you can't just generalize by using the american experience. >> i certainly can.

i'm talking about the united states. >> well, i'm not. >> ok. >> you have to look elsewhere. >> ok. >> we'll leave that book to you. [laughter] >> hi. it is very interesting that this gentleman more or less mentioned what i wanted to say. but however, i'm going to start with the history of white people. i was expecting more universal type of situation, and i do realize with here, the people, and you as the author, that we are back to the same subject, black and white in the united states. it just happens that i do come from another country, and you mentioned france. you actually six or seven months

ago, i was asked what's your race, because i was fielding a question by phone from the washington hospital. and the man was the questionnaire and he said caucasian and i said yes and then i said no, no, black. and he said black? and i said yes, because i'm a descendant of lucy most likely, so i'm black. so what i want to say to you is please, give us a book next time which gives us a view of the universal black and white world. thank you. [speaking in french]

>> hi. >> hello. >> just another angle, i used to live in the u.k., and if you want to talk about how characterization gets taken to the extreme, and that is people of color. so if you're black, you have -- we have basically a whole laundry list, are you black african, black caribbean. if you're black mixed, who are you mixed with and then there's black other, because as i say, i was black american living there, but when you look at the english white, it's basically just one category and the question is, what will it take and when will it become desirable for white people to actually describe themselves to the same degree that other races are asked to

describe themselves, or is there a fear that there will be a loss of power, because one statement -- >> we're going to leave this recorded program now and t you live to a third day of hearings, this week on the 2008 financial crisis. the focus today, the government-backed home mortgage holding company, fannie mae. witnesses include two former high ranking executives from that organization. phil angelides on you were screen. the treasurer of california and the chairman of the inquiry commission, former house ways and means committee chairman bill thomas of california is co-chair. live coverage on c-span2. >> today we will be examining what occurred at fannie mae and its regulateo, the office of federal housing enterprise oversight, and its successor agency, the fhfa, the federal housing finance agency. this morning, we'll be hearing

from mr. daniel mudd and robert levin, who were with fannie mae, so thank you very much gentlemen for joining us this morning. i'm going to start off by asking you to do what we have customarily done with all witnesses to date and we will do with all witnesses from here on forward and that is to ask you both to stand so i can administer the oath to you. do solemnly swear or affirm independent of perjury that the testimony you are about to provide the commission will be the truth the whole truth and nothing but the truth to the best of my knowledge. thank you very much. we are going to start this morning by asking each of you to give a oral opening statement. we have your testimony in hand and we thank you for that. we'd like you each to take no more than 10 minutes for your oral statement. and mr. levin, we're going to

start with you today, and so, we're ready for your testimony. before i start though, mr. vice chairman, would you like to make any opening remarks this morning? >> no thank you, mr. chairman, but i would take the opportunity as is usual with me to ask you that if over the rest of the commission's existence, we have reason to continue discussion over at the material that you've presented, would you be willing to respond to written questions in a timely fashion, in an ongoing way? thank you. thank you, mr. chairman. >> mr. levin, proceed. >> oh and by the way, one last item, you will see a light in front of you and when it gets to one minute, if you see these little lights on the table, it will move to yellow with one minute to go and red when time is up. >> and that means it's liftoff.

no[inaudible] [inaudible] >> -- these are my thoughts now. i'm happy to provide whatever assistance -- >> mr. levin, if you would move the mic a little closer. they're very sensitive and direction am. is the light on on the mic? yeah, it just needs to be a little close early. -- closer. >> we'll start your time over, good sir. >> oh, i'm sorry. >> that sounds better. >> it sounded like a very weak mic. >> it's now -- >> we'll start over. good morning, mr. levin. let's go ahead and start over and let go. >> ok.

start over from scratch, sir? ok. mr. chairman, mr. vice chairman, and distinguished commissioners, thank you for providing me the opportunity to appear of about you today to assist the commission in examining the causes of the financial crisis. as you know, i submitted to the commission a written statement in advance of the hearing and i will not repeat the more detailed explanation, but i thought i would highlight a few of my thoughts now. i am happy to provide whatever assistance i can and will do my best to answer all of your questions to the best of my ability. i was at fannie mae for 27 years. until my retirement in august 2008. and while i left fannie mae prior to the takeover, and the imposition of conservatorship, i continued to work as an adviser to senior management for sick months at the request of the new

c.e.o. . at fannie mae, i was privileged to work with many fine individuals including mortgage lenders, community groups, housing organizations an other stakeholders to help americans achieve the dream of homeownership and affordable rental housing. my pride at the contributions of fannie mae has understandably been overshadowed by the events that give rise to this hearing. from my perspective, fannie mae was engulfed by an unprecedented decline in home prices and resulting dislocations in the housing markets. and these were truly catastrophic. while some people foresaw a correction, few, if any, predicted the unusually rapid and devastating destruction of real estate values that occurred. in hindsight, if we and the industry as a whole had been able to anticipate the nature and extent of the crisis that

engulfed the market, it is clear that we all would have conducted our business differently during this period. but we, like everyone else, were surprised by the unprecedented extent of the economic crisis. however, fannie mae, unlike other financial institutions, was restricted to one class of assets because of the charter, and thus we took the brunt of the crisis head on. at the same time the global economy was in the middle of a liquidity and credit crisis that damaged the capital markets. shortly there half, unemployment rose. this extraordinary upheaval in the economy and in the mortgage market in particular challenged fannie mae in ways that would have been difficult to overcome regardless of any business decisions that preceded the crisis. as the commission is aware, congress created fannie mae as a government-sponsored enterprise, and as such, we had a variety of important stakeholders, which

included the congress. our mission and safety and soundness regulators, private shareholders, debt and mbs investors, mortgage lenders, housing organizations, and others. as a private company, fannie mae raised capital from investors and sought to provide them with pa competitive rate of return. as a company with a public purpose, fannie mae sought to ensure the liquidity of the mortgage market, its only permissible line of business and to promote affordable housing, which also included meeting government-mandated housing goals. the housing goals were set forth inane's charter act. some of the goals relat relatedr single family business, some related to our multifamily. some goals specified that a certain level of our business be at income levels, and hud

increased the goals from time to time, frequently requiring levels of affordable housing and underserved market business that were higher than what our market naturally produced. in response, the company engaged in efforts to create business, to help us meet the goals. these efforts included outreach programs and the application of different underwriting and pricing standards. part of fannie mae's business in the secondary mortgage market was to purchase and securitize mortgage loans created by lenders. fannie mae's influence on the type of loans that lenders originated often changed, depending upon market conditions and the availability of alternative sources of capital for lenders. when fannie mae was one of the principal sources of capital in the mortgage market, fannie mae's influence was greater. when other sources of capital were more plentiful, as in the period prior to the crisis,

fannie mae's influence was diminished. fannie mae and the other gse's were unique. we took our duties to our shareholders and our public missions very seriously. interest throughout most of my 27 years at fannie mae, the company was able to balance successfully its potentially conflicting objectives. however, this was more difficult when the markets experienced significant change and during periods of great stress in the system the growth in the last decade of the private label securities backed mortgage is one such change that had a significant impact on the mortgage markets and fannie mae. private label securities, or pls for short, are mortgage-backed securities issued by entities other than fannie mae, freddie mac and ginny mae. subprime mortgages, alt-a

mortgages and jumbo loans were financed. in 2003, which was also a year of heavy refinance activity, the size of the pls market was about of half of the size of fannie mae'fanniefanniemae's securityi. in 2004, that changed dramatically. in 2004, the plf increased. plf exceeded that of -- almost reached the levels of fannie mae and freddie mac combined. in 2005 and in early 2006, that trend continued, with the dollar volume of pls issued exceeding the mbs issued by fannie mae, freddie mac and ginny mae combined. the effects of pls on fannie mae's business were significant. our business activity relative to the overall market declined dramatically during this period of time. secondly, many of the new products funded by pls had

features that attracted low income borrowers, which threatened our ability to meet our mandated housing goals. fannie mae had never previously experienced market changes of the magnitude that we were seeing during this period. there was an article in 2006, in a publication called mortgage banking, which i quote in my written statement, which summarized the significance of these trends and to briefly quote it here, "a change in the mortgage-backed securities market that began more than two years ago appears to have completely reshuffled the industry's deck of cards. now issuers of pls are holding the aces that were once held by the government-sponsored enterprises, fannie mae and freddie mac. once a junior, the powerful player in the market, plf's are now the leading force driving product innovation and net overall volume of mortgage origination.

further, it appears that the new dominant role for private securities may be here to stay. unquote. the pls phenomenon and the resulting consequences for our business confronted fannie mae with critical strategic questions. first, were the changes temporary or were they permanent, and second, would we best be able to deliver competitive returns to shareholders, stay relevant to customers, and meet our mission requirements by doing nothing new or by increasing our participation in these markets to some degree? these and related questions were the subject of continuous and serious discussion and in-depth analysis by the fannie mae management team and the board of directors over the last decades. we address these issues in a series of dedicated strategic planning sessions, as well as day-to-day discussions. we consider the credit risks in

the new markets, our capabilities to manage the business, and the impact on our achievement of housing goals, our financial results, and our strategic positioning in the marketplace. these considerations led management to expand fannie mae's already existing alt-a business, incrementally over time. in implementing these decisions, management continued to mitigate risk by applying underwriting standards that were more conservative than the standards prevalent in the market at the time. although fannie mae's alt-a books sustained disproportionate losses, it did perform better than the market and sustained smaller losses than otherwise might have occurred. our involvement in the subprime market was minimal. it primarily consisted of the purchase of the aaa rated private label securities, secured by subprime loans. and these purchases contributed greatly to housing goal objectives. with the benefit of hindsight,

had we anticipated the extraordinary market meltdown, we would have been far less likely to ex pan our involvement in these non-traditional products. we began to reduce our participation in the alt-a market in 2007, as the market and our business took a turn for the worse. we have tried to balance the pace of our withdrawal with our public mission to provide hi quid it's, a critical function as the pls market had dried up. >> can you wrap up, mr. levin, please. >> yes, sir. in closing, an unprecedented decline in home prices, a high unemployment rate, a global liquidity and credit crisis engulfed fannie mae in its only line of business, the secondary market for mortgages. these crises were centered on our market an our asset class and we took the full brunt of the market crisis head on, which would have been difficult for the company to deal with under any circumstances. thank you. i'm pleased to answer my questions that you have.

>> >> thank you very much. mr. mudd. >> thank you, mr. chairman, mr. vice chairman. i've had the opportunity to watch some of the commission's proceedings this week, and having submitted remarks which cover a broad array of topics, i'm going to try a little bit to tailor my remarks to some of the issues that you've been pursuing and thank you for the opportunity to appear today. i join fannie mae as the chief operating officer in 2000, following a decade at g.e. in december of 2004, i served as interim chief executive officer and in june of 2005, the board of directors with the approval of our regulator named me the c.e.o. during my time at fannie mae, the company and the u.s. housing markets faced many challenges. during the early part of my tenure, i worked to reinvent the company, and move forward with a sense of purpose, and value and

humility. i worked to improve the relationship between fannie mae and its regulator, the former ofheo, and to return fannie mae to timely filing status with the s.e.c. after completion of that, one of the most complicated restatements in recent history, the company emerged to fails the housing depression in the financial crisis and it did not survive. i want to be clear, i was the c.e.o. of the company, and i accept responsibility for everything that happened on my watch. over the past couple of days, i've heard mr. greenspan assign himself a 70/30 rating and i believe the chairman gave himself a 51/49 rating. i am envious. my experience was during the crisis of 2007 and 2008, at the gse's, it was virtually impossible to get on the positive side of that ratio, because so many decisions were a choice between unsavory

alternatives. certainly fannie mae endeavored to be best in class and to continuously improve our business. we hired talented executives to bear in mind world class risk executives, maintain strong controls, and comply with regulations. i did the best that i knew how to consider alternatives, to develop processes, to listen to critical voices, and ultimately to try to predict the perilous path of the housing mark. i could not do what a private firm could do. leave the market, close the window, or short mortgages. the gse's had to stay in the market, provide liquidity and obviously were structured to be long only mortgages. the gse structure required the companies to maintain a fine balance between financial goals and what we called mission goals. on one hand, without revenue and profits and growth, the company

could not attract global capital to the u.s. housing market, and on the other hand, without meeting the mission goals for affordable housing and liquidity, the gs e's could not meet the requirements of their professional chart early. thus i agree with former treasury secretary palm wallison's ultimate assessment that the root cause of the gse's troubles lies with their business model, a mono line gse asked to perform multiple tasks cannot withstand a multiyear, 30% home price decline on a national scale, even had it been without the accompanying global financial turmoil. the government sponsored enterprises were able to balance business and mission when home prices were rising. they could perform when home prices were flat. they could survive a 30-year flood, but not 2008. as you know, the gse's acquire mortgages in the secondary market to promote liquidity, stability, and affordable housing for the american people.

