there was a lasting consensus in this country going back to the great depression that home ownership was a net good for individuals, activities, and the country at large. i government entities created to support home ownership as a social good will tend to socialize the risk to all taxpayers. private companies will exercise their fiduciary responsibility to pass the costs and risks to homeowners. hybrid organizations such as gse will be left to balance conflicts between taxpayers and shareholders. there are no simple answers. i appreciate the commission's work to understand the causes and i thank you very much. >> thank you very much. we will now proceed with questioning by commissioners.

i will start with some questions today before we move on. so let me just move into this. to either one of you or both of you, and i will put some facts on the table for the public and for you. according to the sec reports, fannie mae reported about $134 billion of net losses in 2008 and 2009, most of which driven by loan losses which totaled more than $104 billion in credit losses which totaled more than $40 billion. if you look at the losses carry significantly, they come from loans with higher risk product features, subprime interest only, as of fico with scores

less than 620. they were originated in 2006 and 2007. looking back on that business decision, would you go to the thinking behind -- your thinking behind as leaders of this organization? the dramatic expansion in these higher risk products in that 2006 period? what was the core of the decision to move more dramatically into that arena? as you look at the losses, for example, losses in 2007, all loans constitute 29% of the loans with 58% of the losses. in 2009, at 24% of the loans.

>> 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 say that the alt a book, as you pointed out, is the source of the difficulty. the thinking goes back over a period of time, and just for contacts, the company came out of a time where through the 1990's, fannie mae was the dominant force in the marketplace.

during the time of the restatement, that had slipped on one hand and on the other hand, the market developed a number of ways to go around. any mortgage was a fannie mae mortgage and its stood for nothing more than an alternative to a fannie mae mortgage. so there were a number of studies, questions, process to look at the market and determine whether the feature is with -- features that went with these mortgages were things that we were asking for for 10 years that were no longer relevant to the market. or whether they were key data that was still needed. what were the variances between the markets? overriding that, a broad concern that under the continuation of these trends, fannie mae and

freddie mac's cost role in the market would be less relevant. there was a strategic question of relevance that went to that, let us to use the data we had and develop a plan to understand it, by some securities, look at the day that , developed experts that understood how the market operated , do business with those we knew. we built it out from there. it was a reflection of the growth mr. levin described about that segment of the market. >> let me ask specifically, your market share in 2002 was about 29.4%. 2003, 36%. 2004, 24.8%. i don't want to tilt this.

i want to ask it the things you laid out in terms of your consideration, was it market share, competitive condition or commission-related items that drove you? i would like to ask you and you also. >> i would say it was a combination, but we did not consider market share in itself to be a primary output. market share to me is kind of a secondary indicator of do you have a role in the market? are you remaining relevant to the market? >> what is primary? >> primary his the mission component of the business. so are we in the markets we are supposed to be in? are we maintaining capital? are we turning a fair return for our investments? >> you are saying that market share is not the driver and to

itself, but let me take eight two mission-related. you are not necessarily talking about public policy-related. you are talking about your corporate mission. you are saying return on equity to shareholders, profitability growth, and home ownership mission. how would you weigh those? >> i always tried to wave them equally over the course of time. on any given decision you could move one thing up and one down. >> mr. levin. mic on and close. >> i think the items that mr. mudd said the major macro driver was the growth in the private securities market, which became larger and freddie mac and fannie mae combined. that was the main cause behind the numbers that you went over

about our share of the market. >> so competition from wall street? >> that impacted our market position dramatically. also dramatically impacted our ability to influence what was going on in the market because of the competition. it posed a number of threats to the company. it posed a financial threat because there was less business that was coming into our market. business was going into another market. it posed the mission threat because many of the products that were financed by pls had affordability features, so it threatens our ability to meet our government mandated housing bowles. it also -- mandated housing goals.

i recall a customer saying to the degree i am doing less business with you, why should i invest in my own company resources to continue to do more? >> that person would be? >> that was on the multi-family side, which was also affected by the same influence. i just happen to recall that conversation. along with the issues of, to what degree was this phenomenon permanent? to what degree was a temporary? could we really set out? that is what we were grappling with. >> let me see if i can move to other questions. not unlike some others, you

pursued a highly leveraged growth strategy. your assets went from 1.4 trillion to $2.3 trillion. your capital ratio was about 1.5%. that is probably on the order of -- i got it here actually. your leverage ratio was anywhere from 62 to one up to 73 to one. during this same time when you are more than doubling your assets, a goldman sacks is almost tripling them. but york capital held was extraordinarily low. just 45 basis points on your off sheet -- your off balance sheet.

if you look at some of the numbers -- the level of loans with higher risk product features were many times the level of fannie mae's reported capital. 644% of capital in 2007. i have to ask you, what were you thinking in terms of that extraordinary level of leverage? where you are a 62 to 1, so any kind of market bump will shake your company to its very foundations. >> it is a fundamental question. my interpretation is, by virtue of the gse's being put into business and private companies,

a private company component, in order for fannie mae and freddie mac to attract global capital and put it to work, we had to be able to provide a competitive return on net capital, competitive with other institutions. other institutions during the time in my memory, probably in a 18% range of return on equity, our return is probably one notch below that in the 15%-72% range. 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? you could have been above that. >> we were, we were above the minimum capital. we were above the regulatory override. in fact, we raised capital all

through 2007 and 2008 so that at the end of my time we had more capital than at any point in the company's recent history. >> let me ask you a couple of other questions in the way of framework. there are many documents we look at where city and -- they stated that stain the course was not an option. you did have to move into the non-traditional markets more dramatically. there was a february 21 meeting where you presented the plan that said we need to reverse market share by increasing market share of mortgage-backed securities from a 22% to 25%. there is a july 18 board meeting in which you talk about why you need to ramp up again because of market share relevance. there was one other report, june

2005, there was a presentation called single-family guarantee. he indicated to us that he recommended staying the course. had you taken a more conservative route -- what if -- would it have been wiser to maintain your underwriting standards, or would you have still been swept under by the size of the wave? >> if i can give you a three- part answer. on the last part, the analysis i have done suggests if you presume that fannie mae will need to remain a aaa company to do its business and you present an order to maintain a triple a rating that agencies require no more than 30% preferred capital.

if you use every dollar of the maximum net income the company ever earned and put it to servicing additional capital, the maximum theoretical capital the company could have raised would have been about $90 billion. that would not have been announced under any circumstances. -- that would not have been engulfed. -- would not have been enough. his advice was, we did not think of it as a black and white choice. do you do the loans only, or do you do only the other stuff? the question was how far do you want to move to make sure the market will not shift away personally? his suggestion, let's stick to our name, let's emphasize the product that is our bread and

butter, but we also need to understand these other markets and have controlled high process-intensive participation in the markets. the third point is separated from that, it was the mackenzie city work that was to assess whether in the context of thinking about the business model, was another business model appropriate? should we turn in the charter and privatize the company, thereby restructure through some of these challenges that we faced? >> citigroup was in as a financial adviser, correct? >> yes, but i don't want to miss answers. >> they were advising, correct?

>> they were more or less engaged under the same terms to do the same work, but to do it independently so there would not be groupthink. >> here is my last question and then i want to move on. the memo recommending conservatorship which was september 6, correct? here it is a pretty damning documents in terms of its assessment of fannie mae. it refers to members of the executive team made imprudent decisions. many decisions were safe and unsound. despite clear signs in the latter half of 2006 of growing problems, management continued activity and riskier programs. i will just ask you to comment on whether you agree or not with

the assessment of the report. both of you, just as it briefly as you can. i may ask you for more on the record in terms of trading so i don't consume all the time here. -- in terms of writing. >> i never saw the document at the time. >> thank you. >> i did not agree. if i can back up for a short time. throughout the spring, summer and fall of 2008, we were engaged in a really broad array wide ranging good-faith discussions with both -- my first visit when i became the ceo was to go downtown and see the director. the first thing i did was i gave

the new director a security badge that had the same door openers mine had. we were having conversations every day. like with any examination routine, there are issues that are identified that could be itself identified. you put a project and budget and your work for your way through it -- and you work your way through it. those conversations continued all the way through the date of that letter. when i received it i had to believe that it had been stepped up in the mail somewhere and it was something from in the past, because the issues were known, many of them had already been abbreviated. so -- many had already been

remediated. >> i may ask for more in terms of britain. i will stop my question and go to the vice chairman. thank you, by the way. >> i am going to hold my questions until the end because there are commissioners who have not only 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. i will defer my questions until the end and let those folks carry the question in for now. >> thank you, mr. vice chairmen. ms. murren. >> good morning and thank you for being here. i would like to follow the discussion from earlier about

corporate goals and individual professional goals. specifically looking at the way you determine those particular goals. i also refer back to some of the documents we had an opportunity to review. one of them is a presentation from 2007 where goals are articulated. it is on page 11. also other documents, including annual reports, internal types of presentations. what was remarkable to me, and perhaps you can help me understand better, when goals were articulate it in their most elemental form, typically the growth goals were the first ones. revenue growth, market share growth. later on it you would also mention what you described as your mission-driven orientation.

