supervisor have?&nbsp; Not unlike the kind of issues that Rick has already raised.&nbsp; How should the losses be apportioned in the event that one of these institutions gets in trouble?</P> <P>And we attempt to tackle head on what is really the root problem, and it's been the tendency for regulators in general, when faced--and government, for that matter--with a problem of dealing with one of these failures.&nbsp; The knee-jerk reaction, the tendency, has tended to be to engage in some sort of forbearance rather than attempting to deal with the problem promptly.&nbsp; This has been true with banks in the past.&nbsp; It continues to be true with banking organizations.&nbsp; It was clearly the case with thrifts during the S&amp;L debacle.&nbsp; And it has also held for housing enterprises and GSEs in general, based on past experience.</P> <P>It really wasn't until we had the thrift crisis that, in fact, Congress finally responded in the case of banks with FIDISHU [ph], which Rich was intimately involved with.</P> <P>And essentially the underlying premise in that particular bill, which it seems to me it's awfully hard to argue against, and that is the objective was to minimize the cost to the FDIC, in this particular case the deposit insurer, and ultimately minimize the loss and cost to the taxpayer as a whole.</P> <P>This really was an historic change in banking law.&nbsp; And while the basic structure that was put in place I think is a very sound one, it failed in some key dimensions.</P> <P>And one of the things it failed to do was to align regulatory incentives as sharply as they should have been involved, and we've made some recommendations in our paper as to how to deal with that particular problem, to avoid this tendency to engage in forbearance, which increases the losses to the taxpayer.</P> <P>Now one of our foundation conclusions from looking at the history of how we've dealt with these problems in the past is that it seems undeniable that forbearance and bailouts are undesirable as a matter of public policy.&nbsp; They create one more hazard and really should be avoided at all costs.</P> <P>So for the rest of the day what I want to do is really concentrate on what our recommendations have been for housing enterprises, and the first question we're going to take a look at is the issue of whether these institutions are really special after all.</P> <P>Unlike banks, housing enterprises aren't subject to deposit runs.&nbsp; They don't provide payment services.&nbsp; They aren't major dealers in the securities markets outside of mortgage markets--most of the kinds of rationale that have been put in place to justify treating large banking organizations of being special.</P> <P>However, this doesn't mean, at least from a political perspective, if not an economic perspective that these institutions really aren't special.&nbsp; They're huge in size and play a critical role as a conduit of funds to housing.&nbsp; And that's an obvious observation.</P> <P>They also create direct credit exposure to other institutions; and these creditors, through their holding of these debt and mortgage obligations, are potentially subject to some spillover effects and systemic risk issues simply because of the size of these institutions and the concentration in these particular asset classes that they have.&nbsp; A sudden decline of the value of these securities could force other institutions into bankruptcy.&nbsp; There would be loss of service to the mortgage securitization [ph] market if they were to get into trouble, and the interest rate derivatives market would also be severely disrupted since both Fannie and Freddie are very dominant and significant players in those particular markets.</P> <P>And finally, one of the key arguments for the present structure and I think we have to address this head on, and Peter alluded to it I think in his remarks, there's a bit of a free lunch element that goes along with this.&nbsp; These institutions are designed and put in place to provide a subsidy to housing to achieve a public policy purpose, and this is part of the underlying reason why, among other things, these institutions I think inevitably would be regarded as being special from a public policy perspective.</P> <P>Now as economists, we look at this issue and ask the question:&nbsp; Is this the best way to deliver a subsidy?&nbsp; And I think any economist that would look at the issue said, no.&nbsp; This is not the best way to deliver a subsidy.&nbsp; There are better, more efficient ways, cheaper ways; and mechanisms that impose less risk to the taxpayer.</P> <P>So if your basic assumption is that you're going to provide subsidies to housing in this way, you're inevitably we think led down the road of concluding at some point in time or another that these institutions are going to be special when it comes to treatment from the government.&nbsp; And this is a basic assumption that we have.</P> <P>So we've made some pretty critical observations.&nbsp; I'd call them assumptions in some cases.&nbsp; We conclude and start with the working premise that either in the case of a large banking organization, which we already know about, or housing enterprises, it's more likely that should one of these institutions get into trouble, there will be a concerted effort to keep these institution in business in some way or another rather than to try to liquidate them.</P> <P>In other words, these institutions may be not too big to fail, but they clearly are probably too big to liquidate in any sort of way that avoids the kind of disruptions to other holders of their liabilities in the markets in which they serve.</P> <P>And we take that as a constraint and thus poses the practical problem--</P> <P>[TAPE FLIP.]</P> <P>With problem should they arise.&nbsp; Our analysis in the paper suggests that probably given what we've learned from the large banking organizations, we can go ahead and apply a model that's already been put in place for large banks that addresses many of the key questions that housing enterprises themselves raise.</P> <P>And, in fact, if you if you adopt a system that has many of the key features that we already have in place and put in place with FIDISHA, we avoid a number of problems.</P> <P>We avoid potentially the problem of moral hazard.&nbsp; We have a system that's designed a major objective to protect the taxpayer.&nbsp; The system that we propose would preserve the critical functions that these institutions perform, and I think it addresses a number of the practical problems that would arise should one of these institutions get into financial difficulty.</P> <P>Now what does this model look like that we have for banking organizations?&nbsp; Now the cornerstone really of this model is a capital-based early intervention and prompt corrective action system with heightened regulatory concern as an institution's capital declines through specified capital crunches with required remedial actions in the case of each step down the ladder.</P> <P>The idea is to try to deal with and identify problems before it becomes too late, and you end up in some sort of a crisis situation.</P> <P>In the case of the FDIC, either the FDIC or the chartering institution can close a large bank, for example.&nbsp; It can remove management as well and appoint a receiver for a troubled organization before the book value net worth of the institution goes to zero.&nbsp; At least, that's the theory.</P> <P>Now there's a critical flaw here in basing the procedures and PCAA on book values because book values don't necessary--you can't pay people with book value.&nbsp; You can only pay people with market values of institutions.&nbsp; This was an unfortunate compromise that was made, and one of the recommendations that we would have is that we need to go to a market value approach in implementing a prompt corrective action kind of provisions.</P> <P>Finally, we'd also note that there is a mechanism, partly in the statutes and partly via regulatory discretion, to establish a priority of claims for creditors and apportioning losses, a point that Rick had addressed as well in his remarks.</P> <P>Now, as a receiver, the receiver can remove management.&nbsp; It can wipe out the equity holders.&nbsp; It can impose losses on selected creditors and classes of debt holders, if the equity cushion is insufficient in that particular case.&nbsp; And we argue that all of these same kinds of provisions should be applied to housing enterprises as well.</P> <P>Now there are some differences in the case of the banking organization.&nbsp; The bank can, by statute, tap resources in subsidiaries and affiliates; in addition, is the ability to impose losses on an ex post basis, actually on healthy banking organizations, through assessments and premiums, which depend upon the level of FDIC's coverage ratio for deposits.</P> <P>And finally, the FDIC must also charge insurance premiums for risk.&nbsp; None of these three latter categories are really relevant.&nbsp; Fannie and Freddie don't have affiliates and subsidiaries unless you call charitable foundations affiliates or subsidiaries.&nbsp; And obviously, there's no insurance of an explicit nature, so there's no deposit insurance premiums and the like.&nbsp; In any case, however, we do think that the essential features that I've just outlined are pretty critical.</P> <P>Now similar to the observations that Rick made, we do grant that there are some circumstances under which the conservatorship kind of powers would probably be sufficient to prevent economic insolvency if some certain conditions hold.&nbsp; And we've listed what we think some of these conditions might be.</P> <P>For example, the presumption would have to be that losses would occur slowly enough so that, in fact, OFHEO, the responsible monitoring agent in this particular case, would have a sufficient opportunity to intervene in a timely fashion.