the congressly created gse businesses were specifically prohibited by law from participating in any business outside the secondary market for mortgages in the united states. unlike other financial institutions, this left the gse's unable to diversify and therefore to avoid losses stemming from any u.s. housing finance crisis. in 2007 to 2010, was not merely a housing crisis. we witnessed the market collapse, a collapse of the only market that the gse's were in. starting in 2007, the financial sector grappled with what most observers view as the worst conditions ever seen in the modern capital markets. in the midst of turmoil, virtually every other housing sector investor fled the market, and the gse's were specifically required to take up the slack. through the spring and summer of 2008, my colleagues and i worked with government officials, regulators, our customers in the banking system, housing

advocates, and others to maintain the excruciating balance between providing the liquidity to keep the market functioning, and protecting fannie mae's regulatory capital. until the time the government imposed confer nestorship, ofheo stated fannie mae had maintained regular standards and we were still the principal source of funding to the mortgage market. based on ongoing examinations and frequent if not daily meetings into late august 2008, our regulator continued to declare us in full compliance with our capital requirements. we were also balancing against our hud housing goals, our role in the global capital markets, our fiduciary responsibility to our shareholders, and critically, the need to help individual homeowners afford their mortgages, stay in their homes and avoid unnecessary foreclosures. and we sought this balance consistent with a very strict interpretation of our congressional charter.

as the crisis became havoc, fannie mae was called upon by the administration to refinance subprime borrowers who could qualify for a fixed rate loan. the gse's were asked to provide the lead in providing qualifications, they were asked to provide warehouse loans by lenders who had previously resisted the idea of fannie mae or freddie entering that market. from other corners, fannie mae and freddie were variously pushed to rescue more bore recorders and cut costs. i sought to balance the fine points of mission and business insofar as i could understand them, with the support of regulators and policymakers. that was no longer possible by september 6, 2008. and i am sorry for that. since that time, as all agree, the companies have been operated to implement public policy. as i have tried to explain, a considerable portion of my energies went into balancing the increasingly conflicting demands of operating an enterprise sponsored by the government.

that notion of balance is now a thing of the past. shortly after confer nestorship the regulator declared the housing goals and capital standards invalid. i believe in retrospect, that there was overinvestment in housing. i believe in retrospect, origination standards slipped. there was too much intermediatation. there were too many middlemen. homeownership rates probably rose too high. the gs ess were chartered to expand homeownership while operating as private companies. in doing so, they contributed to the crisis, but they did not precipitate it. let me end by suggesting that homeownership remains a central dream for many americans. i believe that once this crisis is behind us, the fundamental and solid economics of homeownership will reassert themselves, and i hope in that, there's hand opportunity to engage in the future structure of the housing finance system. there was a lasting consensus in this country, really going all

the way back to the great depression that homeownership was a net good for individuals, for communities, and for the country at large. absent some new consensus, i fear it will be difficult to choose between competing models for a new housing finance system. government entities created to support homeownership as a social good will tend to socialize the risk to all taxpayers. purely private companies will exercise their fiduciary responsibility to pass the costs and the risks to homeowners. hybrid organizations such as gse will be left to balance conflicts between taxpayers and homeowners and share hold earls. -- shareholders. there are no simple answers. i appreciate the commission's work to understand the causes of the crisis and i thank you very much. >> thank you very much, mr. mudd and mr. levin. we will now proceed to questioning by commissioners. i will start with some questions today of before we move on.

and so let me just move into this. so really, to either one of you or both of you, and in each of these questions, i'm going to put some facts on the table for the public and for you. according to your s.e.c. reports, the 2009 form 10-k's, fannie mae reported about $134 billion of net losses in 2008 and 2009. most of which were driven by credit-related expenses, loan losses, which totalled more than $104 billion in credit losses, which totalled more than $40 billion. if you look at the losses, very significantly, they come from loans with higher risk product features, alt-a subprime interest only, loan to value of 90% plus, loans with fico scores of less than 620, that were originated in 2006 and 2007.

at the heart of it, looking back on that business decision, would you kind of go to the thinking behind the -- your thinking behind, as leaders of this organization, really, the dramatic expansion in these higher risk products in that 2006-2007 period, what was at the core of the decision to move more dramatically into that arena and just for the edification of you and others, i guess as you look at losses, for example, in losses in 2007, all loans, the selected higher risk product features, constituted i believe, 29% of the loans, the 58% of the losses, in 2008, 28% of the loans, 75% the losses. in 2009, 24% of the loans and 69% of the losses. >> mr. chairman, certainly the

higher risk loans put on the books closer to the time that the underlying home market collapsed were the worst performing and were the first to go. so if you could go back retrospectively and look across the book of loans, i think anybody could -- anybody could say that, in particular, the alt-a book is, as you pointed out in your data, a source of the difficulty. the thinking -- the thinking goes back over a period of time, and just as a bit of context, the company had come out of a period where through the 1990's, fannie mae was really the dominant force in the marketplace, and during the period of the reef statement,

that had slipped on -- restatement, that had slipped on one hand and on the other hand, the market had developed a number of ways to go around and a mortgage was a fannie mae mortgage and alt-a mortgage stood as nothing more than an all eastern difficult to a fannie mae -- alternative to a fannie mae mortgage. so there were a number of questions processed to look at the market and to determine whether the features that went with alt-a mortgages were things that we had been asking for for 10 or 15 or 20 years that were no longer relevant to the market d d yes, sir, i'm sorry. or whether they were key data that were still needed, what were the variances between the a market and the alt-a market and so forth and overriding that, a broad concern that under the continuation of these trends, fannie mae and by derivation,

freddie mac's role in the market would be less relevant, so there was a sort of strategic question of relevance that went to that, led us to use the data that we had to study the market and develop a plan to understand it, go in prudently, buy some securities, get the data, look at the data, develop some experts that understood how the market operated, look at the originators, do business with those we knew and we built it out from there. it was a reflection of the growth that mr. levin described in his statement of that whole segment of the market, that that portion of the book grew. it grew along with the market. >> met me ask very specifically, your market share in 2002 was of the mortgage market, about 29.4%, 2003, 36%. 2004, 24.8%. 2005, 19.6%. was this -- i don't want to tilt it, i want to ask, of the things you laid out in terms of your

considerations, was it market share, competitive positioning that drove you or mission-related items that drove you? >> well, it was -- >> and i'd actually like to ask you and you also, mr. levin. >> i would say it was a combination of those things, but i would say that we did not consider market share itself to be a primary output, so market share to me is kind of a secondary indicator of do you a role in the market, or are you remaining relevant to the market. it's really a very -- >> that's secondary. what's primary? >> primary is the mission component in the business, so are we performing our mission, are we in the markets that we're supposed to be in, is homeownership growing on one hand and on the other hand are we maintaining capital, are we earning a fair return for our investments, are we managing the financial side gentleman. >> i'm asking you to weigh these. so you're really saying market share is not the driver unto itself, but then let me take the two mission related and to be

clear, you're not necessarily talking about public policy related, but it could include that, you're talking about your corporate mission at large and you are saying obviously, return on equity to shareholders, profitability, growth, and then homeownership mission. how would you weigh those? >> i always try to weigh them about equally over the course of time. obviously, on any given decision, you could of move one thing up or one thing down. >> all right. mr. levin. can you pull that mic on and close. >> i'll get better as we go along. the -- i would repeat, i think the items that mr. mudd said. i think the -- you know, the major macro driver was the growth in the private label securities market, which ultimately became larger in issuances than fannie mae, freddie mac and ginnie mae combined and that was the main cause behind the numbers that you went over about our share of

the market. >> so competition from wall street, bluntly stated. >> that impacted our market position dramatically. >> all right. >> also dramatically impacted our ability to influence what was going on in the market, because of the competition. and it posed a number of threats to the company, and it posed a financing threat, because there was simply less business that was coming into our market, the business was going into another market. it posed a mission threat because many of the products that were financed by pls had affordability features and so it threatened our ability to meet our government mandated housing goals. it also threatened our relevance with our customers, and i -- you know, i recall a customer saying, you know, to the degree

i'm doing less business with you, why should i invest in my own company, resources to continue to do -- >> and that person would be? >> that was a conversation on the multifamily side, which was also affected by these same influence, but -- same influence, i just happen to recall that conversation. and you know, then overall, there was the strategic positioning in the marketplace. and so, you know, those were the strategic issues that we were confronting, and that we were trying to deal with, you know, along with associated issues of, you know, to what degree was this phenomenon permanent, you know, to what degree was it temporary, could we really sit out, would we be permitted to sit out, that's what we were grappling with. >> all right. let me see if i can quickly move to some other questions here. not unlike some others, you pursued a highly -- i will say a

highly leveraged growth strategy. your pay sets went from about 1 point -- your total assets plus offbalance sheet guaranteed mortgage-barked securities went from 1.4 trillion in 2000 to $3.2 trillion. your capital ratio is about 1.5%, so that's about a leveraged ratio, if my math training does me well, probably on the order of -- well, i've got it here actually, your leverage ratio was generally either anywhere from 62-1 to up to 73-1. now you weren't alone. i mean, during this same period when you're doubling -- more than doubling your assets, goldman sachs is almost tripling them, jp morgan is almost doubling them, but your capital held was extremely low. just .45% or 45 basis points on your offsheet -- on your offbalance sheet, and if you look at some of the numbers

that, when we look at our investigation of all, you know, your data, it showed that the level of loans with higher risk product features were many times the level of unanimous knee's reported capital. for example, alt-a loans alone were 583% of capital in 2006. 644% of capital in 2007. i just have to ask you, and this is not a question, but what were you guys thinking, just in terms of that extraordinary level of leverage? where you're 62-1, 72-1, so that any kind of market bump is going to shake your company to its very foundations, if not collapse it. >> it's a terrific and fundamental question, mr. chairman. my interpretation is that by virtue of the gse's being put into business as private companies with a public mission, the private company component of it, in order for fannie mae and

freddie mac to attract global capital and put it to work in the u.s. housing market, we had to be able to provide a competitive return on that capital, competitive with our financial institutions. other financial institutions during the period of my memory, probably in the 15, 18, 20% range of return on equity, our return, probably one notch below that in the 15% to 17% range of return on equity, so in some sense, the capital, which was statutory, on the government side, became the capital to do business on the business side of the equation. >> but that was the minimum capital statutorily, you could have been of above that. >> and we were. we were above the minimum capital. there was a regulatory override, we were above the regulatory override and in fact, had raised capital all through 2007 and 2008. so that actually, at the end of

my time at the company, we had more capital than we had at any point in the company's recent history. >> all right. let me ask you a couple of other questions here in the way of framework. there are a number of documents we looked at, july 19, 2005 board meeting, where citi and mckenzie, who were financial advisers, you basically stated staying the course was not the option, in other words, that you did have to move into the month traditional market -- non-traditional market more dramatically. there was a february 21 board meeting where i believe you presented a plan that said we need to reverse market share by increasing market share of mortgage-backed securities from 23% to at least 25%. there's a july 18th board meeting, in which you talk about why you need to ramp up again, because of this issue of market share relevance. there was one other report though, june 2005, a mr. left

hand made a presentation called single family guarantee, facing strategic crossroads, in which at least he indicated to us that he recommended staying the course, and i guess had you taken that more conservative -- looking back on it, would it have been wiser to stay your underwriting standards, or would you have been swept under by the size of the wave? >> it's a -- if i can give you a three-part answer. the -- on the last part, the analysis that i've done suggests, if you presume that fannie mae would need to remain a aaa company to do the business that it was in, and you presume that in order to maintain a aaa rating, that agencies usually will require no more than 30% preferred capital, and if you used every dollar of the maximum net income that the company ever