i would like to get back to whether you can give us a sense of which ones were the most important. was there a way you could -- would you look at it the same way? could you characterize it for us in a more quantitative manar for us? >> i can try. the goals changed over a period of time, so one of the lingering issue is post-restatement was there was an overemphasis on earnings per share. so for some time -- if you look back at the time of 2005 and 2006, they were not related to financial outlets, although there were capital goals. they were mostly related to the things that were most important at that time.

a good-faith relationship with the regulator, manage risk, billed out. we were under a consent order -- build out. there was a list of 80 items that needed to be complete, so that was an objective. what we tried to do in 2007 and 2008 was to rebalance those goals so we did not lose sight of the mission, responsibility, regulatory side. but if you are not making money you are also unable to grow your capital and unable to participate in the marketplace. i would say for me as the ceo, it was about equal balance. for folks that work for me,

depending on the nature of their job, and in this extreme example, a sales job, that was much more financial-oriented, but we also had people who worked with indian reservations and they would have goals oriented around the mission. the proportions would change. but at the top of the organization the concept was that there was a fine balance to be found. >> the notion that because of its order, revenue and earnings growth were not necessarily the driving forces behind the motivation to achieve york goals? >> they were a driving force, they were half of it. >> when you think about compensation -- executives are

oriented to the performance of the goals, there is an emphasis on a stock ownership which aligns your interest with shareholders. could you talk about what wall street's goals were for your company? i would guess there were oriented towards earnings growth, is that correct? >> i'm sorry, what was my impression of what wall street expected as al put measures for fannie mae? >> yes, -- expected as output measures? >> wall street's impression or their expectations for your company and what drove the stock price related to financial proformance? >> there models were largely related to having financial outputs that go into their expectations for the company's financial performance. in addition to that, there was an understanding from the

analysts that 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 goals would translate themselves in to headline risks. headline risks would have an effect on the stock price, so for the analysts on that plane, i think they saw it as a balance but did not model the mission in the same way that a financial analyst with model a financial goal. >> so there was still a balance between financial and mission goals? >> i think they saw the company in that light. >> let's talk about the numbers. over the course of your tenure

he were extremely well-paid, correct? >> i think so. >> when you look at how the board determined compensation, can you talk about how they got to the numbers? what was the methodology they used to determine your cash bonus and stock compensation? >> directionally, although i was not in the room, it was an executive session and i did not make any recommendations whatsoever on my own compensation or see it before they went into the room, but i can tell you what the general process was. the process was that salaries were set to be competitive at a marketplace level. annual bonuses were determined based upon the achievements of those goals that we talked about, so back to the example for a salesperson for a mission person, largely oriented around projects they were working on.

and for somebody at our level, kind an abrogation of all those -- michaels were not very distinguishable from corporate goals. then the long term was set to a level about 70% of the total compensation for comparable positions in the marketplace. >> so the use of comparable was an important part of determining what the numbers were? it was not so much a measure of performance, but what is the marketplace for someone with your skill set that would serve in the same types of institutions that would have similar types of goals, correct? >> i think that is fair. >> when i go back to the property for 2006, they also mentioned that this is correct

that comparability is an important part of how you measure compensation. they give a specific list of companies. we have heard for almost 10 minutes about how you served a number of different constituencies, corporate america, wall street and a public purpose. what was striking to me is in this list of companies, which i will not make you listen to, but they include aig, countrywide, wachovia, citigroup and wells fargo. there is not one company that is a mission-driven company. could you explain why you did not compare your compensation to someone like the director of the homeless coalition? if you have a public purpose -- within that be balanced?

-- would it they cannot be balanced -- would they not be balanced? >> my experience in the company was that for the people that we hired or those that we lost, most of them tended to go to companies like the ones you mentioned. to the extent companies went to homeless coalition or other organizations, because they had retired and taken on a job there, or they were going to do voluntary service, so while relevant, it was not a competitive factor in compensation. >> but what you are talking about is comparability and motivation. to the extent that you have an opportunity to put yourself in

the public service mission, i sat on a public company board. when you look at comparable, they are supposed to span the waterfront of all it is that motivates you. you just told us you were motivated by a public purpose, but i don't see that reflected in how you got paid, which suggests maybe your motivation was not related in that part to the public mission, but to achieving financial goals. >> i have a different opinion. my opinion is that we have to, during my time we had to recruit people or try to retain people. the places they were going tended to be on the business side of the equation. for example, to hire a senior

systems person, senior financial person, the pay for being in a public service-oriented organization unfortunately would not be sufficient to attract them to come to the company. the alternative was probably to get somebody that had less experience. but we did bow to the point by saying we don't pay 100% of what they paid for. that was about the balance that enabled us to retain the talent we thought we needed. >> i would say 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, and the methodology behind how you determine that? >> there were two different firms engaged independently. one by the compensation committee of the board. the other by the human resources management. then there was a third override , senior executive compensation was submitted to the regulator before it was granted. >> do you recall what you paid those firms? >> i'm sorry, i don't. >> if it were in the range of $700,000 for one assignment? does that ring a bell? >> it doesn't, i can attempt to find out, but i don't know what the number was. >> thank you.

>> there is some time left on your clock. mr. wallace? >> now for some easy questions. i would agree with you that right after you took over as they head of fannie mae you did reach out to people in the community in washington to try to gather the critics views as well as the views of others. you are hit by a terrible crisis we have heard from many other witnesses before us, but the chairmen did focus on what i think is one of the most important questions we will have to resolve. that is the reason that fannie mae acquired so many subprime loans. between fannie mae and freddie

mac there were 12 million such loans out of a total of probably 27 million loans all together in our economy. it was about to fits of all the loans that were likely to fail when the bubble deflated. there are three possible ways for proceeding in this direction, acquiring risky loans. >> subprime and alt a mortgages between 2005 and 2007, which everyone agrees were the ones that cost the financial difficulties. you mentioned market share. maybe you bought them in order

to expand your market share. you said that was a secondary consideration, but that has been repeated frequently in the media as the reason for competing with wall street. he wanted to increase your market share. i think that the documentary does confirm that this was a secondary matter. the second idea is that you wanted to make profits. we did hear this from an academic expert who the commission had engaged a few weeks ago. you acquire it these loans in order to make money from them. the third is to comply with the hud's affordable housing regulations. that is what you have been referring to as your mission.

i will try to unpack all of these things, because they are in your mind all mixed together because they were all very important to the kind of thing you were trying to do with this company. let me mention that the hud housing goals did increase substantially during the time that we are talking about. they started at 30% when they first came into effect in the early 1990's, but in 2008 became 50%. what that meant is that all of loans that you had that you bought , of the loans that people -- of delong is that you box -- of the loans you bought

had to go to people that were below the median income in the areas where they were living. 50% starting in 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 do that you were really under pressure from hud. despite the fact you had had difficulties -- accounting difficulties that required you to spend a lot of time on writing your accounting, getting things backed in your accounting, hud was not giving up on you. they were pressing you to continue to make more

investments in these affordable housing loans. it was going up during that time we are talking about between 2005 and 2007. let's consider the things that i was referring to before. this question of the market share. the chairman made a reference to the presentation by tom lunk in june of 2005. in there he said we are facing a choice. we either meet the market, which meant we will have to change the way we do business, we will have to go after more of these subprime loans, because that is where things seem to be going, or we should stay the course. he considered whether you had the resources to do that, not

the financial resources, but whether you had the resources of personnel. he said no, lack of capabilities, we lack the capability to go into this market, we lack the willingness to compete on market price. we lack a value proposition and we lack a conduit capacity. there are also regulatory concerns. basically he says, realistically, we are not in the mission to meet the market today. therefore, we recommend something you have already mentioned, to stay the course. it appears that you did follow this advice, although it was not quite as you suggested, just not going into subprime. it was to -- as he put it,

underground efforts to develop a subprime infrastructure, developing modeling capabilities for alternative markets and develop a conduit capacity. does that sound right to you about the middle of 2005? >> yes, that is correct. >> there is no documentary support for a contrary decision on this relevancy issued after that mid jan presentation. there is nothing until 2007. that is a very important document in 2007. there is an 84-page comprehensive thing that says -- it is called the fannie mae strategic plan 2007-2012. is that your work? >> it sounds like something i would have done. >> it is a very fine piece of

work and comprehensive, but i wanted to make sure this was the product of management's work coming together to decide what the strategy of the company ought to be. >> we did a document every year and in one year it was very extensive. >> that 84-page document. >> this is what the board would read before going to its annual strategic planning session. >> oddly enough, it was not dated, but it did refer to the mortgage meltdown as something you had to deal with. so i would place it probably in june, july or august of 2007. would that be about right for when you had these?