</P> <P>Of course, we also presume that OFHEO is able to identify the conditions under which the institution is experiencing financial distress.&nbsp; It has to have the appropriate authority to act in a prompt manner without being subject to delay and argument and other kinds of pressures.</P> <P>We also presume that OFHEO doesn't engage in forbearance in any such way.&nbsp; And finally, as conservator, there is sufficient time to change the portfolio composition--to change the financial condition of the organization such that it can work its way back out of trouble.</P> <P>If these conditions aren't met, then the conservatorship powers will be weak and will be insufficient to avoid a lot of the negative consequences associated with insolvency that would follow, and probably would result in actions taking place at a time when net worth were sufficiently small that there wouldn't be the possibility of avoiding a lot of the losses ultimately that might accrue to the taxpayer.</P> <P>We believe that the existing experience that we've just observed with OFHEO shows how challenging it has been for OFHEO to attempt to intervene in the activities of these organizations in a timely fashion without encountering significant resistance, either from the management of the organizations or from Congress itself, who has these mixed objectives that it's trying to deal with.</P> <P>Now why do we think that the existing OFHEO authorities are insufficient?&nbsp; And here there's virtually little distinction between our views on this subject and Rick's.</P> <P>Fortunately, we haven't had to deal with an insolvency in one of these institutions, but we would point out that without the receivership powers to close and reorganize and pose losses and, as Rick has said, it's going to fall to Congress to deal with it.&nbsp; And in addition, there's no special applicable bankruptcy laws that would apply.</P> <P>So, you know, it's going fall back to Congress to essentially intervene at this point in time with existing procedures, and it's not clear whether they'll be able to preserve and avoid a lot of the other problems that we've been concerned about.&nbsp; And I'm not particularly optimistic about Congress' ability to act promptly on this kind of a situation.</P> <P>By its very nature, this is not the kind of thing that Congress does.&nbsp; They don't micromanage problems.&nbsp; They set policy, create regulatory agencies, and delegate responsibility to others, and it's not obvious to me that, faced with this problem, that they would be left with any choice but to engage in some sort of taxpayer bailout down the road at great cost to the country as a whole.</P> <P>We see additional risk in perverse ascendance that would apply in the absence of a receivership that could be avoided should receivership be in place.&nbsp; And without the threat of receivership, management and the creditors institutions will likely attempt to stall resolution of the problem.&nbsp; They'll lobby Congress for delay.&nbsp; And, again, history I think in this regards tends to speak for itself.</P> <P>Delay will not only deepen the problem, but also increase the probability of a taxpayer bailout, and the range of feasible resolution options will decline the more deeply these institutions are into financial distress.</P> <P>Without the receivership, the political process will likely be required to determine the apportion of losses and as long as these shares aren't apportioned ex ani [ph], the affected parties, and including the debt holders as well as management, are going to attempt to drag the process out as long as possible, and this is only going to deepen the hole.</P> <P>We have a classic example of just this kind of behavior, and it happened in the case of the thrift crisis.</P> <P>So it's hard to believe that these creditors would behave any differently than we saw happen in the past.</P> <P>Now what do we recommend?&nbsp; We have a number of specific recommendations, many of which parallel but are somewhat different in some cases from the ones that--the five that Rick had already articulated.</P> <P>First, and probably most importantly, we would like to see transfer of the bank type PCA policies right to the housing enterprise institutions.</P> <P>MR. CARNELL:&nbsp; Prompt corrective action.</P> <P>MR. EISENBEIS:&nbsp; Prompt corrective action.&nbsp; Yes, PCA.</P> <P>MR. CARNELL:&nbsp; Not everyone knows what PCA is.</P> <P>MR. EISENBEIS:&nbsp; Oh, I'm sorry.&nbsp; Sure.&nbsp; Right.&nbsp; We'd, of course, like to see several modifications, some of which I've already detailed, especially ones based on market values rather than book values.</P> <P>We'd like to seen an independent regulator who's not dependent upon Congress, and what I mean not dependent upon Congress I mean not dependent upon Congress for funding to carry on its activities.&nbsp; That funding lever is an important avenue that Congress has to affect policy, and as long as that lever is there, there is difficulties for the regulator doing as it should.&nbsp; And as a sidebar, I'd notice too that we would also recommend that the regulator should be charged with the ability to levy fees for examinations.&nbsp; And if you stop to think about it, there's a pretty compelling argument for that particular recommendation, because if I charge you for the amount of time it takes me to figure out what you're doing, you're going to have an incentive to try to minimize the cost that you incur for that particular monitoring function.&nbsp; And the more complex, the more difficult the institution is to assess its financial condition, the more costly it's going to be to monitor the institution, and the greater the incentives the institution will have to minimize its monitoring costs.&nbsp; And you'll get a marginal tradeoff here--is the institution will trade off the benefits of a more complex organization and complicated financial patterns with the costs of revealing to the regulator what in essence is going on in the institution.</P> <P>But we would not, at the same time, let that be the source and sole source of funding to the organization, to the regulator, because if you do that, then you're back in the sense of the regulator being the captive of the institution that it's regulating.</P> <P>But we just use this as an incentive mechanism to try to control and induce additional transparency on the part of the institution.</P> <P>Not surprisingly, we also argue that receivership is critical to affect underlying incentives.&nbsp; And, like Rick, we would also like that receiver to have the authority to create a bridge institution.&nbsp; And here I think we'd go a little bit further that we don't necessarily mean one bridge institution.&nbsp; You could create several bridge institutions and essentially sell them off into the marketplace to essentially spread and create more competitors in this particular market.&nbsp; It would just depend upon what the individual circumstances might be--what would be the best way to deal with and solve some of these other problems that we have talked about in the past.</P> <P>Loss minimization also requires that you have to establish in advance what the priorities of claims and default would be and give the regulatory agency or the receivership in this case the authority to determine which classes of creditors get paid first, according to this predetermined priority of claims.</P> <P>We'd also argue that because of the complexity and the nature of the contracts that concern the derivatives transactions in particular that they should be just transferred into another bridge institution and the receiver have the authority to continue those transactions and resolve them in that particular way.&nbsp; In that case, we would sort of regard those as one of the means of sort of [tape gap]--we come there, and the fact that many of the--the act of terminating those transaction might cause some great disruption to the counter parties on the other side is that they have to reestablish the hedges, and they may not be able to do that in a timely fashion.</P> <P>So, you know, we would solve that problem by just putting those transactions into the bridge institution.</P> <P>Now the last point I'd like to make is that we think it's critical that there be a pre-arranged resolution plan put in place ahead of time so that the creditors would know exactly what situations they would be facing in advance should these institutions or should one of them get into some sort of financial difficulty.&nbsp; This essentially would aid and support the ideas behind and reinforce market discipline, and if there's one thing we know as economists that uncertainty in this particular case is the priority of claims is the enemy of market discipline.</P> <P>So let me make a couple observations before I quit about what the importance of planning is in particular--why we think it's so important.</P> <P>Planning we think is really a necessary condition for credibility; that the required legal structure is put in place before a crisis actually takes place.&nbsp; It has a number of benefits.&nbsp; It increases market discipline by clarifying who's at risk and where they stand in line.&nbsp; It improves the pricing of the liabilities, therefore.</P> <P>We also feel that plan would constrain the regulators and make it more difficult for the regulator to engage in forbearance, and it makes their responsibilities more transparent as well.</P> <P>It has an additional benefit of constraining management and limiting their ability to lobby for relief, and we think that all these are really important.</P> <P>Absent the credible plan, bad things can happen.&nbsp; It increases the likelihood of a bailout of creditors of forbearance.&nbsp; It reduces the chances that--it would increase the chances that financial problems will spill over into the real sector as well.