earned, about $6 billion, and put it to servicing additional capital, the maximum theoretical capital that the company could have raised would have been about $90 billion. and that wouldn't have been enough under any circumstances to my knowledge. that's the first part. the second part, mr. lund's presentation, we actually did follow his advice and his advice was, -- we didn't think of it as a black and white choice. do you do the 30 year fully amortized fixed rate loans only or do you do only the other stuff. the question was how far do you want to move to make sure that the market is not going to shift away from me permanently, so his suggestion, as i recall it, was let's stick to our knitting, let's emphasize the product that of after all is our bread and butter, that 30 year loan, but we also need to understand these

other markets and have controlled, managed, high process intensive participation in the markets. and then the third point is actually separated from that, not really part of that analysis, was the mckenzie city work, which was really to assess whether in the context of thinking about the business model that we talked about probably enough today, was another business model appropriate? in other words, should we turn in the charter and privatize the company and thereby restructure our -- through some of these challenges that we faced. >> and let me just -- citigroup was in as a financial adviser to you in this capacity, correct? >> yes. but i don't want to miss answers there. >> no. >> it was -- they were advising, correct? >> they were advising,. >> they and mckenzie were more

or less engaged under the same terms to do the same work, but to do it independently, so that we could -- there wouldn't be group think, if you will. >> here's my last question for both of you and then i want to move on to other members. the memo recommending conservatorship which was september 6, from fhfa, it's a pretty damning document in terms of its assessment from fanney and refers to members of the executive management team made imprudent decisions, many decisions were unsafe and unsound. they go on to talk about despite clear signs in the latter half of 2006 and 2007 of growing problems in the economy, management continued activity and riskier programs and continued its higher eligibility program for alt-a loans. i'm going to ask you to comment on whether you agreed or not with the assessment of the

conservator's report and both of you, as briefly as you can, and i may ask you for more on the record in terms of writing so i don't consume all the time here. >> i had announced my retirement. i never saw that document at that time. >> ok. thank you. >> i did not agree and if i can just back up for a short period of time, throughout the spring, summer, and fall of 2008, we were engaged in a really broad array of wide ranging, good faith discussions with both ofheo and my first visit when i became the c.e.o. was to get in the car and go downtown and see the then director. the first thing i did when the new director came in was gave him a security badge that had

all of the same door openers that mine had. there were examiners on site, we were having conversations every single day. and like with any examination routine, there are issues that are identified. could be self-identified. could be identified by the regulator. you put a project and a process and a budget and some people around them, and you work your way through and that's happening all the time. in this day and age, no examiners are going to sit there and say we're not paying attention to anything, so those conversations continued all the way through the date of that letter and when i -- when i received it, i was -- i had to believe that it had been stuck up in the mail somewhere, and it was something from so far in the past, because the issues were known in the process of remediating, many of them had already been remediated, they had all been identified to the regulator, so i think it simply goes to the context that the purpose of the letter was really

to force conservatorship. >> i may ask for more in terms of written. let me stop my questioning and go to the vice chairman. mr. vice chairman. thank you by the way. >> thank you, mr. chairman. i'm going to hold my questions to the end because there are commissioners who have not only a very great interest in this area, i do as well, but they have spent, not just the time of this commission, but years examining these institutions and the circumstances surrounding them, as you have been asking questions, mr. chairman, so i'll defer my questions until the end and let those folks carry the questioning for now. >> thank you, mr. vice chairman. ms. murren. >> good morning and thank you for being here. i'd like to follow the discussion from earlier about corporate goals and individual professional goals.

and specifically, looking at the way that you determined those particular goals and i also refer back to some of the documents that we've had an opportunity to review, one of them is a strategic presentation from 2007, where gomes are articulated in a list. it's on page 11, for the record. also other documents, including annual reports, proxy statements, internal types of presentations, power points, and what was remarkable to me, or what was noteworthy and perhaps you can help me understand a little bit better, is when goals were articulated in their most elemental form, typically, the growth goals were the first ones, earnings growth, revenue growth, market share growth. and later on, you had also mentioned what you describe as your public purpose or your mission-driven type of orientation. and again, i'd like to get back

to whether you could give us a sense of which ones were the most important, was that in priority, was there a waiting that you could assign, you referenced that you looked at them all equally, would you look at it the same way, could you characterize for us in a more quantitative manner perhaps? >> i can try. the goals changed over a period of time, so one of the -- one of the lingering issues post the restatement was that there had been an overemphasis on earnings per share, so for some period of time, the goals, if you look back at the period of 2005 and parts of 2006, were not related to financial outputs, although there were capital gomes per se, they were mostly related to the things that were the most important to the company at the time. get the restatement, get in a

good -- get in a good faith, goodwill relationship with the regulator. manage risk, build out. we were under a con send order at the time that i took the job. and there was a list of something like 80 items that needed to be completed for that, so that was an objective in that time. what we tried to do in 2007 and 2008 was to kind of rebalance those goals out, so that we didn't lose sight of the mission, responsibility, regulatory side of it, but, you know, if you're not making money, you're not driving profits, you're not increasing revenues, you're also unable to grow your capital and therefore you're unable to participate in the marketplace, so i would say that for me, as the c.e.o. of the organization, it was about an equal balance. for folks that worked for me, depending on the nature of their

job, if it were really -- and it's an extreme example, an origination job or a sales job, that was much more financial goal oriented, but we also had people who did work with indian reservations in the west and they would have mostly goals oriented around the mission, and as you tiered from those folks to me, the proportions would change, but at the top of the organization, i think the concept was always that there was a fine balance to be found there. >> so the notion that because of its order, that revenue and earnings growth were not necessarily the driving forces behind your motivations to achieve your corporate or individual goals? >> they were a driving force, and you know, in my mind's balance, half of it. >> and when you think about compensation, which is, you know, for executives at any corporation that are really oriented to the performance of the corporate goals, there is an

emphasis on stock ownership, which alliance your interest with shareholders. could you talk about what wall street's goals were for your company? i would guess that they were oriented towards earnings and revenue growth, is that correct? >> i'm sorry, just to understand, so what was my impression of what wall street expected as kind of output measures for fannie mae? >> yes, i would think that as a large stockholder, you would be very sensitive to the orientation of wall street, so wall street's impression or their expectations for your company, and what drove the stock price related to financial performance? >> their -- as i think you know from your background, their models are largely related to having financial outputs from the company that go into their models and their expectations for the company's financial performance. i think in addition to that, there was an understanding from the analysts that i talked to

that you know, there was -- there was -- the company had to perform its mission as well, and in parallel or else it would be hard to achieve the financial goals, or the non-achievement of mission goals would translate themselves into headline risk and headline risk in and of itself would have an effect on the stock price, so for the analysts that were on that plane, they -- i think they saw it as a balance, but they didn't necessarily model the mission in the same way that a financial analyst would model a financial goal. >> ok. so there was still a balance there between financial and mission goals, correct? >> i think they saw the company in that light, yes. >> so let's talk a little bit about the numbers. you were over the course of your tenure at fannie mae, extremely well paid, both of you were, correct? >> i think so. >> when you look at how the

board determined compensation, could you talk about how they actually got to the numbers, what was the methodology that they used to determine your cash bonus an your stock compensation? >> directionally, although i was not in the room, it was executive session of independent directors, and i did not make any recommendations whatsoever on my own compensation or see it before it went into the room, but i can tell you what the general process was. the general process was that salaries were set to be competitive at a marketplace level. annual bonuses were determined based upon the achievement of those goals that we talked about, so back to the example for a salesperson, largely sales and revenue oriented, for a mission person, largely oriented around projects that they were working on, or housing goals that they might have brought in the door, and for somebody at our level, kind of an

aggregation of all of those into our individual -- my individual goals were not very distinguishable from the corporate goals, being the top guy. and then the long-term was set to a level, to the best of my knowledge, about 70% of the total compensation for comparable positions in the marketplace. >> ok. so the use of comparables was an important part of determining what the actual numbers were, it wasn't so much a measure of performance per se, but what is the marketplace for someone with your skill set, with your responsibilities, that would serve the same types of institutions as yours that would have similar types of goals, correct? >> yes. i think that's fair. >> ok. so when i go back to the proxy for 2006, on page 33, they also mention that this is in fact correct, that comparability is a

very important part of how you measure compensation and in fact, they give a very specific list of companies, there are 17 of them, against whom you are measured to be comparable and we've now heard for almost 10 minutes about how you served a number of different constituencies, corporate america, your own company, wall street, and a mission driven and a public purpose, but what was really striking to me is in this list of 17 companies, which i will not make you listen to, but i do note that they include aig, countrywide, allstate, american express, wachovia, u.s. bank corp., citigroup and wells fargo among others, there is not one single company there that is a mission-driven company. and i would wonder if you could explain to me, please, why you did not compare your compensation to say, someone like the director of the homeless coalition, because if you have a public purpose, then would your comparables at least not be balanced as much as your goals are, when you think about your comparables? >> that would be the -- two points. that would be the reason that

instead of total compensation being pegged to 100% of the market, it was pegged to be 70% of the market. secondly, my experience in the company was that for the people that we hired, or the people that we lost, out of the company, most them tended to go to companies like those that you mentioned. to the extent that people went to homeless coalition or many of the other organizations that we knoknow relatively well, it was because they had retired and taken on a job there or they were going on to do voluntary service, and so it -- while relevant, it wasn't a competitive factor in compensation. >> but what you're talking about is comparability and motivation and to the extent that you have an opportunity to cloak yourself in the public service mission, whether it be in your goals, or

the carrying out of your activities, i sat on a public company board amongst others and when you look at comparables, they are supposed to span the waterfront of all of what it is that you do and motivates you, and you've just told us that you were motivated by a public purpose, but i don't see that reflected anywhere in how you actually got paid, which to me, suggests that maybe your motivation for doing what you did was not related necessarily in that great of a part to the public mission, but really rather to achieving financial goals. >> well, i have a different opinion. and my opinion is that we have to, as -- during my time, we had to recruit people or try to retain people, and the places they were going tended to be on the business side of the equation. for example, to hire a senior systems person, a senior risk manager, a senior financial

person, the pay for being in a public service oriented organization, unfortunately wouldn't be sufficient to attract them to come to the company, so yes, you have an alternative there and the alternative was probably to get somebody that had less experience in the things that we were looking for. capital markets, risk management, systems technology. and -- but we did -- we did bow to the point you raise i think by saying no, actually, we don't pay at 100% of what those comparers pay for, we pay 70% of that. and that was the balance that enabled us to attract and run the organization that we needed to run the organization. >> i would say that 75% of a huge amount of money is still a huge amount of money. furthermore, could you tell me how many consultants you engaged to determine your compensation both in terms of its amount and also the methodology behind how

you determined it? i think that there were two different firms that were engaged independently. one by the compensation committee of the board, the other by the human resources management, in order to get that comparable data and so forth, and then there was a third override, which is throughout my period senior executive compensation was submitted to the regulator before it was announced, awarded or granted. >> do you recall what you paid those firms? >> i'm sorry, i don't. :

>> to try to gather the critics views as well as the views of others in order to do a better job. and you were hit by a terrible crisis that we've heard about from, i assure you, many other witnesses who have been before us. but the chairman, chairman angelides, did focus on what i think is one of the most important questions that i think we will have to resolve. and that is the reason that fannie acquired so many subprime and alt-a loans, between fannie and freddie, there were about 12 million such loans out of a

total, probably, of about 27 million loans, subprime and alt-a loans altogether in our economy. so it was about between these two companies, about two, fifth of all the loans that were likely to fail when the bubble deflated. so i think it is quite important for us to try to find out why exactly this was done. now it seems to me that there are three possible ways, possible reasons for proceeding in this direction. what were acknowledge to the risky loans. subprime and alt-a mortgages, in other words, between 2005 and 2007, which everyone seems to agree with the ones that have caused most of the financial difficulties for you. first of all, you have mentioned market share, expand market share. maybe you bought them in order to expand your market share.