>> they were normally in the summer, yes. >> it focuses on what fannie mae will do in the future. it seems clear from that report that there was no plan at this time to move strongly into the subprime market. what we see is that that is what is being decided and put into a plan for the future. after months of research, this is from the plan, after months of preparation for our senior management team at four two days in the college classroom near the fannie mae headquarters and made several strategic decisions. item one on that list was broadened business to maximize value.

item two, it was to add more credit-sensitive assets. you say under our new strategy we will manage more mortgage credit risks, moving deeper into the credit pool to serve a large part of the mortgage market, helping reputable lender served emerging far worse, provides an enormous opportunity for fannie mae to grow, provides value to customers, the market and shareholders, and expand our affordable housing mission. it seems to me, and i would like you to address this, it seems actually only in mid 2007 when this piece was written was it really decided to expand market share by 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. going back to the -- was it 2005? >> 2005, the middle of 2005. >> a process we would use not uncommonly to discuss the strategy was to create a framework that sets up two alternatives that are starker than those that exist in real life. as a result of the setting those book ends and having the debate, the outcome was what you describe, which was that we stay the course, continue our

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

the book, but the process was to develop those capabilities. the construct of your question was market share profit, hud goals. my answer is yes. i cannot make any apologies for trying to earn a profit. if you cannot make a profit, you cannot raise capital and all of that. the question was, do you do it. late? i think the ultimate measure of britain's is -- can you do it prudently? fannie mae's participation in this segment is better by a factor of about two men the same securities that were done by the banks in the private market. i think the process was solid,

the approach built itself out, there were myriad activities going on between the presentation and its strategic document, including we hired people from the industry who had been in the subprime business that had specialization in modeling. as we did that, that gave us the ability to continue to participate in the market. >> absolutely, you were following the recommendations, but what i am trying to pin down is the date when the decision was actually made to go more deeply into this subprime and alt a market. i want to mention something for the sake of everyone listening, indeed fannie mae and freddie mac was required in the early 1990's to start making these kinds of investments. this was not just something that

occurred between 2005 and 2007. in 1999 there was a major hud press conference where the then secretary announced you would be required with new affordable housing requirements to make $ 2.4 trillion in affordable housing loans starting right then. in fact, there was a statement by president clinton saying this was wonderful because home ownership in the u.s. is increasing substantially. that shows that you were under substantial political pressure to make sure that you did these things, because not only was it important for all of us to see that home ownership is increasing in the u.s., something americans always

wanted, but it was a particular interest of the clinton administration and the bush administration. both were focused on improving home ownership. i assume you would agree. >> i would agree. >> i yield the commission an additional five minutes. >> my comment would be because fannie mae and freddie mac don't originate, the business that comes in there toward depends on what originators are willing to originate and then a willing to sell to them. but the businesses being so big, usually an actuarial sample of the market would come in. until the point when the housing goals went north of 50%, just by virtue of being there and receiving loans, the companies were able to reach their housing goals with a reasonable degree

of effort. the conundrum i have always had, and you touched upon this, median is about 50%. so when you are required to have 57% of your business be below 50%, that gap of 7% -- you had to create not just a normal home for those mortgages, you have to create a traction for those loans to come in the door. that took an enormous amount of our attention to continue to try to chase that wheel. >> indeed, you make that clear because i want to turn out to this question of, could this have been for the purpose of making profits? responding to, as you were speaking with the chairman, you were talking about your

responsibility to the capital markets to keep the company together as a profit-making operation so that you would continue to be able to function in that part of your mission. the question is, could you have been buying these subprime loans in order to be profitable? we have heard from an academic student of fannie mae and freddie mac that was one of the motives. however, in 2007 report we have been talking about you say this, the affordable housing goals are a manifestation of our mission. our strategy of expanding our credit appetite is critical in meeting these goals. for 2004-2008, this is exactly what you are saying. the goals require fannie mae's acquisitions to finance a greater percentage of moderate

income family mortgages and the proportion the market will produce. that is especially true as housing affordability, a combination of home prices and incomes, as want. we had to absorb significant -- has fallen. we had to absorb significant costs to meet goals and we are struggling to meet goals in 2007. we will continue to pursue every reasonable opportunity to expand our purchases of goals. to make, and -- to me, it says these things are costly to do. we are not making money on these things. they are expensive. we are struggling to do it. is that your assessment, too? what do you think it means?

>> your impression is correct. mr. levin was right in the middle of that analysis. he may be in a better position to answer that. >> i have questions for mr. levin, but that is a question of time, so why don't you just go ahead? >> if i could for one second. i just wanted to make sure i clarify the relationship between the compensation and profitability. it is not so much -- perhaps i didn't express clearly, that wall street expects firms to be profitable. they expect them to grow at a certain rate. thank you. >> mr. chairman yields the gentleman an additional two minutes. >> we will add another 30 seconds do that to accommodate ms. murran. >> just rephrase what you would

like me to address. >> the paragraph i just read said, and i will just read portions of it again. this is at the end of this paragraph. mr. mudd has written, we had to absorb significant costs to meet the goals in 2006 and we are struggling to meet the goals in 2007. what that says to me is this was not a profitable activity. this was something you were doing because you had to do it. >> much of the business that met our housing goals came through 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 involved the outreach, pricing adjustments, the

underwriting adjustments. there was a set of business that we did at returns that were less than our normal returns. >> thanks very much. i am not saying that you lost money. we don't know that. i don't know you would be able to show us that, but it was clear you are not making the kinds of money on your affordable housing activities that you were making on your standard activities, so this is something that had to be done for mission purposes, but not because it was a profitable activity. as it was for the wall street firms, it was probably very profitable for them. you have a completely different set of standards. your business model is different from the wall street firms, so for you, it probably was not profitable. i think this paragraph suggests

that is true. if i could get some time later i would like to. >> thank you very much for answering those questions. >> mr. georgiou. >> thank you. i would like to follow up on one thing i got confused about. i understood them alt a mortgages did not count toward the affordable housing goals of the mission. is that correct? >> it depends. the affordable housing goals related to the income level of the bar were and where the -- income level of borrower. there ones that did count 81 is that did not count. >> i understood in your interview that you suggested that they generally did not count.

>> my recollection that in the aggregate that alt a was less rich than the goals, but there would be portions that would contribute to the goals. >> to the extent that you financing those that did not contribute to the mission, then they would reduce your ability to meet the mission because they would increase the total number of loans you had to compare your mission-related loans to. is that correct? >> [inaudible] >> you did, nonetheless, increase your financing of alt a loan is about 1% every year from 2004 at 8%, 20059%, 200611%, is that right? these are figures -- 2006, 11%.

these are from our staff report. which you may not have seen. >> i am not familiar with this. - also in a summary we have of the interview that was conducted with you by our staff, it says that in response to the question about fannie mae's increased acquisition of private labels securities, that you said something like pls was considered a money-making activity. it was very conscious that subprime pls was housing goals

rich. subprime was also one of the initiatives that filled the house in gold gap. there was no trade-off between making money and -- it could be characterized as win, win, win. do you recall saying those words? >> i do not recall those exact words, but i would say the subprime -- we expected this to be profitable. . .

>> i want to turn to compensation for justice sutton. -- just a second. this is worthy of a little bit further liberation. between 2000 and 2003, the budget that is the entire budget of your regulator range between $19,000,000.30000000 dollars. -- $90 million and $30 million. this exceeded the budget of the entire regulator. it was $33.6 million in the year 2000 and almost $27 million in