</P> <P>So, in conclusion--we're pushing the wrong button here--we recognize that there's weaknesses in the existing resolution policies for not only housing enterprises but also for large banks, and these should be addressed now rather than addressed at the time a problem arises that really represents a potential drain and threat to the financial system.&nbsp; We argue that the lessons that we've learned from resolving insolvent banks can be applied to housing enterprises, and we have a number of suggested changes to be put in place, including the use of economic values and setting prompt corrective action; giving OFHEO the receivership powers, which includes, among other things; establishing clarity in the priority of payments; giving them power to create a bridge institution or multiple bridge institutions.&nbsp; OFHEO should have a plan to use its authority in the event that one of these institutions gets into difficulty, and it should be public and put forward in advance.</P> <P>And hopefully, in the end, this would improve market discipline and achieve all the objectives that we're trying to achieve.&nbsp; An alternative to the kind of thing that Peter proposes, but it's on the table at least.&nbsp; Thank you.<BR>DISCUSSION</P> <P>MR. WALLISON:&nbsp; Thanks very much, Bob.&nbsp; Okay.&nbsp; We'll turn now to our discussants.&nbsp; And we'll start with Mike DeStefano.&nbsp; Mike is a managing director in the Financial Institutions Group of S&amp;P, Standard and Poors Group.&nbsp; He is the department's Chief Quality and Criteria Officer, in which capacity he has responsibility for broad analytical oversight of the ratings of global financial services.&nbsp; He is also the primary analyst on Fannie Mae, and part of a team that follows the GSEs in the United States.</P> <P>Following Mike--well, actually, why don't you, Mike, go ahead, then I'll introduce Pat Lawler.&nbsp; So, Michael, why don't you just go ahead.</P> <P>MR. DESTEFANO:&nbsp; I liked both papers very much.&nbsp; You know, people should be thinking about these things.&nbsp; And the only perspective I can comment from would be, you know, that of somebody who follows the GSEs from a credit perspective.</P> <P>But in order to put what I say into context, let me just say in our view, you know, we have criteria.&nbsp; We rate, like, several hundred of institutions like the GSEs around the world.&nbsp; This is not unique to the U.S.&nbsp; We call them government supported entities, and, as I say, literally, there are hundreds.</P> <P>And we have a well thought out rating approach, and as part of that, we categorize these government supported entities, and they're not all financial institutions.&nbsp; They are port authorities--all sorts of things.&nbsp; And what I'll call here briefly Class 1, Class 2, Class 3.</P> <P>Class 1 is what we call--I call--solvent equivalents and that's to say we rate them because the links, the ties, to the government are so strong that one could not imagine that the government would not bailout the bond holders.&nbsp; And that was our guiding judgment until about a year ago, and I think that that judgment was well grounded in an understanding of the charter, the laws, the precedents, and everything that you would look at to try to generate or to try to reach a level of confidence that the government would be there for the bond holders when you wanted to government to be there, which is when the institutions are insolvent; otherwise, you know, who needs it.</P> <P>However, about a year ago, and it was no one thing, but a whole series of things, that led us to believe that we could no longer consider the U.S. GSEs as Category 1, that is to say solvent equivalent.&nbsp; Put this into broader perspective, this is something that's been going on really on a world-wide basis.&nbsp; Simultaneously with the debate over GSEs in the U.S., the Germans are going through this process of removing guarantees from the lansbonds [ph], and so just to try to put it into a more global perspective, the debate over U.S. GSEs is a debate that is occurring in one form or another really in much of the world.&nbsp; I mean, the Chinese banks are going through the same debate--you know, should they be privatized.</P> <P>Now in the Category-3, which is what we call institutions in which we think there's a strong governmental interest that those continue as a going concern and that as part of that bond holders could well count upon being bailed out, if you will, given the insolvency of an institution, our approach there is to do a financial assessment of the institution and then sort of enhance the rating up from that financial assessment, based upon a reasonable degree of confidence that because of the strong governmental interest the bond holders can count upon special consideration.&nbsp; Okay?</P> <P>So that's our analytical framework.&nbsp; And so the issue would be if there's legislation, we would look at the whole legislation.&nbsp; We would look at all the parts of it.&nbsp; Now, it's possible--Peter thinks it's sure, right, that there will be a receivership in whatever legislation is passed.&nbsp; And that could well be.</P> <P>So how would we look at it?&nbsp; One, is there anything in receivership that would inherently preclude one considering that--would that preclude one reaching a judgment that there's a strong governmental interest and that the bond holders can be bailed out.&nbsp; And I'd have to say actually, no.&nbsp; There's nothing in and of itself that would trigger--that would preclude, and that's actually Mr. Carnell reached the same conclusion.&nbsp; And I agree entirely, and I'll quote it-- enacting workable insolvency mechanisms for Fannie and Freddie would make a congressional rescue less inevitable but would neither preclude such a rescue nor by itself eliminate the perception of implicit backing. &nbsp; And I'd say we would agree with that.</P> <P>There's nothing, and, in fact, in some systems, we require receivership because it's receivership which triggers the government support.</P> <P>So Peter's observations were I think very, very interesting, and the subtleties in a situation like this can be read any way you want.&nbsp; And it is possible for market participants to walk away from this discussion, see receivership, and breathe a sigh of relief and say that's the last piece that we wanted to be in place so that we could have confidence that the government will, in fact, intervene in a timely way, in an orderly way, and in such a way that bondholders won't lose any money.</P> <P>And it is very possible that there will be market participants who will reach that conclusion.&nbsp; Others may see it as unfinished business.&nbsp; The Federal Home Loan Banks have a receivership mechanism.&nbsp; The Farm Credit has a receivership mechanism, you know, so why wouldn't Fannie and Freddie and let's round out the picture.&nbsp; And, you know, in the spirit of a sort of technical correction, I don't think we would have any credit problem with establishing a receivership.&nbsp; And then if the regulator, in the case of OFHEO, which is on record as saying that they want receivership powers; and I read that several years ago, and I remember thinking, you know, from a Triple-A debt holders perspective that's sort of an unremarkable request.&nbsp; I thought it might have implications for counter parties because it might leave them in a situation of where am I in this receivership.</P> <P>And so, you know, as I said, receivership in and of itself can be read different ways.&nbsp; My suspicion is when we go through the whole thought process and we see it, we'll probably conclude that from a rating perspective, it's sort of a neutral.</P> <P>And another consideration we would probably make is that while we certainly encourage the Fed to make as many statements about moral hazard--that's what they ought to do--and, you know, from good public policy, you should always be bringing up the subject of, you know, moral hazard--but I have to say from a practical perspective, the notion that a GSE would be liquidated by anybody, under any circumstance, would be so remote that I think it would be hard for us or capital markets participants to take that seriously as a real option; which isn't to say that there could not be circumstances under which--because there is in our view a default differential between the U.S. government and the GSE debt--there is a default differential.&nbsp; I think the market recognizes it, and I think that's consistent with our view.</P> <P>However, we only think that differential would manifest itself in extremis.&nbsp; It would be a situation where the government could barely meet its obligations, so here's this other class of obligations it chooses to stop on those.</P> <P>If it was just insolvency of a GSE, you know, you could have permanent corrective action.&nbsp; You could have conservatorship.&nbsp; You can do all sorts of things, but the notion that whoever is making that decision would make the decision to liquidate would be I think so remote from anything that we've learned to expect that it would be hard to credit it.</P> <P>So, you know, having said that, I could say lots of other things, but I'll leave it at that.</P> <P>MR. WALLISON:&nbsp; All right.&nbsp; I'm going to make you say a lot of other things, if you don't mind, Michael.</P> <P>MR. DESTEFANO:&nbsp;&nbsp; Actually, you should really--you have to come like our next credit committee, because that's exactly the way people think in credit committees.&nbsp; They go, oh, receivership. Oh, my God.&nbsp; You know?&nbsp; This has got to be, you know, really, really tough.&nbsp; And then you start thinking about it more and more and people say, no, it's really positive.&nbsp; It's really positive.</P> <P>MR. WALLISON:&nbsp;&nbsp; I think there could be positive spin on this, but I want to take it in your terms.&nbsp; You have a Class-3 or a Category 3?</P> <P>MR. DESTEFANO:&nbsp;&nbsp; Right.</P> <P>MR. WALLISON:&nbsp;&nbsp; And for that, you think there's a strong governmental interest?