you said that was a secondary consideration, but that's one that has been repeated frequently in the media as the reason for competing with wall street, or inquiring these loans were competing with wall street, wanted to increase your market share. i think the documentary evidence, and we will go to that, does confirm this was a secondary matter, is even that you're the second idea is that you wanted to make profits, and we did hear this from an academic expert, who the commission had engaged a few weeks ago. that is, that you acquired these loans in order to subprime and alt-a loans in order to make money from them. and the third of course is to comply with hud's affordable housing regulations. and that is what we have been referring to, or you have been referring to as your mission. and i will try to unpack all of

these things because they are, of course, in your mind as they should be in your mind, all mixed together. because they were all very important to the kind of thing you are trying to do with this company. but let me just mention that the hud housing goals did increase substantially during the time that we are talking about here. they started at 30% when they first came into effect in the early '90s. but in 2000, they became 50%. and what that meant was that all of the loans that you had, that you bought, of the loans that you bought from originators, 50% of those, and, you know, this of course, but for the audience they might not. 50% of those have to be to people who were at or below the

median income in the areas where they were living. so 50% starting in the year 2000. it then increased to 52% in 2005. 53% in 2006, and 55% in 2007. in other words, and some of this was in your prepared remarks and i got some of the same sense listening to mr. levin and to you that you are really under pressure from hud here. day, despite the fact that you had difficulties, a county difficulties which required you to spend a lot of time on writing your accounting, getting things back on course in your accounting, hud was not giving up on you. they were pressing on you to continue to make more

investments in these affordable housing loans. so it was going up during exactly the time that we are talking about, between 2005 and 2007. on now, let's consider the things that i was referring to before. first, this question of the market share. now, the chairman made a reference to the presentation by tom lund in june of 2005, and in their he really said we are facing a choice here. we even meet the market, which meant that we are going to have to change the way we do business. we're going to have to go after more of these subprime and alt-a loans because that's where the things seem to be going. or we should stay the course. and he considered whether you had the resources to do that.

not the financial resources, but whether you had the resources of personnel and skill and so forth. and he said no, actually. lack of capabilities, we lack the capability to go into this market. we lack the knowledge of credit risks. we lack -- we lack the willingness to compete on market price. we lack a value proposition for subprime. and we lack a conduit capacity. and there are also regulatory concerns. so basically he says, realistically, we are not in a position to meet the market today. this is in the middle of 2005. therefore, we recommend something you've already mentioned, and that is the stay the course idea. and it appears that you did follow this advice, although it wasn't quite, as you suggested, just not going into subprime. it was too kind of, as he put it in his memo, underground

efforts, develop a subprime infrastructure, develop modeling capabilities for alternative markets, and develop a conduit capacity. so does all that sound right to you about the middle of 2005? you are green with a? >> yes, that's correct. >> now, there is no documentary support for a contrary decision on this marketshare, or relevancy issue, after that may june presentation and recommendation. there's nothing until 2007. there's a very important document in 2007 and i want to take sure that you wrote that. it is an 84 page comprehensive thing that says, it's called and he made strategic plan, 2007-2012. was that your work? >> i believe -- his house like something i would have done, yes. it is a very fine piece of work i might say. and very comprehensive. but i just wanted to be sure

this was the product of management work coming together to decide what the strategy of the company to be. >> we get a document every year. and one of those years it was more extensive, and without seeing it it's hard to be affirmative, but that 84 page, that sounds like the annual strategic planning document that the board would read before going to its annual strategic planning session. >> okay. now, oddly enough it was not dated. but it did refer to the mortgage meltdown as something you have to deal with. and so i would place it then probably in june, july or august of 2007. would that be about right from when you had these regular planning meeting? >> they were normally in the

summer, yes. >> okay. and it focuses of course from its tower, 2007-2012, it focuses on what any will do in the future. it seems pretty clear from the report, however, that there was no plan at this time to move strongly into the subprime and alt-a market. what we see is that that is what is being decided, what has been decided and put in the plan for the future. you say, after months of research, this is from the plan, after months of research, analysis, discussion, preparation, our senior management team met for two days in june in a college classroom near the fannie mae headquarters, and we made several strategic decisions at that point. item one on that list was deepened and broadened business to maximize value, of course.

item two, was to add more credit sensitive assets. and you say under our new strategy, we will take and manage more mortgage credit risk, moving deeper into the credit pool to serve a large and growing part of the mortgage market. helping reputable lenders serve him urging borrowers, provides an enormous opportunity for fannie mae to grow, provide value to customers, the market, and shareholders, and in the end is emphasized in this, expand our affordable housing mission. so it seems to me, and i'd like you to address this, it seems to me that actually only in mid-2007, when this piece was written, was it really decided to expand market share by quote, moving deeper into the credit pool to serve a large and growing part of the mortgage

market. would that seem right to you? >> i will add some perspective to it, mr. wallison. going back to the 2000, was '05 or '06? >> that was all five. >> a process that we would use not uncommonly to discuss the strategy was to kind of create a framework that sets up to alternatives that are starker than the alternatives that exist in real life. and as a result of kind of setting those bookends and having the debate, the outcome -- the outcome was what you described, the single-family head of business recommending, which was that we stay the course, we continue our investment, we continue the

process, we continue to emphasize the 30 year fixed rate mortgage. but that at the same time, we develop the capabilities to understand the business. by way of reference, the book -- fannie mae's investment or participation or guarantee of alt-a goes on the way back to 1999. so the reason i point that out is, mr. lunch presentation was part of a continuum, and participation of that business was part of a continuum. and if you go through, you go through the years, the numbers that i hear, the alt-a business goes from 2000, 10 billion, 30, 60, 90, down a little bit, down a little bit, then 100 then it stays at about 100. certainly it is a significant part of the book.

but the process was to develop those capabilities into construct of your question was, you know, market share, profit, hud goals. my answer is yes. i cannot make any apologies for trying to a profit when i was running fannie mae. if you can't make a profit when you're running the business, you can do the nation. you can't raise capital and all of that. the question was, do you do it prudently. and i think the ultimate measure of prudence is that a big problem and not perfect to be sure, but fannie mae's producer patient in those segments to this day, to my knowledge, is better by a factor of about two mac than the same as in the same securities that were done by the banks and the private, the private market. so i think that the process was solid. the approach built itself that.

there were myriad activities going on between mr. lund's presentation and the strategic document you referenced, including building out -- we hire people from the industry who had been in the subprime business that had specialization in modeling around alt-a and all that. as we did that week that gave us the ability to participate in the market. >> yes, absolutely, you were falling the blonde recommendation. but what i'm trying to pin down is the kind of the date when the decision was made to go more deeply into this subprime and alt-a market. i want to just mention something for the sake of everybody. who is listening. indeed, fannie and freddie, but then he particularly was required in the early 1990s, as i suggested, to start making these kinds of investments. this was not just something that occur between 2005 and 2007.

in fact, in 1999 there was a major hud press conference where the then secretary, secretary cuomo announced that you would be required, you and freddie would be required with new affordable housing requirements to make $2.4 trillion in affordable housing loans, starting right then. and, in fact, there was a statement by president clinton saying this was wonderful, because housing -- homeownership in the the united states was increasing substantially. and that shows in fact that you are under really substantial, i think, political pressure to make sure that you did these things. because not only was it important for all of us to see at homeownership is increasing and the united states, something americans have always wanted, but it was of particular edges

of the clinton administration and then subsequently the bush administration. both of them were focused on improving homeownership. and i would assume you would agree with the. >> i would agree with that. >> mr. chairman, i would yield the commission an additional five minutes of. >> thank you. >> my short comment would be that because fannie mae and freddie mac don't originate, the business that comes in their door and depends upon what originators or others are willing to originate, and then willing to sell to them. but the business being so big, usually an actuarial sample, if you will, of the market would come in. and until the point when the housing goals went north of 50% come just by virtue of being there and receiving loans, the companies generally were able to reach their housing goals with a resume degree of effort.

but the mathematical conundrum that i've always had, mr. wallison, is and you touched upon this, is as far as i understand it, median is about 50%. so when you are required to have 57% of your business be below 50%, that gap of 7% began to -- you had to create not just a normal home for those mortgages, you had to create attraction for those loans to come in in the door, and that took an enormous amount of our time and attention to continue to try to chase that we'll. >> and indeed you make that clear because i want to turn now to the question of could this possibly have been for the purpose of making profits, responding to, as you were speaking with the chairman and ms. murren, you were talking about your responsibility to the

capital markets, to keep the company together as a profit-making operation, hopefully it in a aaa operation, so that you would continue to be able to function in that part of your mission. so the question is, could you have been buying these subprime and alt-a loans in order to be profitable? and as i suggest, we have heard from an academic student of fannie and freddie, that that was one of the motives. however, in this 2007 report that we have been talking about, you say this, the had affordable housing goals are a public manifestation of our mission. our strategy of expanding our credit risk appetite is critical in meeting these goals. 42004-2008, the goals require, and this is exactly what you're saying, the goals require fannie mae's acquisitions to finance a greater percentage of low and moderate income families mortgages than the proportion the market will produce.

that's a point. that is especially true as housing affordability, a combination of home prices, mortgage costs and incomes, has fallen. we had to absorb significant costs to meet the hud purchase money goes in 2006. and we are struggling to meet the goals and subgoals in 2007. we will continue to pursue every reasonable opportunity to expand our purchases of goals eligible mortgages. so to me, at least, and i would like your sense of what that language meant, but to me it says these things are costly to do. we are not making money on these things. they are expensive. and we are struggling to do it. is that your assessment, to? are what do you think it meant? >> your impression is correct,

and if mr. levin was right in the middle of that announces, and he may be in a better position to answer. >> i have questions for mr. levin but that's a question of time and i probably won't have any. so why don't you just go ahead, mr. levin and response to if i could for one second, commissioner. respectfully. i did want to make sure i clarified the relationship between the compensation and profitability, or wall street expectations. it's not so much i may perhaps i didn't express myself fully, that wall street expects firms to be profitable. it's that they expect them to grow and expect them to grow at a certain rate. >> okay. >> thank you. >> mr. chairman, you'll the judgment an additional two minutes? >> two minutes and we will add another 30 seconds to accommodate ms. murren's comments. wide don't you put it to two minutes and 30 seconds. >> just rephrase what you like me to address the.

>> the paragraph that i just read said, to me at least, and i can read it, i would just read portions of it again. this is at the very end of this paragraph, and mr. mudd, who i think is the author here has written, we have to absorb significant costs to meet the hud purchase money goes into thousand six, and we are struggling to meet the goals and subgoals in 2007. what that says to me is this was not a profitable activity. this was something you were doing because you have to do it. >> much of the business that met our housing goals came from standard channels at standard returns. but because the goals were set at higher levels than what the market was producing, we had to make special efforts that involve the outrage pricing adjustments, underwriting adjustments, and there was a

whole set of business that we did at returns that were less than our normal returned. >> okay. thanks very much. now i'm not saying that you lost money. we don't know that actually. i don't know that your accounting would be able to show us that but it was clear that you are not making the kind of money on your affordable housing activities that you are making on your standard kind of activities. so this is something that have to be done for mission purposes, but not because it was a profitable activity in preference to, as it was for example, for the wall street firms, it was probably very profitable for them. you have a completely different set of standards, and your business model is different from the wall street firms. so for you, it probably wasn't profitable. and i think this paragraph suggests that that's true. so if i could get some time

later, i would like to, but i don't know that i will. >> thank you, mr. wallison. mr. george will. >> thank you, mr. chairman. mr. levin i would like to follow-up on one thing. i just got confused about. i understood that alt-a mortgage is actually not count toward the affordable housing goals of the mission. is that correct? >> a it depends. so the affordable housing goals related to the income level of the borrower and where the phone was located, and there were alt-a loans that do count and there were alt-a loans that did not can't. >> and i understood in her interview with our staff that you suggested that for the most part alt-a loans generally did not count. >> my recollection, that in the

aggregate that alt-a was less rich than the goals, but they would be portions of alt-a that would have contributed to the goals of. >> right, but to the extent that you actually financed alt-a loans that didn't contribute to the mission, then they would actually reduce your ability to meet the nation. because they would increase the denominator, the total number of loans that you had to compare your mission related loans to. isn't that correct? >> that's correct. >> and you did, nonetheless increase your financing of alt-a loans, i guess about 8% back a year for every year it looks like from 2004 at 8%, '05, 9%, '06, 11%. and '07, 12%. is that right? these are figures that i am looking at from your purchases

of nontraditional single-family mortgages. from our staff report which you may not have seemed. >> i'm not the way with most of those numbers. sorry. >> also in a summary that we have of the interview that was conducted with you by our staff, it says that in response to a question about fannie mae's increased acquisition of private-label securities, pls, that you said something to the effect, pls was considered a moneymaking activity. it was all positive economics, and it was very conscious that subprime pls was housing goals rich. and so subprime pls was also one

of the initiatives come if you will, that filled the gap. there was no trade off between making money and hitting goals. it was a very broad brush effort that could be characterized as win-win win. money, gold goals, and market share. do you recall saying words to that effect to our staff? >> i do not recall those exact words, but i would say that the subprime pls, we expected those to be profitable, and those did contribute significantly to the achievement of the housing goals. >> all right. so really there were double -- at least two mandates that you were following here in a larger acquisitions of subprime and alt-a loans, which was to increase your profitability, increase your market share and major housing goals, meet your affordable housing goals that would that be fair to say? >> yes to.