2001, and up to $51.5 million later. it strikes me that that dwarfs the regulator in playing a significant role. would you concur that the regulator really did not have an adequate resources to do the kind of work? could you speak to that? >> i think that would be a matter for them to answer. >> i am sure that they will. i was wondering if your experience as the regulated industry might give us some insight as to that regard. >> mr. mudd? >> i thought and said at the time that i thought that a

strong, credible, well funded regulator made sense. that was not just apple pie and motherhood. it was actually helpful to me, going out and meeting with international debt investors, to say that government sponsored enterprise and, by the way, we are regulated by a credible, effective, well funded regulator. their level of funding was set by congress every year. history can decide if that made sense or not. we did not have anything to do with that. >> it might be a little bit too much to say that you did not have anything to do with it because as i recall, you lobby against the increase -- you

lobbied against the increase. >> i did not lobby against that budget. >> didn't fannie mae hire lobbyists to lobby against it? what i do not know. not in my tenure as ceo. >> the thing that i would say is that the heritage as a financial regulator of a complicated institution, coming out of hud and establishing itself with teams that were available and that therefore, not at the top levels of examiners, and the statutory limitations of them

being a mission regulator, it made it not very effective. >> ok, thank you. just for the record, i think that the fannie mae lobbying expenditures, from 1998 until 2008 were roughly $80 million. i suppose one could argue, in light of the enormous lobbying that goes on, is modest. in an overall $80 million, that is a considerable amount to be spent on lobbying in some years, it is almost comparable to the

entire budget of the regulator. just a comment -- two line >> just a comment, in the housing industry, i cut down lobbying during my time, there and brought external lobbying inside and we were requested to come up here quite often and talk about our program. it was important to have that interface. with the companies so intimately involved, government came with the territory. i agree that we try to follow that during my time. >> at one. -- at one time, fannie mae

executives acted on a plan to have a senator initiate an investigation the hud inspector general and an effort to -- in an effort to head off those practices. >> other than the fact that i recall the center -- the senator having budgets in operation as an issue that he was focused on to read -- focused on. >> he was focused on the fact that they were excessive? >> i remember thinking of him as the watchdog person in congress

around the issues of these budgets. there was a lot of interest in the structure of fannie and freddie. >> but he was not in favor of additional regulation, but lesser overside at that time? >> i do not remember that. the plurality of the people that i was talking to were looking at better oversight, including the director and director lockehart. >> do you have any recollection of that? >> i do not. >> ok, let me go back to a capitol briefing. secretary paulson described the

capital as flimsy capital. would you agree with that characterization? >> we had regulatory capital requirements and then we also did our own internal analysis on a prayer for levels of capital. on the regulatory side, there were the minimum capital levels which were leverage ratios and their words also wrote a -- and there was also a method of stressing our business at an interest rate perspective and from that, we developed an amount of capital to absorber in losses -- to absorbent any losses. -- to absorb any losses.

when i left the company, we were in compliance with both numbers. this attempted to establish the correct capital levels based on the product that we had and then stressing the markets. >> it was not stressed adequately in retrospect. is that fair to say? >> i think that one of the lessons from the experience is that scenarios that people thought were adverse scenarios, you could have any -- could have even more adverse scenarios. >> that is what put us into this crisis. during 2006 and 2007, your loan guarantee fees were higher than what you actually charged. were they not? >> i do not have specific

regulation -- specific recollection, but that what happened. >> -- but that what happened. -- but that would happen. i would say that the perspective that i would put on that is that the models and would set a target for the business -- the models would set a target for the business. sometimes weaver able to get that target the and sometimes the market only permitted us to get less than that target the. -- less than that target. the model would provide a 60%

rate of return, but what was available in the marketplace was a 15% level of return. we still might accept that. if that was acceptable, we would have less than the model fees, but we always had plans on how to get back to the model fees. >> that i will yield three minutes. i know we need to keep on schedule. >> i guess i am trying to get to what you could have done to enhance your capital structure to avoid some of the problems. the market did not want to pay this, but if your model suggested that the rest of the

associated assets that you were buying -- the rest of the associated assets that you were buying required back, -- the rsjk of the associated assets that you were buying required that. mr. mudd, you were trying to respond to that. >> just to say about one option is to trade at market, and then be in the position of unconsciously knowing whether you are being [unintelligible] in terms of individual transactions, what i always thought the models helped do was

to help us to decide, consciously, if we want to give up a potential return because there is more volume for because there are more goals. the models are one component of the relationship. we cannot run as a business that is active in the capital market every minute just by saying that the model has to answer the question for you. the models themselves have to be dynamic and reflective of what is going on in the marketplace. >> i only have one minute left for a couple of possible accounting issues. did you actually not record losses until there were 24 months delinquent? was that the policy at fannie? >> i do not recall.

>> were you required to repurchase loans once they became delinquent and record them at fair value on the balance sheet? mr. mudd, do you recall? >> to my recollection, the way that the accounting handled the purchase of a loan out of a security, that loan have to come out -- had to come out and be marked at fair value. then, should it recover, the income off of that loan would amortize back into it. >> that did not happen until 24 months after the loan became delinquent. >> mr. holsaken?

>> thank you. my first question is, what was your internal risk matrix that said that you could survive? >> the models ran thousands of pads, as you can imagine. at any time, through the summer and fall of 2008, we were disclosing what our best estimation was as far as being likely losses and what they were going to be.

basically, we were not able to imagine how bad reality would be. looking backwards, we were trailing what the market was actually delivering as home prices fell and delinquencies went up and the economy had its effect. we and outside as pfizer's that that was sufficient -- outside advisers that that was sufficient for the 30-year flood. since the estimates had to be based on a sample of real data, you could not make up the data, we went back to california in the 1990's and the texas oil patch in the 1980's and some of the interest rate dislocations at the time and we took those

scenarios and multiplied them by 50 states and then extended them over eight time frame to do a stress assessment of whether we would have sufficient capital. as we all know, the reality of it was that 2008 and 2009 were worse than 50 times the texas oil patch or 50 times the california issue. >> i was just serious how bad you contemplated the stress test. >> our best estimate of the most likely outcome is what we are disclosing. >> the question is, what constituted stress in your scenarios? >> what i just described. it was a standard internal risk assessment being done in a quantitative basis on going. >> as things developed and you

realized that you were missing, did you all for those stress test? >> -- all for the stress tests -- atelateter those stress test? >> isai was describing -- as i was describing, as of mid 2000 and seven, our internal estimate -- as of mid 2007, our internal estimate was a 1% decline for 2007, a 1% increase for 2008 and a 3% increase for 2009. the collapse of housing prices have the still estimating that

the odds were that things were going to remain in their historical norm. >> i am interested -- >> there is a stress test on the downside and the upside. the stress test on the downside -- >> it is very difficult to follow the questions and answers when the witness overrides the question of the commissioner. i do not want this hearing to look like some of the shows on television. >> my interest is on the internal risk-management of the procedures of fannie mae, which ultimately failed.

i am curious as to the nature of those procedures, there quantitative assessment of risk, not likely, but the worst case. how did these interact with other litigants against risk -- and begins against risk -- mitigants against risk. this would have put you in a better financial position. that is where i am going to read it is not a mystery. -- i am going. it is not a mystery. >> i will try to be brief. we had an independent board.

we affectively ran a parallel model of scenarios. we had an independent chief risk officer that reported to the board. under his organization, we had individuals focus on single family credit, multifamily credit, etc.. we had models that were independently verified. we used an increasing amount of independent verification to collect richard data --

collector richard data -- richer data. these were topics of conversation at weekly management meetings. the board met something like 100 times. i would -- in the process, our chief officer would come out and we would ask to install a blueprint of that process. the that -- that, in summary, is how the system was set up and operated. then, of those scenarios -- been, those scenarios [unintelligible]

>> it was fannie mae shot that they did not meet the standards -- was fannie mae shocked that they did not meet the standards? >> it was operating within the standards that it had. we were aggressively raising capital throughout 2007. i do not want to dispute the notion that more capital was the thing. more capital would have been the better thing. there was a point in 2008, or

maybe earlier than that, where it became clear that the bar should not be minimum statutory capital, but it should be higher than that. >> before we leave this, and i appreciate you being forthcoming, what was the number for the down side scenario? was it a 5% decline a written% decline? >> -- or a 10% decline? >> i cannot tell you anything that i do not specifically remember because, based on the inputs and the methodology, you could come up with a variety of different numbers. the last output was one that i described to you in the end of 2008. i do not know what the output turned out to be subsequently

once you had the information of what happened. the downside was consistent with the calculations that we went through to develop that. >> business models have always been of interest to me. there were two things that you did. one was to purchase mortgages, provide a guarantee and then generate a sale the second was to -- generate a sale. >> mr. chairman, i yield the commissioner 5 additional minutes. >> in this spectrum of purposes that you had to pursue, what purpose did the portfolio hold? >> when an originator originates

mortgages, and builds up the look of loans, then they put that into a fannie mae or freddie mac securitiey, the originator of those loans still holds those loans, but they are in the form of a mortgage backed security. the reason this is more valuable on their books is because it is a straightaway fannie mae security. therefore, it has a liquidity value and that the cfo of a bank can get those sold into the marketplace very expeditiously. one of the planes that the

portfolio did was to provide the liquidity to ensure that even if the worst times in the marketplace such as 9/11 or parts of 2008, there was always one to be a bit out there for those mortgages -- always going to be a bid out there for those mortgages. there was no guarantee that anybody else would be out there in a tight market. >> number one, it was a triple a security because it was guaranteed. no. 2, you are saying that because you were already holding these assets, this gave them the assurance that you would buy more? >> how does that help? >> that was one of the purposes of being in the business. >> and other purpose of being in that business is to borrow very

cheaply and invest in a very risky piece of assets that got riskier as time went on. >> i am not in agreement. the overwhelming bulk of the assets were actually a conventional mortgages. so the notion that the portfolio was a riskier loans than the broad book is not accurate in my experience. >> you held a different set of assets in your portfolio then you actually showing? didn't your portfolio become riskier as a result? >> over time, the portfolio grew

and as the portfolio participated in investments and other investments consistent with the market, i guess that the point that i was trying to make is that the businesses are different, but the class's of assets in which the two businesses are investing is the same. >> but over time, there was not a decision to hold greater backing. there was not a decision to stress test more aggressively until very late. the only thing that seems to happen is that you relied more and more on the taxpayer to pick up the pieces when it falls apart. what did you do with this risky portfolio and what others have testified as being inadequate, internal risk-management?