</P> <P>MR. DESTEFANO:&nbsp;&nbsp; That's my summary [inaudible] strong governmental interest.</P> <P>MR. WALLISON:&nbsp;&nbsp; Right.&nbsp; But you do in those circumstances, 'cause I remember reading this when you put out the statement about a year ago.&nbsp; You said--but you will now do financial analysis.</P> <P>MR. DESTEFANO:&nbsp;&nbsp; Right.</P> <P>MR. WALLISON:&nbsp;&nbsp; Okay.&nbsp; Now here's a company--again, perfectly hypothetical company with two and half percent capital; issues no financial statements; has no financial statements right now, and then there is a receiver appointed to this company that has no financial statements, and you're going to say--and you do financial analysis--</P> <P>MR. DESTEFANO:&nbsp;&nbsp; Right.</P> <P>MR. WALLISON:&nbsp;&nbsp; Of some kind.&nbsp; You're going to say that a company like that should still be triple-A.&nbsp; And if you say that, how is Class-3 different from Class-1?</P> <P>MR. DESTEFANO:&nbsp;&nbsp; You're saying under Class3, what is the basis of our financial analysis?</P> <P>MR. WALLISON:&nbsp;&nbsp; Well, I mean if you're doing financial analysis of a company that doesn't have any financial statements.</P> <P>MR. DESTEFANO:&nbsp;&nbsp; This temporary hiatus in having a financial statement.&nbsp; Actually, as a matter of fact, all three of the GSEs do not have timely financial statements.&nbsp; The Federal Home Loan Bank--is Alex Pollack [ph] in the room here?&nbsp; The Federal Home Loan Bank has been having problems with getting theirs up so it's holding up the whole system.</P> <P>Actually, it's a very good question and not to be totally, you know, cavalier about it.&nbsp; In this circumstance, we try to get information from the company to the extent that they can provide credible information, and we try to determine from the statements and the comments of the regulator, you know, whether from the regulatory perspective these things are deteriorating financially or not.&nbsp; And it isn't true to say there's no financial information.&nbsp; Throughout Freddie Mac's crises, OFHEO did certify their capital on a quarterly basis, and in the case of Fannie Mae they are going to publish, you know, their monthlies.&nbsp; So it's not that there's no financial information.</P> <P>But granted, okay, but granted--leave aside how we reach our financial determination, if certainly--you know, and I said it's our view--I'm not saying it's the capital markets view.&nbsp; In my view, the capital markets don't seem [inaudible] it's a Category-1.&nbsp; And so there's no doubt that from a capital markets perspective they get a certain amount of slack.&nbsp; But I think it's an overstatement to say there's no financials or there's no basis upon which to form a financial opinion.&nbsp; We think that there is, and on the other point, the uplift, you know, as we'll say, we'll look at the legislation and we'll look at everything that's in it, and we'll weigh all the parts of it.&nbsp; And, you know, see what degree of confidence, you know, we have at the end of the process.</P> <P>MR. WALLISON:&nbsp;&nbsp; Huh huh.&nbsp; Okay.&nbsp; All right.&nbsp; We'll go on.</P> <P>MR. DESTEFANO:&nbsp;&nbsp; Right.&nbsp; Well, I want to hear from Pat Lawler why we must have receivership or--</P> <P>MR. WALLISON:&nbsp;&nbsp; I think we'll hear from Pat.&nbsp; Let me just make it--say a few words about Pat, who's the chief economist and associated director for policy analysis and research at the Office of Federal Housing Enterprise Oversight, OFHEO.</P> <P>Before joining OFHEO in 1994, Pat was for six years the chief economist for the Senate Banking Committee.&nbsp; Among other pieces of legislation he worked on was the Federal Housing Enterprise Financial Safety and Soundness Act of 1992, which established the current regulatory framework for Fannie and Freddie.&nbsp; They just forgot receivership, huh?</P> <P>He also served on the staff of the Federal Reserve Board and the Federal Reserve Bank of Dallas.&nbsp; Pat?</P> <P>MR. LAWLER:&nbsp;&nbsp; Thank you, Peter.&nbsp; OFHEO supports Congress' providing us with receivership authority or a successor regulator.&nbsp; And anything else I say are my views and may or may not be the views of OFHEO.</P> <P>I like both of these papers very much, too.&nbsp; I think they're both strong papers and well worth reading.&nbsp; I thought Rick's paper was especially strong in the nature and implications of government sponsorship, and I thought the Atlanta Fed paper was especially strong in the areas of practical issues and resolving large financial institutions, and I enjoyed them very much.</P> <P>I think both papers do an excellent job of pointing out the advantages or receivership authorities.&nbsp; One area that's important: we currently have conservatorship authority.&nbsp; We're in the process of working on a regulation which would clarify what we intended, what we believed that meant.&nbsp; But even after doing that, it's a departure from bank authorities, and it would provide more legal clarity if we have receivership authorities.&nbsp; For some of the steps that we think we may be able to presently take, it might be a lot stronger legally to have receivership authority.</P> <P>Another important factor is speed, and the Atlanta Fed paper emphasized the importance of ability to reorganize a failing institution, to be able to do it quickly in a way that might help establish or maintain the functioning of the institution so that it could support housing finance markets and so that any resolution, the losses associated with any resolution, had lower magnitudes regardless of who bears those losses.</P> <P>I think the flexibility that is provided by receivership could prove to be especially valuable.&nbsp; I'm not quite sure in the Atlanta Fed paper whether means we have to specify what we would do.&nbsp; In every possible resolution, there are an awful lot of different circumstances that might attend to resolution, and so there are some things that would be important to specify and other things we presumably want some flexibility in.</P> <P>But I think Rick gave an excellent example of circumstance in which receivership might be far superior to conservatorship no matter how interpreted, with the accounting issues example that he offered.&nbsp; I can offer several more.&nbsp; I'll just offer a couple.</P> <P>One is an institution whose net equity is considerable but to the point where decent prospects that it may have for the future are not enough to overcome the net equity, and it's impossible to get financing that will boost the capital up to acceptable levels.</P> <P>In such a circumstance, it might be that the whole, if you will, might be less than the amount of subordinated debt even.&nbsp; Under our conservatorship authority, there's nothing we could do to cancel or kill off that subordinated debt.&nbsp; And, in fact, in five years we could stop payments--if you got a conservatorship going for five years, which would not be a good thing.&nbsp; After five years that those payments would be due and would be--this would be an issue--the existing of the sub-debt which is designed to help protect the government, protect senior creditors, in fact, would inhibit the ability of the regulator to actually do a constructive resolution.&nbsp; With receivership authority, you could reduce or cancel those claims and solve the issue as well as potentially some of the claims of senior creditors.</P> <P>Another kind of situation might be great uncertainty about the value of part of an enterprise's portfolio or its guarantees--something that threatened but did not guarantee collapse of the institution.&nbsp; It might be that receivership offered a way of segregating out the problematic portion of the business and enabled the other portion of the business to be sold to private investors or reorganized so that it had adequate capital and could function and provide the services that part o the housing finance markets depend on, while the other portion remained into conservatorship until some of the uncertainties resolve themselves.</P> <P>And finally, I'd like to mention you could have a change, a dramatic change, in circumstances that suggested that this was not going to be a going concern; that, in fact, it's not only not too big to fail, but not too big to liquidate.&nbsp; It might take a very long to do it, but it might be--it is at least conceivable one ought to allow for the possibility that long, slow liquidation of the firm might be appropriate, and if that became necessary the greater legal certainty about some of the authorities necessary under receivership would be more valuable than conservatorship.</P> <P>I think these are powerful reasons for providing any regulator with this authority.&nbsp; And I think, as the papers point out, the perceived implicit guarantee is really the heart of the issue to the extent that it doesn't have almost universal support.</P> <P>Rick argues that the ambiguity associated with the perceived implicit guarantee is a bad thing.&nbsp; It makes it difficult benefits from these institutions and creates large risks and that the lack of receivership authority supports that implicit guarantee.</P> <P>At the same time, he recognizes that it's the perceived implicit guarantee that's an integral part of what it is that makes a GSE.&nbsp; In the Atlanta--the Atlanta Fed paper is more explicit.&nbsp; It suggests privatization; wants to ensure that there's no bailout, and I think Bob just said bailout should be avoided at all costs--that's what I heard--which is a strong statement suggesting that any intended subsidies, if there are any intended subsidies to the GSE be provided directly to the intended recipients.</P> <P>I think both would appear to hope that receivership would diminish or eliminate the perception of an implicit guarantee, Peter's thoughts notwithstanding.