>> mr. levin? mr. mudd rather. you are not in your head as will. >> i am not in my head because i agree. all of those were factors. >> thank you. i want to turn to compensation for just a second because it's already been touched upon, but i think it's worthy of a little bit further elaboration. during the years of 2000, 2003, the budget, that is the entire budget of your regular range between 19,000,030,000,000. and in all those years, the total compensation of the top four executives at fannie mae and freddie mac exceeded the budget of the entire regulator. i mean, it was 33.6 million in 2000. almost 27 million in 2001. 26 million in 2002.

up to 51.59 and 2003. it strikes me that it's sort of towards the ability of the regulator to really play a significant role. would you concur that the regulator really didn't have adequate resources to do the kind of regulation that would because back in a financial institution? maybe mr. levin, since you longer experience at the agency. could you speak to that? >> i really couldn't. i mean, that would be a matter for them to answer the. >> well, i'm sure they will, but i was wondering if your experience as the regulated entity might give you some insight in that regard. mr. mudd? >> i thought and said at the time, and through my tenure that i thought a strong, credible

well-funded regulator made sense. and that wasn't just apple pie and motherhood, because it was actually helpful to me going out and meeting with international debt investors, and others, to say that the short story of fannie mae, government-sponsored enterprise, public-private mentioned -- mission, and by the way were regulated by a credible, effective well-funded regulator. . .

offo heritage as a financial regulator, coming out of hud and staffing itself with teams that had -- were available and therefore perhaps not at the top levels of other regulators and examiners, and the statutory limitations that were -- that existed around the bifurcation of ofheo being a safety and soundness regulator and hud

being a mission regulator, made it, in my experience, running or working in regulated institutions over the years, not very effective. >> ok. thank you. just for the record, i think it's -- i think the fannie mae's lobbying expenditures from 1998 to 2008 were roughly 8 it million dollars. -- $80 million, which i suppose, one could argue, in light of the enormous lobbying that goes on by financial services companies generally is modest, but in an overall, simply viewed $80 million is a considerable amount of money to be lobbying. i mean, it was, in many instances, in some years, almost comparable to the entire budget of the regulator.

>> just a comment there commissioner, within the housing finance industry, it is an industry which is -- i cut down lobbying during my time there and brought external lobbying inside, had people who actually knew about the company, do any lobbying, around we were requested to come up here quite often to talk about our programs, our efforts, our capital, what have you, so it was important to have that interface, but with a company so intimately involved, government in fact in the name of its business, the government-sponsored enterprise, it -- some of that came with the territory. i agree that there are limits and there are appropriate ways to do it and we tried to follow those during my time. >> at one point, there was a suggestion by mr. falcon, who we'll hear from after you, this

afternoon, that fannie mae executives acted on a plan to have support kid bond initiate an investigation of ofheo by the hud inspector general in an effort to head off an investigation that they were doing into fannie mae's accounting practices. do you have any familiarity with that particular effort? >> no, other than that i recall that senator bond, as a general matter, was -- had regulatory budgets and ofheo's budgets and operations, as an issue that he was focused on. >> in what respect? he was focused on that they were excessive? >> i think -- i just thought of -- i remember thinking of him as sort of the watchdog person

in congress around the issues of over offbudgets and regulations, lots of people had interest in the regulatory structure of fannie mae and freddie. >> right. but he wasn't in favor of additional regulation -- additional oversight but lesser oversight of fannie mae and freddie at the time? >> i don't remember that. i think most of the -- plurality of the people i talked to were generally interested in better oversight, including both director falcone and director lockhart and i shared that, but that's -- >> ok. mr. levin, do you have any recollection of that intervention? >> i don't. >> ok. let me try to go back to capital briefly. secretary paulson's the gse's

capital as flimsy capital. would you agree with that characterization? mr. levin? >> we had regulatory capital requirements, and then we also did our own internal analysis on appropriate levels of capital. on the regulatory side, there were what we called the minimum capital levels, which were leverage ratios, and there was also a risk-based regulatory standard, that was set by stressing our business from a credit perspective and an interest rate perspective, and from that developing an amount of capital to absorb you know, any losses. and we have -- my recollection is when i left the company, we

were in compliance with both numbers, of the leverage ratio, but also the risk-based capital ratio, which attempted to establish the correct capital levels based on exact product that we had, and then stressing the markets. >> yeah. but it wasn't stressed adequately in retrospect, would that be fair to say? >> i think one of the -- i think one of the lessons from the experience is that scenarios that people thought were really adverse scenarios, that one of the lessons is you can have even more adverse scenarios. >> indeed and that's really what we ended up facing, which put us in no this crisis, but during 2006 and 2007, your model loan guarantee fees, were higher than the fees you actually charged, were they not? >> i don't have specific recollection, but that would

happen from time to time. >> so if you didn't charge the fee that you modeled, then then you're charging the lower fee, the model fee, you weren't pricing the mbs guarantees that the price commensurate you were charging yourself, is that correct? >> i think the perspective i would put on that is that the model -- the models would set a target fee for the business. and sometimes we were able to get that target fee, sometimes we were able to get more than that target fee, sometimes the market only permitted us to get less than that target fee, so for example, and i'm just making these numbers up to give the conceptual example. the model might say that the fee ought to be at a level that produces a 16% rate of return. but what was available in the

marketplace was a 15% rate of return. not what the model was as a target, but something less, that we still might consider acceptable, and if we consider those numbers acceptable, that we, you know, would do business at less than the model fees, although we always had plans and we always pushed the businesses to develop plans on how to get back up to the model fees. >> all right. i will yield three minutes. i know we want to keep on schedule. three minutes. >> thank you. you know, i guess i'm trying to get to what you could have done to have enhanced your capital structure, your capital base, to have avoided some of the problems. i mean, obviously, i understand, the market didn't want to pay them, but if your model suggested that the risk of the associated asset that you were

buying required that kind of fee, to provide you sufficient return, it seems to me it was a deficiency to not attempt to collect it or to choose not to purchase those assets unless you could actually obtain the guarantee fee that your model suggested. mr. mudd, you were looking to try to respond to that. >> just to say that one option here would be to trade at market and then therefore be in the position of unconsciously knowing, and we're talking about matters of single digit basis points here, whether you're being creative or decreative in terms of individual transactions. what i always thought the models helped do was to enable us to decide consciously, do we want

to give up a little potential return here, because there's more volume, or because there are more goals rich, or because of some other factor. the models and the model fee are one component of the relationship. at the other time, you can't run a business that's active in the capital markets every minute, as you know, just by saying, i can't answer your question, the model has to answer the question for you, because the model themselves -- the models themselves have to be dynamic and reflective of what's going on in the marketplace. >> understood. let me just turn real quickly, we have a minute left, to a couple possible accounting issues that i think were of some significance. did you actually not record losses on delinquent loans until they were 24 months delinquent, was that the policy at fannie

mae, mr. levin? >> i don't recall. >> and were you required to repurchase loans from mbs trust once they became delinquent and then record them at fair value on the balance sheet, mr. mudd, if you recall? >> to my recollection, the way that the accounting handled a purchase of a loan out of a security, that loan had to come out and be marked at fair value and then should it recover, the income off of that loan would amortize back into the -- >> but that didn't happen until 24 months after the loan became delinquent, isn't that right, which is a little late in the accounting world. leave it at that. my time is done. thank you very much, gentlemen. >> thank you, mr. chairman.

thank you, gentlemen, for taking the time to be with us today. one of the very clear messages that both of you shared with us is that the business model that was fannie mae, simply could not survive the precipitous price declines we saw in residential real estate in the united states, and -- so i question my first question; what did your internal risk metrics tell you you could survive, what kind of price declines were survivable, given your business model? >> the models ran thousands of pads, as you can imagine, and at any time through the summer and fall of 2008, we were disclosing what our best estimation was of what the likely losses were going to be. we found ourselves through that period basically not being able

to imagine how bad reality would be, so looking backwards, those estimate ofs of what the losses were ultimately going to be were trailing what the market was actually delivering, as home prices fell and delinquencies went up and the macro economy had its effect, but we and outside advisers as well looking at our capital thought that that was sufficient to withstand what i called earlier the 30-year flood, but by way of reference, what that 30-year flood was, since the estimates had to be based on a sample of real data, you couldn't make up the data, we went back to california in the 1990's, to the texas oil patch in the 19alist, some of the severe interest rate dislocations over a period of time and we took those scenarios and multiplied them by 50 states, and then extended them

over a period of time, to do a stress assessment of whether we would have sudokov capital. -- have sufficient capital and as we all know now, the reality of it was that 2008 and 2009 and until home prices eventually bottomed, were worse than 50 times texas oil patch or 50 times california. >> so that was the outer bounds of what you considered. i was just curious how bad you contemplated in your stress testing of your portfolios. >> i think the answer is that hour best estimate of the most likely outcome was what we were disclosing, you know, and i -- >> the question is, what constituted stress in your scenario. >> what i just described. >> 50 times, oil patch, something like that. and that was a standard internal risk assessment being done on a quantitative basis, on going? >> yes. >> ok. as things developed and you

realized that you were missing, did you alter those stress tests in any way? >> the stress tests were updated on a regular basis. i don't remember what the regularity was. within some number of months to reflect the reality. as i was describing in the earlier part of the answer to your question, i wrote it down here somewhere, as of mid 2007, our internal estimate of conventional conforming home prices was a 1% decline for 2007, a 1% increase for 2008, a 3% increase for 2009, a 4% increase for 2010. so that close to the collapse of housing prices we were still estimating that the odds were

things were going to remain within their historical parameters. >> just to be clear, that cost -- >> that constituted -- >> i'm interested in -- >> there's a stress case on the downside. there's a stress case on the upside. >> that's what i'm interested in. the stress test on the downside. >> the stress case on the downside of would have -- >> mr. chairman, it's very difficult to follow the questions and answers when the witness overrides the question of the commissioner. >> sorry. >> let mr. holtz-aken ask the question and then respond. >> i don't want this looking like some of the shows on television. >> let's add a minute back on for mr. holtz-aken. >> thank you, mr. chairman. my interest is in the internal risk management procedures at fannie mae, which ultimately failed, and left the taxpayers with the single largest bill we will face in this episode, and i am curious as to the nature of

those procedures, their quantitative assessment of the risk, not likely outcomes, but worst case, and down side risk, and the degree to which we were updated in light of clear misses, and how they interacted with other mitigants against risk, where you expressed that you held adequate capital, despite evidence to the contrary and stronger regulation, which would have put you in a better prudential position. so that's where i'm going. it's not a mystery and i would just like to know how it was done. >> i apologize. i don't mean to be disrespectful. i'll try to be brief, but we had an independent risk management committee of the board, we had

an independent view from ofheo, who effectively ran a parallel model with their own set of stress scenarios. we had an independent chief risk officer, who reported dotted line to me, and straight line to the board. under his organization, we had individuals who focused on single family credit, multifamily credit, etc. we had models, which were independently verified. and we used an increasing amount of independent verification to basically develop richer at a time that has it became clear that we were going through the phenomenon i described to you of the models not being able to

catch up with the reality. and those were -- those were updated, they were a topic of conversation at weekly management meetings, and i think in the year of either 2007 or 2008, the board met something like 100 times and this would have been an item of discussion at that level. so i would -- and the process, our chief risk officer had come out of the money center bank that we had judged had the best process and we asked basically to install something that looked like a blueprint of that process. and that's -- that in summary is how the system was set up and operated. and then those scenarios that we described in the earlier question were input and return through. >> are you aware that yesterday we received testimony from the comptroller of the currency, mr. dugan, who said that when invited by the fed to review the

risk management procedures and the capital held at fannie mae, was shocked that they did not meet the standards that for example a national bank would have and that the capital was so inadequate, how do you react to that? >> i react to it that fannie mae wasn't a national bank and under its regular story regime, it was operating under the capital standards that it had, a. and b, we were aggressively raising capital throughout 2007 and into 2008, so i don't want to dispute the notion that more capital was a better then and yet more capital would have been even a better thing. there are natural financial limits, if you will, on the amount of capital that you can actually raise in the real world. there was a point in 2008, maybe even earlier than that, where it

became, you know, it became clear that the bar shouldn't be minimum statutory capital, that it should be higher than that and we tried to operate accordingly. >> if i could just get, before we leave this, and i appreciate your forth coming on this, what precisely was the number for the downside scenario, was this a 5% decline, a 10% decline? >> i will try -- i will be forth coming, but i can't tell you anything that i don't specifically remember, because based upon what the inputs and the methodology were, you could come up with a variety of different -- a variety of different numbers. but i -- the last output was the one that i described to you in the end of 2008. i don't know what the outputs turned out to be subsequently. once you had the real data interns of what actually happened.