>>this is not something that isa revelation of 2010. this is something that many people predicted and, knowing that, i am curious that it was allowed to happen. >> by and large, the focus has been around credit risk. the procedures around managing interest rates have the same degree of controls and limits that you would expect. we raise capital and we reduced limits -- we raised capital and

we reduced limits. so, -- >> i yield back, mr. chairman. >> what purpose did the portfolio serve? >> i yield 2 minutes for the purpose of the witness answering a question. >> a portfolio served an important liquidity function. i would mention three levels of liquidity. one would be general contribution to liquidity which helped reduce mortgage rates which help people get into home care. a second would be periods of stress in the marketplace.

the portfolio was a critical function. mr. mudd mentioned 9/11 and 2007 and 2008. those are good examples. a third function of the portfolio would be for a class of mortgages for which an active a securitization market did not exist. a prime example of this would have been the multifamily market, which there was not much of a securitization market. virtually all of that business was done in whole loan form. 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 other business to rid i would put what we did in subprime and that sense. -- in that sense. >> even a very weak regulator it took the first opportunity it had to limit the size of portfolios that were not in the interest of the public. but keep it >> mr. thompson? >> many believe that the house and bauble may have been a significant contributor to the financial collapse. arguably, fannie and freddie took advantage of the housing market. while private level security guys were the johnny-come-

latelies, you guys have been in the market since 1938. there is no question about that. if you look at the time when home ownership in our country grew substantially, there was about a four-five year timeframe when there was a 10% increase in home ownership. that is quite substantial from historical norms. at what point does someone who has such market knowledge and has a public mission have a responsibility to also say that something is going wrong and therefore use your knowledge of the market to tell congress to slow down. mr. mudd? >> i think that there is that responsibility. we had those conversations throughout the rulemaking process as hud established the housing goals.

the other side of the corn is that when i first started to look at the data of home ownership, there was a 10% to 15% gap in home ownership rates. there was clearly ground to be made up there on a fairness basis. there were similar programs in earlier administrations. . a lot of the increase in home ownership was driven by folks that were able to access the home ownership market for the first time. in retrospect, i thank that it got too high at the time.

it reflected that there had been no progress for a certain time frame and then there was progress. i thought that that was good progress. >> it is true that part of that increase in home ownership is attributable to loans that were originated that had very low standards of the origination and that therefore could have contributed to an eventual collapse. the blind pursuit of metrics put our country at risk. >> as i tried to indicate, the business that fannie mae did was about 70% of the loans in the market.

about 30% of the total market delinquency is fannie and freddie. 30% are held by private institutions. i think that we did act with prudence. in retrospect, you are absolutely right. folks would get in near the end of the home price rise with law or equity in the house and the day -- with lower equity in the house and they were the first to get hurt. >> would you comment on that which is part of the responsibility to act on market knowledge? >> we had continual conversations with our regulators but what we were seeing on the marketplace.

-- we had continual conversations with our regulators regarding what we were seeing on the marketplace. with hyud, we had regular quarterly meetings. we would express what we thought was part of these meetings. >> so, you could certainly describe your mission as somewhat schizophrenic? a cross of trying to serve the public's interest and the interest of shareholders. as you look with the benefit of hindsight, right now, with what has happened, is this a mission that should have been undertaken?

particularly as it was structured? >> in my mind, it is the most important question in the whole discussion. it goes to a broad determination of whether you want an american government, in some way, to tweak the system in the advantage of home ownership -- my opinion is that where we are in the market, today, this is the notion that you would go back to a private structure and it cannot be logistically accomplished in our lifetimes. i do think that a consensus around what the model should be

is important. i would have the gse focus on first-time home buyers under terms that are generally predictable payments with 20% down there would be a portfolio -- with 20% down. there would be a portfolio. there would have to be an explication of exactly what the relationship is between these entities and the government. >> what would that change, due to your housing goals? >>if that is the more plausible approach to the market, what should the housing goals be? >> it always seemed to me that if you were going to have

requirements like the housing goals, they should also be balanced by the capabilities of the organization. i think that the notion that if you have this, they should be supervised and make sense. i guess this is old, because it does not apply any more. it was set without respect to the market -- >> the goals should have been lower? >> feagles should have been floating -- the goals should have been floating as opposed to straight lined. >> my view on the housing goals is that numbers are not useful.

what would have been more useful would have been to identify what were the problems in the housing and mortgage market coul. it policymakers would look at new rental housing for seniors, this is making up an example, to direct the enterprises to help fix that problem would make sense to me. if that was a problem, it is a problem worth fixing. if it is another problem next year, you would address that other problem, but not numbers four numbers sake. >> was there an opportunity to read prioritize -- to rid prioritize your strategy -- to

read-prioritize your strategy? -- re-prioritize your strategy? >> i'm sorry, -- to an >> could you have changed your charter to focus on what would have made this institution more sound? >> i think that the thing that would have made the institution more sound or produce a different outcome would have been for it to become a more normal financial institution. able to diversify, able to be long or short in the market, able to operate internationally. if the trade for that would have been a cut in the so-called

implicit government interaction, the items that were discussed earlier were to evaluate that course. in my experience, there was never any genuine interest on the part of the government. >> thank you, very much. >> thank you, mr. thompson. >> mr. chairman, 30 seconds prior to moving to the commissioner, my understanding is that it was about your pay grade? >> and that was sloppy language. >> it was not sloppy.

it was quite clear. you made $45 million. only people above $45 million between 2002 and 2008 can answer that question? >> what i meant by that is in addressing if we could affect the charter act -- to like what it was above your pay grade. >> what i meant by that is that it was in a per view of the congress about the company. >> i will get to those questions in a minute. >> mr. genesee? >> in your testimony, you said that there was over investment in housing.

origination standards slip. -- slipped. i agree with that assessment. i want your view on whether fannie's actions contributed to this. i'd like to ask about the contribution of your guarantee to the mortgages. you said that there was an over investment in housing, but fanny is not just a market follower. when fannie takes action, they become a market leader because of size. do you think fannie cause of this market to expand further? did this contributed to over a mess but -- to over investment? >> in that it was the chartered

purpose of increasing home ownership, it did both of those things. it increased home ownership and increased affordable housing. when the collapse came, more people were exposed to the collapse. >> you said that origination standards slip. i understand that you lower default rates. did it then and's origination policies slip? >> we tried to be fair and prudent in the process. you mentioned that the market at large. -- you mentioned at the market at large. in retrospect, there were three factors around the mortgages that deserve greater inspection.

the states with the least affordable housing and least affordable housing happened to be among the bigger states such as california and florida. a proportion of that business came through brokerage channels. this allowed a lot of leakage into the system of loans that were not underwritten to a higher quality. we charged higher fees. we charged adverse market overrides. but because of its vintage being as close to it was, -- as close as it was, dr. eli >>--

>> maybe its slip, but it was not intentional? >> i think that that is a a fair statement, that it was not our intention to slip, but it was our intention to tighten the standards. they were tighter than the private market at large. if you go back and look at it in retrospect, they were not tight enough. >> you said that there was too little skin in the game. did fannie mae lower its down payment requirements? >> not directly in the way that you were describing. -- are describing. there were credit grids that had

a multiplicity of factors on them. to the extent of that day ratio was higher somewhere else in the underwriting, there would have to be a compensating factor that would move those up. >> let me rephrase that a little bit. did fannie mae understand that they were guaranteeing mortgages that have higher ratios and lower down payments? >> yes. >> you said that home ownership rates probably rose too high. do you think that fannie mae contributed to be home ownership rates rising too high? >> contributed, i would say so. >> in your testimony, you said that a mall-line gse structure

cannot withstand a multi-year home price decline on a national scale, even without the accompanying financial turmoil. because you could not diversify, it seems to me that the key phrase is that you were asked to perform multiple tasks. >> i thought about those words carefully and you have interpreted them correctly. >> i am concerned. you seem to be ranking lack of diversity high into the failure. maybe i am just reading something has come plaza. -- that is conclusive. -- that is the impliccomplicit.