&nbsp; And it would appear to be a major motivation for providing the receivership authority.</P> <P>Certainly, these views are not universal.&nbsp; There are people who disagree strongly..&nbsp; And I'm not going to argue today against or in favor of privatization certainly.&nbsp; What I do want to do is say that what's in the rest of these of these papers I think makes clear that receivership is a valuable thing.&nbsp; It should be provided regardless of how you feel about privatization.</P> <P>Receivership authority--I think the crux of it is again how--which Mike just got into--is how would it affect the implicit guarantee, perceived implicit guarantee?&nbsp; And the answer is we don't know, but also that Congress has a great deal of ability to influence that if it wishes.&nbsp; Congress can do it by not only in legislative language, the language actually in the statue, but also in report language, in floor speeches, public statements.&nbsp; It can indicate itself what it thinks the purpose is.&nbsp; Are they regulating--are they providing the regulator additional flexibility to support maintaining these institutions throughout a potential crisis?&nbsp; Or are they viewing this as the firs stage in privatization?&nbsp; And I think there are a number of other things that they could do--I could give extremes--some extreme here.&nbsp; The Atlanta Fed paper had an interesting suggestion that perhaps they could make a distinction between old existing and new debt, and provide that there's a priority for old debt over new debt.&nbsp; And I think that would have potentially a powerful effect on investors' perceptions of any guarantee that the existing--any views about an implied guarantee on the existing debt would be strengthened and any on the new debt would be dramatically weakened.</P> <P>Congress, on the other hand, could put in statements discussing the crucial role of the enterprises, reaffirming the importance of their special relationship; even could put in a provision expediting a vote on reimbursement of any losses of senior creditors in receivership.&nbsp; Those things would tend to strengthen the implicit guarantee at the same time they were providing receivership.</P> <P>So I very much agree with Mike's conclusion that it's not at all clear what effect receivership has on the implicit guarantee and Congress, if it chooses can have a significant effect on that.</P> <P>MR. DESTEFANO:&nbsp;&nbsp; Can I just--but just one please.</P> <P>MR. WALLISON:&nbsp;&nbsp; Go right ahead.</P> <P>MR. DESTEFANO:&nbsp;&nbsp; [Inaudible] was also mentioned in the countries in the Fed paper.&nbsp; Priority of claims is really important from a ratings perspective.&nbsp; And, you know, it doesn't currently exist.&nbsp; So if law is going to be developed that's going to establish priority of claims, from a ratings and I think market perspective, it's real important that it jibe with general expectations.&nbsp; Now in the Fed paper there was all sorts of stuff about putting counter parties first; maybe giving a preferred position to MBS holders under the guarantee; as well as this notion that the new senior debt holders would be subordinate to the existing.</P> <P>Now if you put all of that together, you might reach conclusions about a de facto subordination of senior creditors.&nbsp; That could lead one to certainly look at, you know, the rating.</P> <P>My understanding, though, is at least in the legislation that's been out there--and granted there's nothing, you know, I guess official--I mean, there's this stuff from last year-but the Shelby Bill last year seemed pretty orthodox--senior sub.&nbsp; There wasn't any of this, you know, counsel parties go first and that kind of thing.</P> <P>And so that would really be important and whether that would be a matter of statute or whether that would be implementation by a regulator certainly from a debt holders perspective, we would have to look at that real carefully.</P> <P>MR. WALLISON: Thank you, Mike.&nbsp; Before we go to questions from the floor, I'd just like to ask our panel a couple of things.&nbsp; So prepare your questions actually since Bert is here, he gets the first question.&nbsp; So you all prepare your second question.</P> <P>But I'd like to ask the panel one thing.&nbsp; We have legislation that is, as Mike suggested, there was the Shelby Bill last year.&nbsp; There is a bill now, the Hagel--we'll call it the Hagel Bill--have you all looked at that legislation and compared it to what you think are your ideals for what legislation should contain, and, if so, do you have one or two things that anyone here from the Hill might take back as something that really ought to go into the bill that is not in it now?&nbsp; Rick, have you given that any thought?</P> <P>MR. CARNELL: I have reviewed the Shelby Bill, so I haven't looked at the Hagel Bill as such.&nbsp; But I thought that Chairman Shelby's proposal last year that he started the mark up with, that is, before the Bennett Amendment--I think he got things just about right there.&nbsp; So I would not have--at this point--have major suggestions for that bill.</P> <P>MR. EISENBEIS:&nbsp;&nbsp; We haven't had chance to look at the Hagel Bill yet.&nbsp; Obviously, one of the things we'll do.</P> <P>MR. WALLISON:&nbsp;&nbsp; But on the Shelby Bill did you get a chance to go over that in comparison to your views of what should be in receivership?</P> <P>MR. EISENBEIS:&nbsp;&nbsp; I don't think we sort of matched it up.&nbsp; Scott, do you want to respond to that?</P> <P>MR. FRAME:&nbsp;&nbsp; I don't think that--I mean, we wanted to take--there was a couple different approaches we could have taken after our analysis.&nbsp; But if I recall I think the choice was made to kind of step back and view this as kind of a, you know, an open question and view it through that prism rather than, you know, let's look at piece of proposed legislation and, you know,&nbsp; analyze that.</P> <P>MR. WALLISON:&nbsp;&nbsp; So your paper should be looked at as--by the people who were doing the drafting.</P> <P>MR. LAWLER:&nbsp;&nbsp; Peter, before you go on, I actually did have two thoughts.</P> <P>MR. WALLISON:&nbsp;&nbsp; Okay.</P> <P>MR. LAWLER:&nbsp;&nbsp; And the context for this would be I have--I was sort of surprised by some of the criticisms of Chairman Shelby's bill last year, where people were saying this is Trojan Horse for privatization, ending GSEs as we know them.&nbsp; Very strong statements like that.</P> <P>MR. WALLISON:&nbsp;&nbsp; This surprises you?&nbsp; You've been in Washington all this time?</P> <P>MR. LAWLER:&nbsp;&nbsp; These statements were not by lobbyists for Fannie Mae and Freddie Mac.&nbsp; Their statements could not possibly surprise me unless they were to turn themselves in.&nbsp; But these statements were by the--by some of the people's elected representatives.&nbsp; And so basically, the statements betray a great anxiety about receivership as a threat to the continued existence of GSEs, an anxiety that I believe is exaggerated.</P> <P>However, I would say if one wanted to respond to that anxiety in the spirit of trying to build agreement for legislation, two things come to my mind.&nbsp; The first would be that you don't actually--that right now the Shelby Bill would use grounds for receivership and conservatorship that are drawn from the Federal Deposit Insurance Act.&nbsp; These are the grounds for appointing a receiver or conservator for an FDIC insured bank.</P> <P>I generally really like the idea of using banking law as a baseline for GSE regulation.&nbsp; But the fact is these grounds for putting bank in receivership are broader than you really need.&nbsp; I could go into detail, but I won't.&nbsp; But you don't need that much breadth.&nbsp; And I think the grounds could be trimmed back some, and also more--and this is consistent with the Atlanta Fed paper--more emphasis placed on the GSEs' capital situation; and, in fact, it might even be possible to have a higher trip wire for putting a GSE in receivership than for putting it in conservatorship.&nbsp; The grounds for bank receivership and conservatorship are the same for both.&nbsp; But it might be logical to differentiate here.&nbsp; That's very much consistent with prompt corrective action.</P> <P>MR. WALLISON:&nbsp;&nbsp; Did you mean a higher?</P> <P>MR. LAWLER:&nbsp;&nbsp; What I mean is--</P> <P>MR. WALLISON: Conservatorship as opposed to receivership?&nbsp; You never get to--</P> <P>MR. LAWLER:&nbsp;&nbsp; I'm saying higher to get over.&nbsp; Maybe I'm using the wrong metaphor here.&nbsp; But the point would be that if a GSE's capital got this low, you could put it in conservatorship, but maybe receivership you have a lower level.&nbsp; It's at least worth thinking through, and more broadly being able to put somebody in receivership or conservatorship for all of the fact that they've committed.</P> <P>[END OF TAPE 1]</P> <P>--there's some uncertainty for that that you don't really need here.&nbsp; The second thing and this is very much--I'm really just emphasizing here something that is in the Atlanta Fed paper, as I understand it.&nbsp; You could say that if there is a viable firm that can be created from the old GSE, you could actually direct the regulator to do that.&nbsp; In the Federal Deposit Insurance Act, creating a bridge bank is just an option.&nbsp; But one way to respond to concerns and receivership is part of a plan for doing away with GSEs as we know them is to say, well, in fact, the norm will be that if a viable firm can be created, you will create that firm?</P> <P>MR. WALLISON:&nbsp;&nbsp; As a GSE?</P> <P>MR. LAWLER:&nbsp;&nbsp; It would be--yeah.&nbsp; In other words, it would have the same legal rights that the GSE had before.</P> <P>Now the fact is that if a GSE fails, the market may be wanting somewhat more capital for all GSEs than it did before the failure.&nbsp; But the point is that the same rights would be there and the same function there going forward.