the downside was consistent with the structured and the calculations that we went through to develop our regulatory numbers that were consistent. >> i want to make sure i understand the business model, because it's always been of interest to me. there were really two things that you did. one was to purchase mortgages, provide a guarantee, and generate mbs's for sale and the second business was to borrow and hold those risky mbs's in a large portfolio? >> yield the commissioner an additional five minutes. >> and in this spectrum of purposes that you had to pursue, the public purposes, the profit purposes, what purpose did the portfolio hold? >> when a -- when an originator

originates mortgages and builds up a book of loans that they then put into a -- into a fannie mae or a freddie mac security, they are still -- they are the originator of those loans obviously, but they still hold those loans, but that are now in the form of a mortgage-backed security on their books. the reason that the mortgage-backed security is more valuable per se on their books is because it's a straight away fannie mae, mbs, aaa security. and therefore, it has a liquidity value in that the cfo or the treasurer or of behalf of the bank can get those sold into the marketplace very expeditiously, which they couldn't do with the individual loans. one of the things, and to my view, one of the most important things that the portfolio did was it provided the liquidity to

ensure that even at the worst times in the marketplace, 9-11, or parts of 2008, there was always going to be a bid out there for those mortgages, and so we sort of were able to achieve a liquidity premium on the price of the mbs thousand the existence of the portfolio, because there were certainly no guarantee that anybody else would be out there in tight markets. >> so, number one, it was a aaa security because it was guaranteed. right, it was a guaranteed provided? so they had security. number two, you're saying that by already holding $3.2 trillion worth of assets, this gave them assurance you would buy more? how does that help? >> that was what i said. it was the question of what was the purpose of being in that purpose and that was one the purposes of being in the business. >> another purpose to be in that business would be to simply borrow was what is an implicit government guarantee very cheaply and invest in a very

risky set of assets that by your own admission got riskier as time went on and take advantage of the implicit backing of the taxpayer to make money. how do you feel about that? >> not in agreement. the overwhelming bulk of the assets in the portfolio were actually typical conventional conforming mortgages, and so the notion that the portfolio was a locust of riskier loans than the broad back was not accurate in my experience. >> so that you held a different set of assets in your portfolio than you actually were bundling into mbss, because as you said, you made a conscious continual shift, greater magnitude, 2004, 2005, didn't you were portfolio become riskier as a result? >> over time the portfolio grew

and over time the portfolio participated in investments and private label securities and other investments, consistent with the market. but i goals the point i was trying to make was that the -- that directionnally and qualit qualityively, the businesses are different but the assets the businesses are investing in are largely the same. >> but over time, there was not a decision to hold greater capital backing, stay at the regulatory minimums, there wasn't a decision in any way to stress test more aggressively, until very late. indeed, the only thing that seems of to have happened is you've relied more and more on the ability of the taxpayer to pick up the pieces when it falls apart. what did you do in the presence of this very large risky portfolio and what others have testified to be sort of inadequate internal risk management to ensure that you didn't end up in the position you ultimately ended up in? i'll start and mr. levin might

have some additional comments. >> i'd be happy to hear it. >> i want to point opt. this is not something that is a revelation circa 2010. this is a concern circa 2003 when i testified at the congressional budget office. this is something that many people predicted, and knowing that, i am curious that it was allowed to happen. >> by and large, the locus of the credit crisis has been around credit risk and not interest rate risk. the risk fundamentally taken in the portfolio is interest rate risk, and the procedures around managing interest rate, we've talked mostly today about credit risk. had the same degree of controls and limits and models and the other things that you would expect. we raised capital, we've reduced limits, we charged higher fees. we focused all of the

organization on the risk management within the portfolio. so i guess i'm maybe -- >> mr. levin briefly and then i yield back, mr. chairman. >> i wanted to go back to one of your initial questions, which was why the portfolio. what purpose did it serve? >> yield the gentleman an additional two minutes for the purpose of the witness answering the question. >> thank you. >> and a portfolio served a very important liquidity function in the marketplace, and i would ascribe three levels of liquidity. one would just be general contribution to liquidity, which helped reduce mortgage rates, which helped people get into homes. a second dimension of it would be in periods of stress in the marketplace, when other sources didn't exist. the portfolio was a critical function, and, mr. mudd

mentioned 9-11, and i think the 2007 and 2008 period would be additional examples. and then a third function of liquidity for the portfolio would be for class of mortgages for which an active securitization market did not exist. and i think a prime example of this would have been the multifamily market. which over this time period, there really wasn't much of a securitization market. and virtually all of that business was done in whole loan form, in the portfolio. and then just the final comment i would make on purples of the -- purposes of the port foam, that there were -- portfolio, that there were also products that would contribute to our affordable housing goals, that were better done through the portfolio as opposed to being done through the other

line of business. and so i would put the -- what we did in subprime in that example. :

>> you guys had been in the market since 1938. there's no question about that. i think if you look at the period where house ownership our homeownership in our country grew substantially is about a four to five year period where there was a 10% increase in homeownership are quite substantially from historical norms. and so i guess my question is, at what point does someone who has such great market knowledge and has a public mission have a responsibility to also say something is going wrong here, and therefore, usually knowledge of the market to tell hud and to tell congress, slow down, something is not right. mr. mudd? >> i think there is, there is that responsibility. we had those conversations throughout the rulemaking process as hud established the housing goals.

the other side of the coin coin, a little bit to me, was that when i first started to look at this, the data of homeownership, there was a 10, 15, maybe more percent gap in homeownership rates between minorities and the majority. and there was clearly ground to be made out of there on a fairness basis, and president bush had a minority homeownership initiative that we participated in. there were similar programs in earlier administrations. and a lot of the, a lot of the increase in homeownership was driven by folks able to access the homeownership market for the first time. in retrospect, i think that, i think that it got too high. at the time, it reflected that

there have been no progress for a period of time, and then suddenly, in my interpretation, a confluence of all the different programs and focuses and initiatives and so forth that were underway, there was progress. i thought that was good progress. >> so but it is true that part of the increase of homeownership was attributable to loans that were originated that had very, very low standards of origination. and, therefore, could have contributed to it and eventual collapse. so the blind pursuit of metrics put our country at risk? >> well, as i try to indicate before, but this is that fannie mae did was in order to better than the market. even writ large to this day, about 70% of the loans in the market are fannie or freddie loans, in total. and about 30% of the total

market delinquency is anti-freddie. 30% of the loans in the market are held by private institutions, where it resides 70% of the delinquency. so i think we did, we did act with prudence. we did act as a braking force. in retrospect, you're absolutely right. folks that get in new the end of the home price rise with lower -- with a lower equity in the house are going to be the first to get her. and unfortunately those were a lot of the emerging homeowners you were describing. >> mr. levin, you were with any for a very, very long time. would you comment on that part? >> you know, we had, we had continual conversations with our regulars about what we're seeing in the marketplace. and so, you know -- >> how about with congress or with hud? >> with hud.

and there were conversations, you know, with all parts of, all parts of the government. but with hud we had regular quarterly meetings where we would discuss issues like this, and they were usually centered around our housing goals and what we were sitting in connection with our housing goals. and we would express what we thought, you know, to them as part of these meetings. >> so you could certainly describe your mission as somewhat schizophrenic, the cross between trying to serve the public interest, in the interest of shareholders. as you look with the benefit of hindsight now, at what has happened with the gse's, is this a mission that really should have been undertaken?

particularly as it was structured. >> it, in my mind, commissioner, it is the most important question in the whole discussi discussion, and it goes to a broad determination of whether you want american government, in some way, to tweak the system to the advantage of homeownership -- >> what i'm asking for a short opinion. >> my opinion, my opinion is with where we are at 90 something% mac of the loans in the market today being run to the government in one form of another, the notion you would go back to a fully private structure, cannot be logistically accomplish in our lifetimes. i do think that a consensus around what the model should be is important. if it were for me to do, i would

have the gse's focused on principally first time homebuyers getting folks onto the ladder in the first place. under terms generally predictable payment, fixed-rate, 30 year loans with 20% down, the old fashion way. there would be a portfolio, the portfolio would not be as large as it has been. and there would have to be some, in my view, explication of exactly what the relationship is between these entities and the government. >> so what would that change due to your housing goals? if that's the more plausible approach to the market, what should the housing goals therefore be? >> well, it always seemed to me, sir, if you're going to have, if you're going to have

requirements like the housing goals, they should also be balanced by the capabilities of the organization. so i think the notion of if you have entities like this, they would be supervised and regulated to attain mission goals, has to make sense. to my judgment, the flaw in, i guess it's not an old regime because it doesn't apply anymore, the flaw in the gold regime was it was set without respect to the market, which effectively put the companies in a position of having to outstrip the market in order -- >> the goals should have been lower. >> the goals -- the goals should have been floating with respect to where the market was. as opposed to straight line under the numbers that mr. wallison described. >> mr. levin? >> my view on the housing goals is that, you know, numbers is for numbers aren't useful.

then what would have been more useful would have been to identify what really were the problems in the housing and mortgage markets. and then to direct the companies to address what really considered real problems here and so for example, you know, if policymakers we determined there was a problem with new rental housing for seniors, just making up an example, to direct the enterprises to help fix that problem would make sense to me. because if that was a problem, then it was a problem worth fixing. and if the next year there was another problem, and have us address that other problem. but not numbers for numbers sake where there might not be a problem. >> was there an opportunity perhaps to reprioritize your charter and focus on those things that were most relevant in the marketplace that would have made institution more

sound? expect that wasn't done at my pay rate. >> mr. mudd, i guess you had the only pay grade it might have been done on. >> it comes with the territory. i'm sorry, could you -- >> could you have reclassified or change your charter to go focus on the things that would've made this institution more sound? >> i think that the thing that would have made the institution more sound, or have produced a different outcome, would have been for it to have become, over time, a more normal financial institution. able to diversify, able to allocate capital, able to be long or short the market, able to operate internationally. and if the trade for that would have been, you know, i cut in the so-called implicit ties with

the government i think that would have been a better solution. the items that were discussed earlier, the work that citibank and mckinsey did was in part to evaluate, evaluate that course. in my experience, there was never any genuine interest on the part of the government of pursuing that are allowing that to happen. >> thank you very much. >> thank you, mr. dobson. mr. hennessey? >> mr. chairman, 30 seconds prior to moving to the commissioner? my understanding, mr. levin, was in your response to the question asked by commissioner holtz-eakin that it was -- >> it was thompson that asked the question. it was above your pay grade? >> that was sloppy language. >> it wasn't sloppy that it was quite clear that my understanding is between