>> the lack of diversification left us exposed to the one market that cratered the worst. i do not know how i can distinguish the two factors from each other. >> if i could, i just want to follow up on another line of questions. what you said about not being aware of the firm trying to lobby congress on the appropriation of the regulator completely contradicts my experience over the past 10 years. i would just suggest that this is an important area for us to understand because we have heard several times that fannie mae was in compliance with the regulatory capital standards,

but if fannie or its proxies' were trying to keep those capital standards up to what a national institution would have used, there would be a problem. i remember learning about iron triangles. i think that we need to understand to what extent these firms were trying to influence both legislative and executive branch policy numbers to not just keep the funding for the regulator low, but to prevent stricter capital standards and to prevent the regulator from having stronger authority. >> we will know that for the record. i know that they have already provided some information on lobbying expenses. >> thank you.

>> thank you mr. hennessy. >> thank you very much. thank you both for being willing to appear before us and help us with our work. in the written testimony of james lockhart, who will appear before us this afternoon, he said that fannie and freddie had very large derivatives positions in regards to their mortgage interests. i understand that fannie held 1.2 trillion dollars in an amount of derivatives in the summer of 2008. this is prior to the conservatorship.

freddy had an additional 1.6 trillion dollars in derivatives. if you have knowledge of this, could you tell us what kinds of derivatives were being held by fannie mae? >> they were principally in the form of option swaps. they were used for the purpose of extending the debt to the underlying assets. >> 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? >> the individual consumer can

pay off any time that they want to. ideally, you would match 30-year funding to a 30 year asset, but because of that option, you had to understand what the likely actuarials were going to be. therefore, it was generally most efficient to fund components of the portfolio with short-term paper or other forms of straight debt and then used the derivatives market in order to create the option maliki -- the option now the -- the option ality. >> so it was interest rate risk and prepayment risk. >> yes ma'am. weber derived of the same thing 3 >> -- yes, they were derived of the same thing.

>> we would purchase credit enhancement in the form of mortgage insurance. that is how we do it. >> did you engage in any kind of speculation with derivatives trading? >> no, to my knowledge, it was all on the book. >> mr. la carte -- mr. lockhart mentioned concern during the time he was the director. this is in respect to fannie mae and freddie mac being excused to -- be exposed -- being exposed. can you explain what those

concerns were? >> i was not able to read his testimony. as i suspect that you know, the risk is the failure of one of the counterparties to perform. within the risk-management function, we built out the team that was focused on counterparty risk and aggregate exposure to the chair those counterparties. -- to each of those counterparties. it would have been possible for us to have an exposure on the derivatives side as well as the client could be a customer of ours. we were able to look across an entire counter party and understand what the exposure was, there.

we were able to reduce exposure in both the bear stearns and the lehman brothers associations in advance. >> did you experience any default in connection with bear stearns or lehman brothers in 2007 or 2008 on the derivatives positions? >> i do not know. >> the wall street journal, on tuesday, reported that fannie mae and freddie mac correctly have more than two trillion dollars in interest rate swaps on their books. they are thereby, among the largest participants in that market.

evidently, the federal housing finance agency is considering requiring that all those instruments be cleared through a clearing house in order to diminish counterparty risk and to obtain improved pricing in permission. . .

mike observation of reading the article was as i noted in the testimony, in some ways it will effectuate changes of policies of the market. there may be other reasons to do that i am not aware of. >> do you have a reaction? >> i would be interested in the proposal. i have not seen the proposal, so it is difficult without seeing it. >> let me follow up a little bit on some questioning from the commissioners about the political power and influence that fannie mae exercised prior

to the conservatorship. fannie mae certainly had a reputation of exercising very significant political power in washington through both extensive lobbyinging and government relations expenditures, and also hiring a team of high government officials to conduct its government relations and lobbying. does it seem unusual to you that millions of dollars were being spent each year during the time you were c.e.o. for lobbying expenses? >> no, it does not. >> why not? >> in premise, i would agree

there was a time when there were too many of the behavior activities that you described. >> one was that? >> -- when was that? >> prior to my time as ceo, certainly. one of the things that was on my list upon accession to the job was to get that right. ibut at the same time, there wee a number of complicated issues that went fundamentally to the existence of the companies before congress, and secondly, there were calls that had to be responded to by someone who understood what the lobbying rules, the interaction rules are, and this people happen to be lobbyists.

my determination was the thing to do was to bring them into the companies said they were under my direct supervision but they also understood what the company was doing. instead of schmoozing, it or working on the issues of the day. -- they were working on issues of the day. but with the regulatory bill which changed i hope the fundamental nature under which the company was like to operate, i thought and i still think to this moment that it was very important to get that exactly right and for us not to be on heard in terms of this provision will have the specific impact on what the company can do, how will run the company, the effect on capital markets. and did not seem like the appropriate way to do it. the last sentence on that is, as you may know, the lobbying numbers are derived as a head

count percentage, or multiplied by the overall expenses of the firm. during that time, we were going through an expensive restatement, which made that denominator higher than that. those numbers have to be used with some degree of caution. >> any more time on this matter? >> i would like to ask one more question. >> two minutes. >> i want to ask whether fannie mae had a pact that its officials would contribute to and would be used to making contributions to public officials? >> yes. >> and what was the name of the pac? >> fannie pac or something like that. >> you have any recollection of how that was and how large the contributions to it work? >> i think it is a matter of

public record. >> i am sure it is, and perhaps we will find it, thank you. >> mr. hennessy, i am moving back to you. you have one minute, 50 seconds, but we will give you two minutes because of our generosity. >> you are too kind, mr. chair. >> don't forget it, though. >> i certainly want. i am stunned by this comment, because as a white house official of the past decade, i was directly lobbied by outside consultants who told me they were hired by fannie and who told me that fannie had gone through the white house staff who they thought were working on the issue and targeted a specific lobbyists to each one of those staff. my experience is different from what you describe. we talked a lot about the balance between your fiduciary responsibilities to shareholders and the need to fulfill your public purpose. he said without earnings, the

gse's would not have been able to attract capital, post reserves, or perform the function of channelling capital flows. earnings are key to both of those private schools and public goals. i am confused about the public purpose of buying, guaranteeing $350 billion of mortgages. was there a direct benefit to the housing market or was it in direct through higher profits for the firm? >> i think both. >> what was the direct benefit? >> the direct benefit is that there were, as mr. 11 mentioned, -- as mr. levin mentioned, there were loans and conventional category, but for want of some traditional part of non alt a loan underwriting.

to pick an example, at one point we look at providing loans to teachers. a loan to teachers would not have 12 monthly amortized payments, it would have nine months of payments and then three months of non-payment or work not working. you might agree that is a laudable purpose, but in either case that would be an alt a loan. that is a demonstration of how i think it could serve the mission as well as the financial side of the business. >> thank you. >> you said you wanted a place on the record before we go to the vice chair? >> i just wanted to finish briefly on the list of what i would regard as potential accounting improprieties. the fhfa and occ did not recognize laws until the had been delinquent 24 months of

delinquent borrowers. the occ noted in a report that allows methodologies have to be revised to recognize it. lost in the. for this regardless of the timing of the loss of that -- of the loss event. there are three areas, and i guess i will state it for the record and you could respond in writing thereafter. did fannie make unsecured loans to look delinquent borrowers under any program or the underlying loans thereafter no longer reported as the liquid loans and did fannie make this unsecured loans so it would not have to repurchase the underlying loans and record mark to market charges? >> and we will ask for responses. thank you. >> thank you. just a few minor matters. it just for those --two minutes.

those watching 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. on page 8 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. it will be useful to see how influential those guidelines were in fanny's purchase of subprime and alta a loans. a question came up about whether alt a loans are goals rich, and there is some information on that. in 2000, hud adopted a rule which said, as they describe the

role, new provisions clarify certain other provisions in the rule, accounting different types of mortgage purposes towards goals, including provisions regarding the use of bonus points for mortgages that a secured by certain single-family rental properties. that is why the alt a loan would be bowls rich because it allows -- would be kohl's reach because allows non-owned investments to be rented. a rental property did provide housing for the groups that were supposed to be included within the affordable housing loans. and we have some information that was turned over by it freddie mac that, on balance, they say alt a loans were net positive for the housing goals. finally, the question about

private label securities, which in fact fannie and freddie purchased in substantial numbers. this is a significant number of their purchases, and more profitable because these were high-interest loans, unlike the loans that fannie had made, and they were not as good quality as the loans that fannie was making. would you made the point, mr. mudd, that your loans were performing better than other loans, this is 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. the top part is -- >> if you could wrap up. we are over time. >> the top part is in buying these tools, you were advancing

your competition's position because they would assemble these pools of conforming loans and sell them to you, and they helped with the affordable housing guidelines and were also profitable, but it also helped wall street do more of the securitization they were doing. >> we will leave that. if you would like to respond, we 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 are obviously dealing with "investments", which look a lot like some of the other folks who were in front of us in dealing with investments with, unfortunately, much the same outcome, but in fact you are really not a business at all.