&nbsp; I think that's another way of responding to anxiety here.</P> <P>MR. CARNELL:&nbsp;&nbsp; I think it's a response to anxiety, but probably not necessary.&nbsp; The incentives of a regulator of two or three or four GSEs is not to abolish one of them.&nbsp; And so the natural incentive would be if there's a way we can save a going concern, we want to do it.&nbsp; I think that's--</P> <P>MR. EISENBEIS:&nbsp;&nbsp; And that really is part of the reason why we feel that planned kind of issues is pretty important.&nbsp; Now we didn't have in mind that you have to detail, you know, every permutation and combination of circumstances.&nbsp; But that's not the point.</P> <P>But the idea is that, in fact, you know, if you think about what happens if you get to the point where the regulator has to put one of these institutions in receivership, it's tantamount to admitting that you haven't done your job in one way or another.&nbsp; So by having the receivership power and so on actually makes you perhaps do your job better on the early intervention and working yourself down.&nbsp; It sort of puts the incentives in the right direction.&nbsp; So the idea is you never get to the point where you have to invoke the receivership.</P> <P>MR. WALLISON:&nbsp;&nbsp; Okay.&nbsp; Scott, do you have a--</P> <P>MR. FRAME:&nbsp;&nbsp; Yeah.&nbsp; I was just going to add one clarifying remark.&nbsp; It's something that both Mike and Pat picked up on.&nbsp; They attributed a recommendation to give existing bond holders priority over new bond holders that we had in the paper, and I wanted to clarify that we weren't necessarily advocating that, but rather we gave that as an example in response to concerns that Fannie Mae had raised that establishing or incorporating receivership would create somehow some undue level of uncertainty for investors.&nbsp; And we said, well, you know, if one is truly concerned about this, one way to deal with it would be to set up that sort of priority structure.&nbsp; We didn't see it as necessary.</P> <P>MR. EISENBEIS:&nbsp;&nbsp; And that's just a phase in kind of recommendation because over time, everything would become new.</P> <P>MR. WALLISON:&nbsp;&nbsp; Okay.&nbsp; I think we'd like to go to questions at this point from the floor.&nbsp; I'd just like to make one point about Rick's remark about receivership being part of an intention to destroy the GSEs.&nbsp; I don't know whether you had a chance to watch the President's State of the Union Message yesterday, but I thought I saw some people come out and say that private accounts were intended to destroy Social Security.&nbsp; I mean, and those were elected representatives of the people.&nbsp; And so that's the way discourse occurs in Washington now.&nbsp; I know when you were here, it was a completely different world.</P> <P>[Laughter.]</P> <P>But that's Washington today, my friend.&nbsp; And everything is out to destroy everything else.&nbsp; Burt?</P> <P>MR. ELY:&nbsp;&nbsp; Yes, Peter.&nbsp; Burt Ely [ph] for the record.&nbsp; Just two quick comments on which to pose a question to Rick and Mike.&nbsp; First of all, I think Rick said something that's very important here, and that is the bankruptcy laws, in fact, would work legally in this situation.&nbsp; Of course, the bankruptcy the bankruptcy code addresses basically all of the issues that have been raised here that the receivership provision would address.</P> <P>And the other thing is Rick pointed out something and that's Congress can change law; in fact, does quite often.&nbsp; So it's possible to bring Fannie and Freddie and the Federal Home Loan Banks under the receivership--excuse me--under the bankruptcy code.</P> <P>My question for Mike and Rick is that, as you know, there has been a tremendous amount of angst in Congress about this implicit guarantee, and at a Senate Banking Committee hearing last February, particularly there were numerous statements there were numerous statements made--we've got to get rid of this implicit guarantee.</P> <P>Might not brining the GSEs under the bankruptcy code do far more to weaken, if not eliminate, the implicit guarantee by saying these organizations are going to be treated just like any other large non-banking firm; and, therefore, should be seen less or not at all as implicitly backed by the Federal Government, and might not that action be much more effective in weakening or eliminating the implied guarantee than all of the utterances of Congress?</P> <P>MR. DESTEFANO:&nbsp;&nbsp; If I could go first, because we've been thinking a lot about this.</P> <P>I think that the answer is no.&nbsp; If you want use the most analogous situation, and you look at the world of public finance, municipal finance, and lot people think of GSEs within that frame--you know, it's not really corporate, you know.&nbsp; But it's municipal finance.&nbsp; And as you know, municipalities can't be filed into bankruptcy, but they can file themselves in.&nbsp; But they never do, and when the try to do so, it's overruled by the state.</P> <P>Now why is that?&nbsp; Because in the world of public finance, okay, the thought is that everybody will be better off if the resolution to an insolvency is conducted at the policy level so that the government can say these are the interests of the employees; these are the interests of the taxpayers; these are the interests of the bond holders, et cetera, et cetera.&nbsp; And so at this policy level, let's resolve it instead of going into a bankruptcy court and haggling; and under some kind of rules.</P> <P>And I think most people would say, if you proposed bankruptcy, yeah, but it's never going to be involved.&nbsp; You know, when the time came for it, everybody would draw back and say that the best way to resolve the problem is on the policy level, which means that, you know, in our view, there would be role, an important role for Congress.&nbsp; And I think this is the expectation.</P> <P>MR. ELY:&nbsp;&nbsp; Isn't that same thing true of receivership then?</P> <P>MR. DESTEFANO:&nbsp;&nbsp; Yes.</P> <P>MR. ELY:&nbsp;&nbsp; If bankruptcy would never be invoked--</P> <P>MR. DESTEFANO:&nbsp;&nbsp; Yes, that's what I in effect said.</P> <P>MR. ELY:&nbsp;&nbsp; Then receivership will never be invoked.</P> <P>MR. DESTEFANO:&nbsp;&nbsp; Yes.</P> <P>MR. ELY:&nbsp;&nbsp; So isn't this kind of a pointless discussion in some ways today?</P> <P>MR. DESTEFANO:&nbsp;&nbsp; No, it isn't a pointless discussion if you want to have it.</P> <P>[Laughter.]</P> <P>You know, was the discussion over, you know, Hamilton's proposal to assume the states' debt and there was no moral obligation and no legal obligation to do it, but yet the government decided to do it.&nbsp; And that's why the Capitol is here in Washington.&nbsp; You know, was that a discussion worth having?&nbsp; Yeah, it was a discussion worth having.&nbsp; But having had that discussion once, the capital markets are not inclined to have it again.&nbsp; So your likely response is going to be that as long as, you know, Alexander Hamilton's statue is in front of the Treasury Department, the government is going to pay--and whether you have a receivership or whether you have bankruptcy.</P> <P>Now our role is a little bit different because we have to have, you know, a logical coherent, convincing case for the way we rate.&nbsp; And our statements of interpretation of support don't go nearly as far as things that have come out of the--that come out of the government.&nbsp; I mean, you quoted Rick some things that the CBO has said over time; that says what?&nbsp; That these are, in effect, government obligations; no qualification, implying that their full faith and credit.&nbsp; So that's coming out of the government.&nbsp; So what you're going up against is a market that is so convinced that, yes, this is not a legal obligation.&nbsp; There was no legal obligation for Alexander Hamilton to pay off the debts of South Carolina; whereas, Virginia had paid off its own debts and, you know, James Madison argued that it's unfair to the taxpayers to do this.&nbsp; You know, but that debate happened a long time ago, and we know how it came out.&nbsp; And, you know, in the capital markets people tend to go with, you know, the history, the tradition.</P> <P>So I really think you have to hit them over the head big time to really sort of make a point about there's no implicit support or whatever, whatever.&nbsp; And I think, as I say, the markets are much more convinced in the support argument than we are.</P> <P>MR. CARNELL:&nbsp;&nbsp; Burt is indicating that he's available to knock heads if necessary.</P> <P>By the way, I just--if I could respond briefly to Mike DeStefano.&nbsp; I think Mike just said something very significant about creditor perceptions.&nbsp; And remember what we're talking about here in terms of perceived government backing of--people say perceived implicit guarantee, and I ridicule that term in my paper.&nbsp; Don't miss it.&nbsp; It's about page two.&nbsp; I liken it to a mental will, in which the person who has just died has stated where they want their property to go.&nbsp; It's not going to be effective, is it?&nbsp; Or an oral traveler's check.&nbsp; Again, not very effective.</P> <P>[Laughter.]</P> <P>An implicit government--and implicit financial guarantee it's really a contradiction in terms.</P> <P>So, if, in fact, the perception--so this is all a matter of creditors believing that the government hasn't done anything in terms of a guarantee.&nbsp; The question is that creditors are predicting that there would be a bailout.</P> <P>Now, in fact, if creditors would associate perceived government backing of GSEs with the words national integrity on the Alexander Hamilton statue in front of the Treasury, which means we pay our bills; if that association is there, then these things, this--then that should be on budget.