2002008, you made $45 million. so only people above 45,000 -- excuse me, $45 million between 2000, 2008 could answer that question? >> what i was addressing was the question of could we have affected the charter act that spirit and it was above your pay grade. >> and my language was sloppy. >> it wasn't sloppy. >> what i -- >> if you want to as a choice of. >> what i meant by that, sir, was that was in the purview of the congress, not the company. >> mr. chairman, i will get to those questions in a minute. >> mr. hennessey? >> naked, mr. chairman. mr. mudd, in your testimony you said, let me quote here, i believe in retrospect it was over investment in housing, rigid nation standards slipped,

there was too little skin in the game, homeownership rates probably rose too high. i agree with that assessment, and i want a better understand your view about whether fannie's actions contributed to each of these four outcomes. my personal view is either the policymakers on both sides of the aisle contributed to each of these four problems. and i'd like to ask about the contribution of your decision to guarantee roughly $350 billion of alt-a mortgages. let me go through each of the for quickly entering. you said there wasn't over investment in housing. but he is not just a market follower. when penny takes an action to become a market leader just because of their size. do you think your decision to increase participation in the old a market cause of this market to expand further? detainees guarantees contribute to over investment and alt-a mortgages? >> i think danny mays investment at large, given it was in the

charter purpose of increasing homeownership and increasing affordable housing did both of those things that increase homeownership and increased affordable housing. and, therefore, made the pie bigger, and therefore when the collapse came, more people were exposed to the collapse. >> okay. and then use it origination standards slipped. now i understand your point that you had lower default rate than your competitors, but detainees origination standards slip on alt-a mortgages? >> we tried to the very prudent and procedural in the process, and you've already mentioned the point about the comparison to the market at large. i think that in retrospect, there were kind of three factors around the alt-a mortgages that probably deserve greater examination, but it is bad i don't have access to anymore,

where the state concentrations in alt-a tended to be the states with the least affordable housing. states with the least affordable housing also happened to be a among the biggest state states, california and florida among them. one. and two, a proportion of that business, high proportion of alt-a business came through broker channels, and i think the broker channel by and large allowed a lot of leakage into the system of loans that were not underwritten through higher quality. so that is what i had in mind there. we charged higher fees. we charged at first market overrides on the alt-a come on the alt-a but. but because of its vintage being as close as it was to the collapse in home prices, though also tended to be the first ones back i think what i'm hearing from you there, is yes, the standards slip that you, you did

the best to manage it. is that they're? >> well -- >> or maybe, maybe a slip but it wasn't intentional and you did your best to manage it. >> i think that, that is, that is a fair statement, that it was not our intention to slip it, but in in fact he was our intention to tighten the standards around alt-a. in fact, they were tighter as you pointed out than the private market at large, but if you go back and look at it in retrospect, they were tight enough. >> you said that there was too little skin in the game. dick cheney so lower its down payment requirements for subprime and alt-a mortgages? >> not directly in the way that you're describing. the participation in those markets, there were credit grids that had a multiplicity of factors on them that sort of sum

total down to a number of out whether a loan would be approved or not, approved in the fannie mae system. so to the extent that an ltd ratio was higher, somewhere else in the underwriting there would have to be a compensating factor that would move those up. >> let me try to, let me rephrase a little bit. did he fannie mae understand that they were guaranteeing mortgages that have higher ltd ratios and lower down payment? >> yes. >> okay. in use at homeownership rates probably rose too high. do you think fannie mae's increase participation in subprime and alt-a markets contributed to these homeownership rates rising too high? >> contributed, i would say so. >> next, in your testimony, different topic you're, you said a model i gse structure asked to perform multiple tasks, cannot withstand a multiyear 30% home

price decline on a national scale, even without the company will financial turmoil. and you've mentioned several times that because you are a model and from, because you couldn't diversify, that was a significant contribution to the firm's failure. it seems to me that the key phrase there is asked to perform multiple tasks because a monoline firm can survive a severe shock if it doesn't excellent job of risk management and if it is sufficiently well-capitalized. yes? >> yes, i thought about those words care for and you have interpreted them directly. >> so it is not -- i am concerned, you seem to be ranking lack of diversity high in the reason for failure, and it -- maybe i'm just reading something impressive. but it seems to me that having these extremely high leverage ratios and the inability manage the risks was probably more important to the firm failing than the lack of diversification.

would you agree? >> well, the lack of diversification left the gse's exclusively exposed to the one market that cleared the worst. so as respectfully i don't know how i can distinguish the two factors from each other that i would be happy to try. >> okay. and then if i could, i just want to follow-up, on on mr. georgiou's life question, because what you said about not being aware of the firm trying to lobby congress on the appropriation for the regulator, just completely contradicts my experience over the past probably 10 years. and, mr. chairman, i would suggest it's an important area for us to understand because we've heard several times that fannie mae was in compliance with the regulatory capital standards.

but if fannie or its proxies were at the same time trying to keep his capital standards from being raised to something more like what a national bank or another large financial institution would have use, then there's a problem. i remember back in the clinical science class we learned about iron triangles, between a regulated firm, congress and the regular. and i just think we need to understand not the taxpayers in effect owns these firms, to what extent were these firms trying to influence both legislative and executive branch policymakers do not just keep the funding for the regulator loan, but to prevent stricter capital standards and to prevent the regulator from having stronger authority over the size of the portfolios? >> we will note that for the record, and also instruct the staff i know have provided some information on lobbying expenses, which i think were cited by mr. georgiou as accumulating to $80 million over the timeframe reference. >> thank you.

>> thank you, mr. hennessey. ms. born? >> thank you very much, and thank you both for being willing to appear before us and help us with our work. in the written testimony of james lockhart, who was the director of ofheo from 2006-2008 and who is going to appear before us this afternoon, he said that fannie and freddie had very large derivatives positions in connection with their portfolios of mortgage interest. and i understand from our staff that danny held about $1.2 trillion in an amount of derivatives in the summer of 2008. prior to the conservatorship. and that freddie had an

additional $1.6 trillion in notional amount of derivatives. if you can -- if you have knowledge of this, can you tell us what kinds of derivatives were being held by fannie mae? >> they were principally in the form of options swaps and swaps there on, plain vanilla used for the purpose of extending the match on the debt to the underlying mortgage assets. >> so they were basically being used for hedging purposes? >> yes. >> and they were trying to hedge the interest rate risk that you had, is that right? >> yes, ma'am. the feature of the 30 year fixed-rate mortgage is that the individual consumer can pay it off anytime they want to, and

ideally he would match 30 year funding to a 30 year asset. but because of that option you had to understand what the likely actuarial and life of the mortgages were going to be. and, therefore, it was generally most efficient to fund components of the portfolio with short-term paper or a bullet debt or other forms of straight that. and then use the derivatives market in order to create the option audi to match the term of the mortgage company to adjust that bookkeeping on its interest rates were going up and the book was extending our rates are coming in and the book was paying off. >> so both interest rate risk and prepayment risk? >> yes, ma'am. which were derived of the same root cause of. >> right. did you also hedged against default risk and the

portfolio's? >> not in the form of derivatives. we would purchase credit enhancement in the form of mortgage insurance was the way we would do it. >> did you engage in any kind of speculation with derivatives trading? >> now, to my knowledge it was all on the book, not for speculative purposes. >> mr. lockhart suggested that there were concerns during the time he was the director of ofheo about the derivatives position with respect to fannie mae's and freddie mac's exposure to counterparty risk, and also he said interest rate risk. can you explain what those concerns were?

>> i can explain how i thought about them from the point of the counterparty risk. i'm not sure -- i was not able to read mr. lockhart's testimony. but as a general matter, as i suspect you know, the risk on the derivatives book is available in the counterparty to perform. so within the risk management function we build out a team that was focus on counterparty risk and aggregate exposure with limits each of those counterparties. and we actually come in the case of fannie mae, had to look at it across the book. does it would have been possible for us to have an exposure on the derivatives i'd come on the debt side, and as well as the institution could have been a customer of ours on the credit side of business. so that function was created to enable us to look across and or,

2007 or 2008? on the derivatives. >> i don't know. i don't have access to them. >> "the wall street journal" on tuesday, april 6, reported that they may and freddie mac currently have more than $2 trillion in notional amount of interest rates swaps on their books, and they are thereby among the largest participant in that market. and evidently the federal

housing finance agency is considering requiring that all those instruments be essentially cleared through a clearinghouse. in order to diminish counterparty risk and also to obtain improved pricing information. would you have considered that a good move while you are at fannie mae? >> i -- hard to reposition myself in the past, i think my concern would have been that putting limitations on the markets where fannie and freddie could hedge that didn't come as very large users of derivatives, would put them in a different

position with respect to the rest of the market. and that could either advantage others at the expense of fannie and freddie, or it could disadvantage fannie and freddie at the expense of not having as wide a palette of tools to use. my observation of reading the article was that, as i note in my testimony, the companies are being used in some ways to effectuate changes in public policies and public markets. and so there may be other reasons to do that that i am not aware of it anymore. >> mr. levin, do you have a reaction? >> i would be interested in the proposal. i have not seen the proposal, but it's difficult without that. >> let me just follow-up a bit on some questioning that you had from commissioner georgiou and hennessey about the pluto power and influence that fannie mae exercise to the conservatorship.

fannie mae certainly had a reputation of exercising very significant political power in washington through both extensive lobbying and government relations, expenditures, and also hiring or retaining high former government officials to conduct its government relations and lobbying. does it seem unusual to you that billions of dollars were being spent each year during the time you were ceo for lobbying expenses? >> no, it does not. >> why not? >> their -- and premise i would

agree that there was a time when there was, there were too many of the behaviors or activities that you described. so this was -- >> when was that? >> prior to my time as ceo, certainly. and one of the things that was on my list up on -- upon secession of the job was to get that right. and my thought was -- but at the same time there were a number of complicated issues that went fundamentally to the existence of the companies before congress. and secondly, there were inbound calls from congress and other branches of a government that had to be responded to that and had to be respond by somebody that understood what the lobbying rules and interaction rules of government are. and those people happen to be called lobbyists. my determination was the thing

to do was bring them inside the company so they were under my direct supervision, but they also understood what the county was doing. instead of, you know, schmoozing they were action working on the issues of the day. but with the regulatory bill, which changed -- i hope to -- the fundamental nature under which the company was going to operate, i thought and i still think to this moment, that it was very important to get that exactly right. and for us to not be on field having our voice heard in terms of this provision will have this specific impact on what the company can and cannot get them how we do and don't run the country, how our effects on the capital markets will and will not be. it didn't seem like the appropriate way to do it. last sends on that is that as you may know, the lobbying numbers are derived as a headcount percentage, multiplied

by the overall expenses of the firm. and during the period we were going through an expansive restatement, which made that denominator higher than it would have been in the ordinary course. numbers have to be used with some degree of caution. >> ms. born, do you need any more time on this matter? >> i would like to ask one more question. >> two-minute? >> thanks. i would just want to ask whether fannie mae had a pact of its officials would contribute to and that would be used to make contributions to public officials. >> yes. >> and what was the name of the pact? >> fanny pack or something like that. >> do you have any recollection of how large that pact was and how large the contributions to it were? >> i don't. i know it's a matter of public record. i think. i'm sure it is.