when you were asked about compensation and the companies that you compare yourself 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 ceased to exist. but you did not have to have articles of incorporation, and you did not have to make a profit. so in any of those discussions, i will spend a little time to bring it back into what i would probably say, any more so than other commissioners, my world. for more than three decades, have been in washington. people look at washington, d.c., as national capital, international capital. tom brokaw in his book talked about washington, d.c., and in

the time i have been here, i could tell you in spades it is also a company town. i am looking at a 2002 paper put out by fannie mae under the heading, "fannie mae papers," tidal, "implications of the new fannie mae and freddie mac." it talks about policies of issue to the housing community. the conclusion of the paper, not on surprising -- not un surprising, says the probability of 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 shot a career in -- shot a career in, and assuming fannie mae and freddie mac hold substantial capital to withstand that shock, the exposure of the government to the rest -- to the risk will become insolvent appears quite low. commissioner hennessy talked about the fact that as there was an attempt to get fannie mae to increase its capital levels, there was resistance from fannie mae, get 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 by the fellow of peter or sag,

who is currently the director of office of management and budget. i want to talk about small town, company town. franklin raines was fannie mae's vice-chairman from 1991-1996. 1996, he moved directly from fannie mae to be the director of the office of management and budget. from 1996-1998. when he left, the director of the office of management and 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. 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 an administration from your " business" back to your "business." i looked at lobbying slightly differently than i think most people here. you said you wanted to make sure that you had people on the field. i think you and i both know is better to have people in the locker room. i think there is just overwhelming evidence, when you look at those people who were employed for lobbying, and i probably read this differently than others, i am shocked at the

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

committees. i am a little more interested in a slightly different way, because you really have as a kind of board of directors based upon your origin, by statute, which is why you did not have to incorporate, and that the money that is your life's blood in terms of structure and movement is actually appropriated by congress. over my 30 years, i got to know -- i never wanted to be on 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 need the appropriations from those specific areas, both in the house and senate. they take a very proprietary attitude toward those areas.

they are theirs. he mentioned a senator. the senator from missouri, who was at that time, the chairman of the va subcommittee. it is true in the house as well, and we will hear some testimony from the panel following years to reflect more on this 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. 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 "business models" of fannie mae?

>> my recollection is, especially in the days that i ran the housing of community development organization in fannie mae, which was the organization -- >> i have very little time. really, a yes or no will be sufficient because it followed up with comments to elaborate. >> i will be short. we made a big effort to try to do important things in communities -- >> i will try again. yes or no? >> and we made -- >> mr. chairman? >> can you answer that question? >> i did ask a minute of time. >> i will give it back. i think it is a fairly straightforward question, mr. levin, about whether you are in a meeting or not and if

approaching a member of congress was raised. >> i think yes or no would be appropriate. >> we want it members of congress -- >> that is be on five words. >> come on, yes or no. the answer is yes, right? >> please answer the question. >> yes. >> "yes." not that hard. what should get into the rhythm, it is easier. did you ever attend an event that was classified as a political event for a then- sitting member of congress for the house or senate? >> don't recall if i ever did. >> you don't recall. you would not remember going to end of that for a particular member of congress? you did? so that is what i mean about not having to worry about who was on the field if you have access to the locker room.

i don't know why people focus on paying for lobbyists. i guess what i am trying to point out to you is, in reference to the statement from the commissioner, there were a lot of people, including myself, who were well aware of the internet access by fannie mae both through your political action commission and direct involvement that was designed to agree -- very great extent to promote your "business model." in testimony that we will hear very briefly in reference to the commissioners question, there is a quote, and it is attributed to fannie mae's internal auditor, focused on the last decade, and the effort to double earnings in

five years to 6.46 -- i assume that is billion. it says, "you must have at 646 brand it in your brain, recited in your sleep, recited forward and backwards, a raging fire in your belly that burns away all doubt. live, breathe, dream 646. after all, thanks 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 that had a big impression on me. it was called "bridge over the river kwai." in terms of someone so enthusiastically involved in their work that at the "aha" moment it was "what f. i'd done" in terms of -- what have i done"

in terms of helping the japanese move their supplies across a bridge 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 tweet towards home ownership -- tweaked towards home ownership, come on, how much would you give back to help the taxpayers with their burden left by the way in which you in your cohorts ran this particular "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 turn. i am just amazed, mr. levin, at

the kind of decisions that ran the company into the ground war above the $45 million marked, which was your pay grade. thank you, mr. chairman. >> i have some quick concluding questions, clarifications. very brief answers. then one question for you, mr. maude, in conclusion. when you talk about mission, i want to be clear that obviously the business, the profit mission, and i mentioned affordable housing. would liquidity be included in the mission? liquidity for the housing market? for the record? >> yes. >> as i understand the interchange, and i think i am characterizing it, that all lines of business were pursued with an eye towards making money but there may have been differential profit goals for

this various lines of business, correct? >> yes. >> ok. just want to be clear. but there were no businesses in which you deliberately engaged with the idea, even though it obviously turned out as such, in which you engaged or underwrote them, cross subsidization to the extent that a loss and a particular business unit? >> not to my knowledge. am ok. mr. thomas? >> i want to clarify, it was a goal of earnings per share. >> thank you. that is too long a question. all right. here are my final two comments, questions. in 2007, the market is beginning to crash, you bought $21 billion of private label securities that year when most of the markets

were trenching dramatically. was there any pressure brought on you to do that by folks, for example, and political positions, without regard to party or administration or congress, to support wall street, saying yes to continue to move in and buy pls, or were you buying private-label securities? did anyone ever say to you, look, 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 all flow that? did that ever occur? >> nobody ever said that to me. >> same. >> ok, good. final question. march 19, there is a press release, fannie mae, freddie mac both failed, in which you had your portfolio limits lifted,

you had your capital surplus reduced, and you commit to raise more capital. why on god's earth, in 2008, would you position yourself to do more in the market as a straight business enterprise? >> um, the -- the capital override that the regular had in place at that time was set up as a hard-line, and with the volatility in the markets, we had a concern, on account of nothing that we did, that we go under the capital line and therefore be in technical violation. so are ask was to give some flexibility around that line on the capital requirements, but to

ameliorate the logical concern that would come out of that by expressing our interests to maintain those levels of capital, if not raise capital. we thought at that point in the market, with arms resetting, subprime loans not being finance a ball, that there was some good that we could do by helping to finance our war is coming out of those loans who otherwise would have qualified -- to help finance borrowers coming out of those ones who otherwise would not have qualified for their loans. >> march, 2008 was my question. is that what you were referring to? in response? >> the discussion went on before that and after that. >> you had sought to lift the portfolio cap to do more, correct? or was there such a thing? >> we had taken the portfolio down below where it was actually required to be. >> why were the caps lifted?

>> that would be a topic to talk about what the regulator. >> you did not ask for? >> i think we were in favor of doing it because it gave us more flexibility. >> all right. it seems odd to me that in the markets, most business enterprises are looking at the market which values their decreasing risks, risk is increasing, and what fannie mae is doing and announcing, and freddie, concerted action of these to business enterprises are increasing their portfolio caps, i.e., their ability to raise caps and capital. >> a component of it was it was seen as an indication that there would be -- there was a liquidity crisis, so there would be some expectation there would be liquidity available in the marketplace. it does not imply we were going to do anything that was outside.

standards. when everybody else left, it widened up the spreads. am i not want to take any more time. the regulator will be here and was very involved in that transaction, so we can explore that more. we may have written questions for you to fully understand exactly what happened, why, and who were the parties engaged in those discussions. >> ok, commissioners. thank you very much mr. levin and mr. mudd. we will break until 12:25. thank you. [captions copyright national cable satellite corp. 2010] >> too big to fail is a harder issue. i think we're past the dales of exclusively small local based banks and financial institutions. >> looking for more about the financial crisis?

at the video library, searched it, watch it, put it, share it. video from yesterday or 10 years ago. every c-span program since 1987. c-span video library, cable's latest gift to america. [captioning performed by national captioning institute] >> next, a speech by iranian president mahmoud ahmadinejad. later, democrat part stupak says he will not run again for congress. and later, the southern leadership conference from new orleans. this week on "america and the courts," a look at the life and career of supreme court justice john paul stevens, who has announced his retirement. that is tomorrow at 7:00 p.m. eastern on c-span.