&nbsp; It should be reflected in the credit--the subsidized credit should be reflected--I see the OMB people are smiling--should be reflected in government spending and it should be voted by Congress, and that would certainly be a different world for GSEs.</P> <P>Now to respond to Burt.&nbsp; Basically, I defer to Mike in terms of creditor perception, and that's the essence of this.&nbsp; I think I can see your point that the more you treat GSEs like other firms, the more people may see it as not being special.</P> <P>On the other hand, the existence of a specialized receivership regime need not correlate with a government guarantee.&nbsp; We have had a specialized bank insolvency law, including receivership, for more than 150 years, and so that's more than twice the history of Federal Deposit Insurance.&nbsp; So the two don't necessarily go together.</P> <P>MR. WALLISON:&nbsp;&nbsp; Okay.&nbsp; Thanks.&nbsp; Dawn, would you identify yourself and take the next question, and then Josh?</P> <P>MS.&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp; :&nbsp;&nbsp; Sure.&nbsp; I'm Dawn with Dow Jones.&nbsp; I have a question for Michael that might kind of put you on the spot.&nbsp; I'm sorry.</P> <P>Last year--you seem to have switched your opinion on whether receivership would affect the GSEs' credit rating; is that correct?</P> <P>MR. DESTEFANO:&nbsp;&nbsp; Yes and no.</P> <P>[Laughter.]</P> <P>MR.&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp; :&nbsp;&nbsp;&nbsp; Senator Kerry, where are you?</P> <P>[Laughter.]</P> <P>MR. WALLISON:&nbsp;&nbsp; Reporting for duty, captain.</P> <P>[Laughter.]</P> <P>MR. DESTEFANO:&nbsp;&nbsp; First of all, it doesn't put us on the spot, and I'm glad that somebody in the capital markets has a memory longer than--</P> <P>MS.&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp; :&nbsp;&nbsp; That's not the part that's going to put you on the spot.</P> <P>[Laughter.]</P> <P>MR. DESTEFANO:&nbsp;&nbsp; Thirty days.&nbsp; Okay.</P> <P>[Laughter.]</P> <P>And our reaction to the legislation last year which was, you know, it over--and really fed in part into our decision to consider these, you know, as three, was all sorts of things that were both in the legislation and that were being said around the framework of the legislation.&nbsp; And we perceived that receivership could have, we thought at the time, you know, a meaningfully inhibiting effect upon Congress' ongoing oversight role, which we've repeatedly said is really important to our view of the creditworthiness of the securities.&nbsp; And, however, having now said that we're, you know, talking about Category-3, strong governmental interest, the receivership, you know, plays less of a role in our overall thinking.</P> <P>And then we also think that when you step back and you look at the dynamic of the whole process that, you know, Congress is not saying to bond holders you're going to get a regulator, and we're walking and don't expect any--because, you know, there's lots of that preserves the role of Congress.</P> <P>And so our sense is that, you know, in the final analysis, you know, insofar as it's appropriate, there will be, you know,&nbsp; congressional input into any ultimate resolution of a GSE.&nbsp; And I think it's--in the Fed paper you talk about, you know, even in your view of the receivership, it wouldn't extinguish the charter.&nbsp; That could only be done by Congress.&nbsp; Was that in your paper?</P> <P>MR. EISENBEIS:&nbsp;&nbsp;&nbsp; Right.&nbsp; Mm hmm.</P> <P>MR. DESTEFANO:&nbsp;&nbsp; So, you know, I think even in terms of existing legislation, there is, you know, building in a role for Congress.&nbsp; So, you know, so I think that in our analytics, we're at the different places now than we were last year.</P> <P>MS.&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp; :&nbsp;&nbsp; You're saying that you think that whatever bill passes that there will be some sort of congressional review a la the Bennett Amendment?</P> <P>MR. DESTEFANO:&nbsp;&nbsp; No, because we don't even know what the proposed legislation is, you know.&nbsp; We don't know what the proposed legislation is, but if it--</P> <P>MS.&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp; :&nbsp;&nbsp; But the proposed--</P> <P>MR. DESTEFANO:&nbsp;&nbsp; A la--</P> <P>MS.&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp; :&nbsp;&nbsp; In the Senate, it's the Shelby Bill without the congressional review.</P> <P>MR. DESTEFANO:&nbsp;&nbsp; Right.&nbsp; Right.&nbsp; Right.&nbsp; Without tagging on a congressional review, in our view, unless there's something ultimate to lead us to believe that there would no role for Congress, we would assume that there would be a role for Congress.</P> <P>MS.&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp; :&nbsp;&nbsp; Even though the White House has said they would veto that?</P> <P>MR. DESTEFANO:&nbsp;&nbsp; Yeah.&nbsp; No, I'm not saying that they would have to be the mechanism.&nbsp; Let' say you had the Shelby Bill pass.&nbsp; Okay?&nbsp; And the Shelby Bill says you can have receivership, dah, dah, dah, dah.&nbsp; The Shelby Bill doesn't say that there's no role for Congress; that Congress can't have a debate; that Congress cannot intervene.&nbsp; You know, the farm credit system is subject to receivership.&nbsp; And as we all know, both part of the farm credit--I'll get the--okay--both part of the farm credit system was liquidated, and we had a recapitalization.</P> <P>Now I'm--shaking--we've always considered the receivership in the farm credit and the FO2B context sort of [tape gap] light.&nbsp; You know, that you can reorganize the system and cut out pieces of it but that you weren't going to close down the whole system by a receivership.&nbsp; Is that what you were--was that your?&nbsp; Yeah.</P> <P>And I don't know, you were looking into the receivership provisions--</P> <P>MR. CARNELL:&nbsp;&nbsp; Still are.</P> <P>MR. DESTEFANO:&nbsp;&nbsp; And still are.&nbsp; Yeah, and we could be corrected on that, but our sense was that, you know, in the multi-part systems, you know, receivership, liquidation, you know, is more easily accomplished than if there's only one [inaudible].</P> <P>MS.&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp; :&nbsp;&nbsp; My follow-up question is dealing with analysts and Fannie and Freddie.&nbsp; When Enron stock dropped from $60 a share to $10 a share, analysts continued to have strong buy ratings on the stock, and it seems like the same thing is happening with Fannie; and the same thing with the debt.&nbsp; And you in particular last year, when you came out saying that the receivership provision would cause you to downgrade their debt, I'm hearing--I'm only asking because I'm hearing increasing rumblings from the Hill and from staff at other agencies that Congress is really ticked specifically at S&amp;P for doing that.&nbsp; And the belief is that Fannie Mae put you up to it, to kind of lobby them.</P> <P>So I have to ask did Fannie at any point, or Freddie, indicate to you that they would like that they would like that information to get out there in the press?</P> <P>MR. WALLISON:&nbsp;&nbsp; I'm glad you weren't putting him on the spot?</P> <P>[Laughter.]</P> <P>MR. DESTEFANO:&nbsp;&nbsp; Oh, gosh.&nbsp; How does one begin to respond to that?&nbsp; One, we never said that receivership would lead to a downgrade, but that receivership is something that we would look at, just as we would look at anything else of a nature that could change the relationship between the GSEs and Congress.&nbsp; Okay.</P> <P>And--</P> <P>MS.&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp; :&nbsp;&nbsp; But you said it would cause them to lose their triple-A status.</P> <P>MR. DESTEFANO:&nbsp;&nbsp; Mm hmm.</P> <P>MS.&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp; :&nbsp;&nbsp; I can get the quotes.</P> <P>MR. DESTEFANO:&nbsp;&nbsp; I'd like to see the quotes because we never said that.&nbsp; I never said that.&nbsp; And in the nature of things, we would never say that unless we were taking a rating action along that line.&nbsp; So that's not the case.</P> <P>And whether we are a registered lobbyist for Fannie Mae and Freddie Mac I think the answer to that is no.</P> <P>MS.&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp; :&nbsp;&nbsp; But did they at any time indicate that they'd like to get that information out in the press, or out in the public somehow?</P> <P>MR. DESTEFANO:&nbsp;&nbsp; I think I know what you're asking, and it would be really tough for me to answer, you know, in a way that would--I'd have to answer, you know, was this their initiative?&nbsp; No.&nbsp; Do they have independent grounds other than rating considerations to care about receivership is something you would have to ask them.</P> <P>MR. WALLISON:&nbsp;&nbsp; Josh.</P> <P>MR. ROSNER:&nbsp;&nbsp; Josh Rosner [ph].&nbsp; Two quick questions.&nbsp; The first one is for the presenters on the receivership authority, do you think that the ultimate receivership powers should reside at either OFHEO or a new regulator or should there be consideration of the FDIC as being involved in that.&nbsp; That's that first question.</P> <P>The second question is for Michael.&nbsp; You suggested that it used to be when it was a Category-1 that you would start with the analysis of the guarantee and as a Category-3 you would start the analysis on the fundamentals.&nbsp; You suggested that as a Category-3, you start with the fundamentals and then add back your understanding or your view on government guarantee.</P> <P>MR. DESTEFANO:&nbsp;&nbsp; Yeah.</P> <P>MR. ROSNER:&nbsp;&nbsp; So given the leverage ratios, the operational risk weaknesses that we've seen, the G&amp;A spending as a percentage of portfolio growth, et cetera, what would your rating be before you add back the government piece?</P> <P>MR. DESTEFANO:&nbsp;&nbsp; Okay.