we will find it. thank you. >> mr. hennessey i'm going to move back to you because you did have one minute and 50 seconds, but we will give you two minutes because you know our generosity with time. you had another question. >> you are too kind, mr. chairman,. >> don't forget though. >> i certainly won't. frankly, i'm stunned by these comments because as a white house official in the past decade, i was directly lobbied by outside consultants who told me they were hired by fanny at adobe that, in fact, and he had gone through the white house staff what they thought were working on the issue and target a specific lobbies at each one of those staff. so my expense is just different that what you're describing. my question come to talk about the balance between your fiduciary responsible is to your shareholders and the need to fill your public purpose. and in your testimony you said without earnings that gse's would not have been able to

attract capital to post reserves, to finance affordable housing projects, or to perform the function of channeling global capital flows into u.s. homeownership. so earnings are key to both of those private goals and those public goals. and i'm confused about the public purpose of buying, guaranteeing, about $350 billion of alt-a mortgages. was a direct benefit to the housing market from these guarantees, or was it indirect through higher profits for the firm's? >> i think both. >> what was the direct benefit? >> the direct benefit is that there were, as mr. levin mentioned earlier, there were loans in the alt-a category that were obviously conventional conforming loans. but for want of some traditional part of the non-alt-a loan underwriting. just to pick an example, at one

point we look at providing loans to teachers. a loan to teachers wouldn't have 12 monthly advertiser payments or could have nine months of payments, and in three months of nonpayment when the teachers not working. now, you might or might not agree that that would be a laudable purpose, but in either case that would be an alt-a loan. so that is just an illustration of my thinking in terms of how alt-a could serve the nation as well as the financial side of the business. >> thank you. >> mr. georgiou, yet something you want to place on the record before go to the vice chair. >> i just wanted to finish up briefly on the list of what i would regard as potential accounting improprieties. fhfa and occ know that fannie did not recognize losses and to a loan had been the liquid 24 months. and that fannie mae unsecured loans to delinquent borrowers. the occ noted in the report that

allowance methodologies must be revised to recognize in hair loss in their portfolios regardless of the timing of the loss event. and it was critical, given the extreme liberal attitude with respect to lost recognition and compounded by significant business initiatives undertaken by the gse's to do for losses. there are three areas, and i guess i would just state for the record and maybe you could respond in writing there after. that fannie make unsecured loans to delinquent borrowers under the home saver advanced program or any other program? were the underlying loans thereafter no longer reported as a delinquent loans? and it any make the unsecured loans so it would not have to repurchase the underlying loans and record mark-to-market charged? thank you them at stake and we will ask you for great responses to those questions. all right, gentlemen? thank you. mr. wallison? >> thank you, mr. chairman. just a few minor matters, i think. just for those who are watching

on -- two-minute. those who are watch on television, it would be important for you if you want to take a look at our website where there is a staff report on fannie and freddie. and on page eight of that report, there is a chart which shows fannie and freddie's compliance with the affordable housing guidelines, and how that rises just above the requirements that hud was imposing as it went on. so it would be useful to see how influential those guidelines were in fannie's purchase of subprime and alt-a loves. a question came up about whether alt-a loans are, in fact, goals rich, and there is some information on that. in 2000, hud adopted a rule which said that she and as they describe their rule, do

provisions clarify certain other provisions of hud's rule for counting different types of mortgage purchases toward goals. including provisions regard the use of bonus point for mortgages, that are secured by certain single-family rental properties. that's why a alt-a would be a goals rich blown because it allowed a non-owned investment to be rented, and a rental property did provide housing for the groups that were supposed to be included within the affordable housing loans. so that explains it. and we do have some information that was turned over by friday, freddie mac, that on balance basic alt-a loans wordnet positive for the housing goals. and, finally, i want to talk about this question of private-label securities which, in fact, fannie and freddie did

purchase in substantial numbers. this was a significant element of their purchases. and they were profitable because these were high interest loans, unlike many of the loans that fannie had made. and they were not as good -- they were not as good quality as the loans that fannie was making. so when you made a point, mr. mudd, that it was -- your loans were performing better than other loans, this was exactly right. those subprime loans that underlay the private-label securities were much worse in terms of their quality and have a much higher delinquency rate. and the odd part is that -- >> mr. wallison, if you could wrap up. we are over to. >> and the odd part is in buying these pools, you were in fact advancing your competitions position, because they would

assemble these pools of conforming loans and sell them to you. and they helped you with your affordable housing guidelines. they're also profitable, but it also helped wall street do more of the securitization that they were doing. thank you. >> we will leave that and if you would like to respond, we will ask you to do that in writing. mr. thomas? >> thank you, mr. chairman. much of the questioning that we have heard today is based on the fact that you odyssey were dealing quote unquote investments which look a lot like so many of the folk who were in front of us in dealing with investment. unfortunate, with much of the same outcome. but, in fact, you folks really aren't in a business at all. i mean, when ms. murren asked

you about compensation and the companies that you compared herself with, those really are companies. they have articles of incorporation, a lot of them in delaware because of their roles. they basically have to make a profit if they don't make a profit at some point, they cease to exist but you didn't have to have articles of incorporation. and you didn't have to make a profit. so if any of those discussions, i'm going to spend a little time to bring it back to what i would probably say more so than any other commissioner, my world. for more than three decades, i have been in washington. people look at washington, d.c., as a national capital, international capital. but tom brokaw in his book talk about washington, d.c., being a small town.

and in the time that i have been here, i can save that in the space it is also a company town. i'm looking at a 2002 paper put out by fannie mae under the heading fannie mae papers, headlined titled implications of the new fannie mae and freddie mac risk-based capital standard. again, this is 2002. is is down in the core fannie mae papers is an occasional series on policy issues of interest to the housing community. and the conclusion of the paper, and not unsurprising, are probably wouldn't seem today, this analysis shows vote, based on historical data the probability of a shock and severe the risk-based capital standard is substantially less than one in 500,000. and may be smaller than one in

3 million. given the low probability of the stress test shock occurring, and assuming that fannie mae and freddie mac hold sufficient capital to withstand the shock, the exposure of the government to the risk of the gse's will become insolvent, appears quite low. commissioner hennessy talk to you about the fact that as there was an attempt to get fannie mae to increase its capital level, there was resistance from fannie mae, yet this document, based upon that assumption, was put out, i assume, to try to attract business under your concept of your business model. but probably as important as the content of this is who wrote it. there are three names on here. the one that i was drawn to was a fellow by the name of peter r.

orszag, who is currently the director of the office of management and budget. i want to talk about small town company. franklin raines was fannie mae's vice chairman from 1991-1996. in 1996, he moved directly from fannie mae to be the director of the office of management and budget. from 96 to 98. when he left, the director of the office of management and the budget he became ceo at fannie mae. 1999-2004. in my more than 30 years, i don't recall, because in yesterday's panel, former comptroller of the currency, mr. hawke, talked about the advantage of going in and out of

government and the cross-fertilization and the benefit. and i agree with that with certain limitations, but i have never seen the in and out of government revolving door quite so focused on a position of significant importance in and administration, from your quote unquote business back to your quote unquote business. i look at lobbying slightly differently than i think most people here. you said that you wanted to make sure that you had people on the field. i think you and i both know it's a whole lot better if you have people in the locker room. and i think this -- there is just overwhelming evidence. when you look at those people that were employed for lobbying, probably read this book differently than others, i am

shocked at the virtual 100% content of the profile of the lobby firms. they are either former members of congress, members of congress to be, or the spouses of members of congress, or depending on who is in control, a significant staffer who had been with the majority with democrats when they're a majority of our with republicans if they are in the majority, or back again. i mean, it is a clear indication that, notwithstanding their knowledge, there may have been a secondary reason. maybe the knowledge might have been secondary. as to why these people were employed, in my opinion. commissioner born asked you about the involvement in the political process process, political action committees.

i'm a little more interested in a slightly different way, because you really have as a kind of board of directors based upon your origin, that is, by statute, that's what you'd have to incorporate, and that the money that is your lifeblood in terms of structured movement is actually appropriated by congress. and over my 30 years, i got to know just what i never want to be the appropriations committee, but i got to know those who were. and i think it would be fair to say that given the size of the appropriations committee, it breaks up into subcommittees that look at specific areas of the federal government that dean the appropriations from the specific areas, both in the house and the senate. and they take a very proprietary attitude toward those areas.

they are the. you mentioned senator kit bond was mentioned. senator from missouri. as at that time chairman of the va appropriations subcommittee. ranking member senator mikulski, maryland. it is true in the house as well, we will hear some testimony with the panel following yours to reflect more on those particular activities. i just want to ask a simple question of you about what went on behind closed doors. mr. levin, you were there longer than mr. mudd. did you ever -- were you ever present at a meeting in which there was a discussion about how a particular member of congress might be approached in attempting to advance the quote unquote business model of fannie mae?

>> my recollection is, stems from the days that i ran the housing community develop an organization in fannie mae, which was the organization that may speed i got very little time. really a yes or no would be sufficient because you can follow it up with comments to elaborate. >> i will be short. we made a big effort to try to do important things in communities speak i will try again. yes or no? >> and we made a -- >> mr. chairman? >> mr. levin, can you answer that question? >> i just lost a minute of time. i don't have enough time because i conceded it to others. >> i will give it back to you. i think is a pretty straightforward question, mr. levin, about whether he was raised with respect to advancing the interest of fannie mae.

i think there's a fair characterization. i think a yes or no would be appropriate. >> we wanted there was of congress to be -- >> five words. come on, yes or no? the answer is yes, right? >> please answer the question. >> yes. >> thank you. >> mr. mudd? >> yes suspect it's not that hard. once you get into the rhythm is easier. did you ever attend an event that was classified as a political event for a been sitting member of congress in either the house or the senate? >> i don't recall if i ever did. >> you don't recall if you ever did. it was pretty boring so you wouldn't remember going to an event for a particular member of congress. mr. mudd? >> yes. >> you did. >> so that's what i mean by not having to worry about who is on the field if you have access to the locker room.

i don't know why people focus on paying for lobbyists. so i guess what i'm trying to point out to you is, in reference to commissioner born's statement, there were a lot of people, including myself, who were well aware of the intimate access by fannie mae, both for your political action commission, and direct involvement, that was designed to a very great extent to promote your quote unquote business model. in testimony that we are going to be a very briefly in reference to commissioner boards question, there is a quote, and it is attributed to fannie mae's internal auditor, focus on the last decade in the effort to double our names in five years

to 6.46, and i assume that is built in. the quote is, by now you must have 6.46 branded and your brains. you must be able to say it in your sleep if you must be able to recite it forwards and backwards that you must have a raging fire in the belly that burns away all doubts. you must live, breathe and drink 6.46. you must be obsessed on 6.46. after all, banks to frank, we all have a lot of money riding on it. there was a book and a movie that occurred when i was relatively young and had a big impression on me. it was called bridge over the river clyde. in terms of someone so enthusiastically involved in their work. that at the moment, it was one of my done in terms of a really good bridge to help the japanese move their supplies in southeast

asia during world war ii. the idea that you would ask someone here how much would you give to make sure that government had its program tweaked toward homeownership. come on. how much would you give back to help the taxpayers with their burden left by the way in which you and your cohorts ran this particular quote unquote company? because i think you lost your way to a certain extent. it was more than it ever should have been focused on the amount of money that you folks could earn. and i'm just amazed, mr. levin, if the kind of decisions that

ran the company in the ground were above the 45 million-dollar mark which was your pay grade. thank you, mr. chairman. >> thank you, mr. vice chair. i have just a very quick concluding questions and they're really clever addition. so very brief answers and i have one question for you, mr. mudd, in conclusion. when you talk about mission, i just want to be clear that obviously there is the business, the prophet nation, and i mentioned the affordable housing, did you, would liquidity be included, and liquidity for the housing market? >> yes. >> again, for the record as i understood the interchange with you and mr. wallison, and i think i'm characterizing it, that all lines of business were pursued with an eye towards making money, but there may have been deferential for those various lines of business,

correct? >> yes. >> all right. just want to be clear. but there were no businesses and would you deliberately engaged with the idea, even though obviously it turned out such, but in which you engaged or undergo them in which you would you cross subsidization to the extent of loss in a particular business unit? >> not to my knowledge. >> mr. thomas -- >> mr. chairman, i want to clarify. what was bring in the belly, that 6.46, it was a goal of earnings per share, which really brings it home. >> thank you. >> is too long a question. all right. here are my final two comments or questions. in 2007, you bought as the markets again to gradually can you bought $21 billion of private-label securities in that year when most of the markets were trenching pretty

dramatically. i'm just going to ask you, was there any pressure brought on you to do that by folks, for example, in political positions? and without regard to party administrator or congress to support wall street? thank you guys have to move and continue to buy pos, or in 2007 we brined privately disagreed because you still thought they were a reasonable bet? did anyone come to you and say look, wall street, in 2007, things are beginning, they're pulling out of the market. a lot of the firms on wall street have very significant private-label securities. we want you to help offload some of that. did that ever over? >> no one ever said that jimmy? >> the same. >> good. final question. and that is march 19 there is a press release, fannie mae, freddie mac, ofheo, in which you had your portfolio limits lifted. you have had your capital

surplus reduced. and you commit to raise some more capital. why on gods earth, in 2008 would you be positioning yourselves to do more in the market as a straight business enterprise? >> the capital overrides that the regular had in place at that time was set up as a hardline, and with the volatility in the markets, we had a concern that on account of nothing we did, we could do under the capital line and therefore be in technical violation. so our ask was to give some flexibility a round that line on the capital requirements. but to ameliorate the logical concerns that would come out of

that, by expressing our interest to maintain those levels of capital, is not raise capital. we thought at that point in the market with arms resetting, subprime loans not being financial, that there was some good that we could do by helping to finance borrowers coming out of those loans who otherwise would have qualified for a conventional, conforming type alone. >> all right. my question was march of 2008 though. is that what you're referring to in your response to? the discussion went on before that and after that, but -- >> but you could do more, correct? i was that something -- >> we had taken the portfolio down below where it was actually required to be. s