[music plays] >> what in the world right now is more ridiculous than american politics? >> from past years, using various clips, the gregory brothers have become fire roll hit makers. we will talk to them sunday night on c-span. this weekend on c-span2's "book tv," deborah amos on what has happened to the cities following the fall of saddam hussein. her book is "field notes on democracy." and ralph peters looks at u.s. foreign policy in his latest collection of articles, and less war." -- "endless watr."

find the entire schedule online. >> iranian president mahmoud ahmadinejad unveiled a series of new centrifuges. they will produce fuel for nuclear plants in the country. in a speech, i talked about the advancements in iran's nuclear program and criticized the new start treaty signed by president obama and russian president megadeath, calling it a bit -- and russian president dmitry mcdevitt, calling it a big lie. this is about 40 minutes. >> in the name of god, the compassionate, the merciful, may god hasten the emergence -- the

president is citing verses from the holy koran. i for one would like to congratulate you on the anniversary -- actually, the day when the iranian scientists mastered the technology to produce nuclear fuel. i like to congratulate you on this. i am very happy and i thank god, and once again of the like to congratulate you all on the great achievements that were unveiled before your eyes. today, iranian scientists and experts have fully mastered the nuclear technology, and have

been taking giant steps and moving at full pace towards meeting all domestic needs and making proper use of homegrown potential in the field of nuclear energy. really, the nuclear achievements by iranians, we should be proud of the nuclear achievements by our own scientists, not only for the iranian nation, but for all independent nations and governments across the world. i would like to mention a point here, and that is you and all are well aware of that, but it is not a bad idea to remind you of that.

international relations, iran's role in improving the situation of the world and pushing it towards justice and in line of respecting the rights of nations is a very great one. today, the iranian nation -- actually, it is relying on a solid base for all -- actually, good wishers and -- actually, freedom seekers that is. there is a deep, actually, bond in the nation and other nations, in such a way that almost all nations of the world, actually,

they considered iran's achievements as the rhone -- as their own, and wholeheartedly celebrate iran's achievements. in the news, reports that i have read -- actually, i have seen it all the way through, and actually, in more than 60 countries, i have been contacted at different levels of society in more than 60 countries, and i have seen with my own eyes this bond with the iranian nation. today, and the accomplishment by the iranian nation -- actually constitutes a step forward towards real freedom and

independence for all nations, and all nations actually are in line with that today. the pace of iranian progress on different fronts, especially nuclear technology, which is very actually important, it is very actually proud. look at the achievements unveiled today. we are to establish actually install 60,000 centrifuges. it can produce the fuel needed for a nuclear facility in one year. with the replacement of the centrifuge, the first generation

centrifuges, the new generation will be more effective, using the same facilities without any need for physical expansion of the buildings and all that. we will be able to provide actually nucleolar full -- nuclear fuel for six plants. as you see, there are two rods and sheets sideways. the rate sheet is for the nuclear fuel, and the left sheet is cut in half for you to see the inside. this sheet is 1.5 millimeters thick. at the core of this sheet, you will find a 7 millimeter

actually fuel, and this fuel belongs -- it goes through certain processes later. in different fields, we're seeing numerous achievements and the agriculture, medicine industry, health care. the doctor elaborated on that very well. with god's grace today, and on the back of the relentless efforts of our revolutionary people, we have fully mastered the different dimensions. we have full control over the different dimensions of nuclear technology. maybe we are the only country which actually -- which actually possesses everything from a to z, from the exploration to the

processing of yellow cake, and later processes for that to be prepared in richmond -- enrichment. the machines are very sophisticated. actually, they have to spin at very high speeds to separate particles and all that. if there is a lack of balance or a snag, whatever, in the machine at that high speed, and a matter of seconds, this machine will break down and collapsed. there should be very, very careful measurements, a very actually carefully made alloys and all that which have all been accomplished of course by local

experts. as for the power plants, they are being launched one after the other. as for production of medicines, actually, there is a reactor into iran -- in tehran, a research reactor, that produces medicines theire. they delivered a shipment of fuel to us and we paid for them on that of course. well, that ran out as well. this reactor made 20% in reached fuel. as usual, we asked the iaea to actually give us the 20% enriched fuel. the iaea director general at that time, he relayed our

request to countries and they said, okay, we will provide you with that fuel. during the talks, they said in order to settle the nuclear issue, you give us 3.5% in reached fuel, then we will process that, change it to 20% enriched fuel, and then we will return it to be used in the reactor. in the beginning we said, ok, you are cooperating and we have no problem in that regard. anyway, they made a fuss about it. they said we would like to actually -- actually, they said they would like to take the stockpile of iran's uranium, taken away from iran, and actually make it impossible for iran to make an atomic bomb. well, under the regulations,

under the law passed, we were supposed to make a swap. anyway, knows what was necessary after all. -- no swap was necessary after all. they could actually give us the fuel and we would pay for them and return. there was no need for the nuclear swap. ok, this is the usual thing for us. we are making 3.5% fuel, we give part of that to you. after that, they made a fuss about it and they began to repeat -- actually, they continued their selfish behavior and they said we would set a deadline for iran to swap for this fuel and all that. we said, ok, there should not be

any deadline. under the law, you are obliged to give us the field. imagine you would like to buy some goods on the international market, always the buyer sets conditions. now it is the other way around? anyway, we told them that you need it 20% in ridged nuclear fuel -- enriched nuclear fuel. the reactor is running out of fuel. if you don't provide us with that, we will make fuel ourselves. then they began to scoff at us and said you were not able to do that and buy it from us. anyway, we actually asked our own experts and they said, okay, we will make the fuel ourselves. then we announced that iran has started enriching uranium.

then the super powers began to make propaganda and said they are not able to do it and all of that. then on the 22nd, when they saw iran had actually made the first batch of 20% uranium, there were stunned. then they said, ok, you will have the fuel, but you cannot run it through nuclear sheets. but as you can see, here is the nuclear sheet. you say the iranian nation cannot? the word "cannot" does not exist in the lexicon of the iranian nation. the guests are chanting "god is great." "death to america."

and the 10-day period, we said the iranian scientists are capable of enriching uranium different ways. one is using centrifuges. one of them was put on display in that exhibition. today, all iran has complete domination over the nuclear technology. it does not need your expertise in terms of nuclear know-how. there are no impediments before iranian scientists whenever the interests of the country, the local experts and scientists are able to meet our own nuclear needs in all fields.

those who are watching this and seeing this, they would not like the iranian nation to make progress. they understand what fuel means, they understand what laser means. the third generation centrifuges, what they mean. the iranian nation, in the field of nuclear technology, they have reached a point where no power can deter them -- actually deterred the iranian nation from moving full speed ahead on a path to progress and making sort of nuclear energy. i congratulate you and the iranian nation on this great achievement. there is another achievement in addition to the nuclear accomplishment, which i think is

more important than nuclear energy, and that is self reliance of the iranian nation, self belief. it is like a river actually moving among the world's nations, and this self police, self-reliance is taking root and other nations as well, and a nation which believes in itself, there is nothing out of reach for that nation. a nation which believes in itself will savor the taste of dignity, real security. and today, with god's grace, the most self-reliant nation is the new -- is the iranian nation. we actually hold different meetings with our scientists in different fields.

over the past four years, of course in the past i held meetings with them, but -- actually, the conditions that i said today is unprecedented in the iranian history. among the experts in any field we go, we see we have made great progress in that field. when we ask our experts, can we make that, can we do this or that, so far i have not heard a "no" answer. i have to confess that, actually, our scientists have wholeheartedly, actually, tried to meet the needs of the country in all fields.

today, iran is nuclear. it has gone at nuclear. whether they like it or not. let's take a look at actually the nuclear issue itself. it is hidden to no one today that nuclear energy is clean energy and cheap. when the nuclear power plant becomes operational, well, make a comparison. see what extent it will serve the national interest, benefit the nation. it is a 1,000 megawatt power plant. in one year, it should actually consume equivalent to 7 million

barrels of oil per year. this is something like $500 million. it means we should -- actually, $500 million worth of fuel for a 1,000 megawatt plant. but the fuel that we use for this plant would cost us only 60,000 -- actually $60 million. not only nuclear energy is cheap but it is clean as well climate change is one of the challenges facing the world today. the whole planet earth has become 1.5 degrees centigrade warmer. ok, you can see taking into

consideration the mass of the earth, what does it mean, 1.5 degrees centigrade for the whole earth? well, it has led to drop, cold snaps -- it has led to drought, " snaps. environmental solutions are another concern, as well as diseases, and actually mental pressure, psychological problems. all of them are basically cost life -- all of them are basically caused by fossil fuels, and with all efforts to reduce fuel consumption, the main reason for the environmental solution and the imbalance we are seeing in the bachus system and climate change and all that, the main reason for that is using fossil fuels.

nuclear energy is a very inappropriate replacement -- is a very appropriate replacement for fossil fuels. but actually, what happened in the nuclear energy field? the first people who actually acquired this energy, their main purpose was to actually use it for military purposes and dominate other nations. nuclear energy is a divine blessing. however, arrogant powers and selfish people, those who want to actually dominate all nations

from square one, from the very beginning they actually had a different approach to clean energy, they misused it. what is the first historical memory to nuclear energy? that was the nuclear bomb dropped on hiroshima and nagasaki. it was then when, actually, a nuclei had a lot of power. from the very beginning, they used it to dominate other nations. and by making wrong policies. so after this day,