&nbsp; That is in the public domain, and that's in effect our risk to the government rating, but let me explain what that includes</P> <P>Our risk to the government rating is the same as what we call our status quo financial assessment, and it's looking at the entity as it is, with all the benefits and negatives of its relationship with its government.&nbsp; And it's on that basis, saying, you know, what's the risk that that could fail.&nbsp; Okay.&nbsp; And the risk to the government, the point being and cost the government money.</P> <P>So on that basis, our financial assessment for Fannie Mae is still double-A minus and it's on credit watch.&nbsp; Negative under review.</P> <P>MR. ROSNER:&nbsp;&nbsp; So you're suggesting that if we were to compare the financials to other companies before adding back the risk to the government piece that other companies with these financial characteristics would have a double-A?&nbsp; Is that what you're suggesting?</P> <P>MR. DESTEFANO:&nbsp;&nbsp; It depends on what you mean by the financial characteristics.</P> <P>MR. ROSNER:&nbsp;&nbsp; The leverage ratios.&nbsp; The thin capital base.</P> <P>MR. DESTEFANO:&nbsp;&nbsp; Okay.&nbsp; Okay.&nbsp; If you--</P> <P>MR. ROSNER:&nbsp;&nbsp; The operational weaknesses.</P> <P>MR. DESTEFANO:&nbsp;&nbsp; Okay.&nbsp; If you include in that--okay--if you include in that their cost of funds and their liquidity, because of their access to the market, yes, they would--</P> <P>MR. ROSNER:&nbsp;&nbsp; But so what you're really saying is that you are building the government guarantee into the model and not doing it afer the fact?</P> <P>MR. DESTEFANO:&nbsp;&nbsp; Yeah.&nbsp; We have--</P> <P>MR. ROSNER:&nbsp;&nbsp; Because those are characteristics of that?</P> <P>MR. DESTEFANO:&nbsp;&nbsp; Yes.&nbsp; We have never said that our risk to the government rating is a full privatization of Fannie Mae, because we have no idea what a fully privatized Fannie Mae would be.</P> <P>MR. ROSNER:&nbsp;&nbsp; But you did suggest that the financials were the basis?</P> <P>MR. DESTEFANO:&nbsp;&nbsp; Yes.&nbsp; The status quo financial assessment.&nbsp; Okay?&nbsp; And that's everything that they exhibit today, which includes capitalization, liquidity, profitability, asset quality--</P> <P>MR. ROSNER:&nbsp;&nbsp; Hedging costs?&nbsp; Credit--</P> <P>MR. DESTEFANO:&nbsp;&nbsp; Yes.&nbsp; Et cetera, et cetera.</P> <P>MR. .ROSNER:&nbsp;&nbsp; Cycles</P> <P>MR. DESTEFANO:&nbsp;&nbsp; Yes.&nbsp; All of that.&nbsp; All of that.</P> <P>MR. WALLISON:&nbsp;&nbsp; Well, this is interesting.&nbsp; Okay.&nbsp; We--</P> <P>MR. EISENBEIS:&nbsp;&nbsp; Let me ask the part about FDIC.&nbsp; We didn't have any particular views as to who actually should be the one who does the liquidation, and, you know, we're agnostic on that particular issue.&nbsp; It's not obvious since there's no insurance that it would necessarily--that there be necessary advantages to putting the receiver in FDIC.&nbsp; But I think the ultimate answer would come down to a pretty careful consideration of how the regulatory incentives might be affected by who had that particular power, which I think is the important kind of issue and consideration.</P> <P>I wanted to make just one observation, sort of replying to point that Burt made.&nbsp; You know, I don't think that the answer solely lies in receivership without a lot of attention to being paid to how things are administered.&nbsp; And similarly, bankruptcy is not a panacea.&nbsp; There's been a lot--I mean, Chrysler was subject to the bankruptcy laws and yet government stepped in and bailed Chrysler out.&nbsp; So, you know, putting some--having the bankruptcy statutes doesn't necessarily carry much distinction with it.&nbsp; And there's an interesting study that George Kauffman [ph] had done, which showed that the losses on assets of companies in bankruptcy were much greater than the losses on assets of institutions in bank bankruptcy.</P> <P>And so your ultimate preference I think would hinge upon how much of the sort of going concern and other kinds of values of the assets you're willing to sort of try to preserve and how quickly you want to preserve them than anything else.</P> <P>MR. WALLISON:&nbsp;&nbsp; Okay.&nbsp; Let me take John in the back.&nbsp; John, will you identify yourself, please?</P> <P>MR. BARNETT:&nbsp;&nbsp; Yes.&nbsp; John Barnett [ph] from HUB D Capital.&nbsp; This is for Mr. DeStefano.&nbsp; I was on the S&amp;P call when you talked about how you were changing the rating a few months ago, from one to three, assuming that it wasn't--</P> <P>MR. DESTEFANO:&nbsp;&nbsp; Right.</P> <P>MR. BARNETT:&nbsp;&nbsp; Right.&nbsp; My question is on that call you mentioned that you weren't looking at OCI in your rating because you thought it would all work out in the end.&nbsp; My question is: In the future, are you going to change and look at OCI and also are you going to look at more market value based on?</P> <P>MR. WALLISON:&nbsp;&nbsp; John, you'll have to describe OCI for everybody here.</P> <P>MR. BARNETT:&nbsp;&nbsp; Yeah.&nbsp; Other comprehensive income.&nbsp; I'm sorry.&nbsp; Where Fannie Mae's large derivative losses were that they're going to have to bring back under--</P> <P>MR. WALLISON:&nbsp;&nbsp; That's right.&nbsp; Okay.</P> <P>MR. DESTEFANO:&nbsp;&nbsp; Yeah.&nbsp; Yeah.</P> <P>MR. BARNETT:&nbsp;&nbsp; Their financial statements.&nbsp; Are you going to look at those and also more market value type measures that Robert was talking about in his presentation?</P> <P>MR. DESTEFANO:&nbsp;&nbsp; Yeah.&nbsp; I think the answer to the second is yes.&nbsp; But in answer to the OCI, I think our strong inclination will be to follow the regulator and, you know, to the extent--in other words, the regulatory capital measures.</P> <P>Now to the extent that you don't qualify for, you know, the OCI treatment, then that's going to appear, you know, immediately in the regulatory capital as well as in the GAAP capital.&nbsp; So, to a certain extent, you know, the issues goes away if they're not using, you know, 133 or not using it as much as they were using it.</P> <P>In terms of, you know, GAAP capital as a pledge of financial institutions, it raises all sorts of interesting questions.&nbsp; And maybe one way out, you know, is to move more towards, you know,&nbsp; a full market value of the firm and to track that on a quarterly basis.</P> <P>But that's not necessarily an easy solution, because there's lots of, you know, problems associated with that approach as well.</P> <P>You know, it's sort of interesting that at year-end 2003, when GAAP capital was around $22 billion and the RAP capital was $30 billion that the full mark to market of the firm was $30 billion.&nbsp; And to a certain extent, you could say that was sort of accidental or you can say that, you know, all three provided, you know, different insights, you know.</P> <P>But, yes, in terms of trying to move towards, you know, a more fully market value approach, you know, insofar as you can do that.</P> <P>MR. WALLISON:&nbsp;&nbsp; Okay.&nbsp; This will be the last question.&nbsp; I should say that if anyone--we're going to end after this question, but if you need to leave now, we were supposed to leave at 4:00 p.m.--or end at 4:00 p.m., and this has been so interesting I didn't want to break it up.&nbsp; So if you want to go, we won't consider you rude.&nbsp; Please identify yourself.</P> <P>MS. HAMICK:&nbsp;&nbsp; Okay.</P> <P>MR. DESTEFANO:&nbsp;&nbsp; If I go, will you consider me rude?</P> <P>MR. WALLISON:&nbsp;&nbsp; Yes.&nbsp; Yes.</P> <P>[Laughter.]</P> <P>MR. CARNELL:&nbsp;&nbsp; Category-3 rudeness.</P> <P>MS. HAMICK:&nbsp;&nbsp; My question is for you, Michael.&nbsp; Please don't leave.&nbsp; I'm Shelly Hamick [ph] with the National Association of Homebuilders, and I just want if you could clarify something, because the issue of receivership has--is an issue that a lot of us in the housing industry have been grappling with, and particularly the impact that it has on the whole--you know, and&nbsp; perception of the implicit guarantee and triple-A status and it's everything we've been discussing.</P> <P>And I just want to clarify that you said that even if there's a receivership provision in the bill and it--depending upon if it's structured properly so that it would have appropriate creditor--you know, prior to your claims, et cetera.&nbsp; Even if there wasn't a congressional check off as part of that provision, but if there were other provisions or statements within legislation which, in fact, reaffirmed Congress' commitment to the GSEs that the markets would still have the view of the GSEs with the implicit guarantee and the triple-A status.&nbsp; I guess that it would not have a negative impact on investors' perceptions?</P> <P>MR. DESTEFANO:&nbsp;&nbsp; I guess there would be one, the rating question, and, you know, again, we'll look at it.&nbsp; We'll look at the whole package.&nbsp; We'll reach a conclusion, you know, in terms of the whole legislation.&nbsp; And in light of the things I've had to say here about receivership and current perception as well as our analytical starting point.&nbsp; The market is the market, and, you know, I don't know, but my sense is there's still such residual confidence, as I said in government is for it, that, you know, it could very well--whether we took rating action or not--it could very well lead to, you know, no effect.</P> <P>But, I mean, I can't predict that.</P> <P>MR. WALLISON:&nbsp;&nbsp; Okay.&nbsp; That will have to be the last one.&nbsp; I appreciate everything the panel did.&nbsp; Two excellent papers and excellent commentary.&nbsp; And I appreciate all of you coming.&nbsp; So thanks very much, and we'll see you at the next conference.&nbsp; On the 15th of February, there's a conference on G-Fees.&nbsp; So if you're interested in Fannie and Freddie, G-Fees is up next.&nbsp; The 15th of February in the afternoon.&nbsp; Thank you very much for coming.</P> <P>[Applause.]</P> <P>[END OF TAPED RECORDING.]</P></body></html>