WASHINGTON - Most experts would agree that the purpose of creating a new supervisor of Fannie Mae and Freddie Mac is to make it stronger than their current regulator, so lawmakers have been focusing on whether to grant it receivership powers or control over minimum capital.
Yet the less-noticed issue of how to structure the board of the new regulator may have more impact on its daily operations - and thus its long-term success.
Senate Banking Committee Chairman Richard Shelby, R-Ala., has indicated that he is preparing legislation to create a regulator with a strong executive director and an advisory board that includes cabinet agency officials.
But some industry officials said they worry that the agencies would try to impose their own agendas. Conversely, others fear the board would not be powerful enough, leaving no check on the executive's authority.
All sides say the issue is pivotal.
"It's huge," said Kenneth Guenther, president of the Independent Community Bankers of America. "You can't have world-class regulation if you have a regulatory structure that doesn't work. You can't have good plumbing in the house if the hot-water pipe is connected to the toilet."
Senate sources familiar with the matter say that the advisory board would avoid the pitfalls of other regulatory bodies. Though they cautioned that particulars could change before a bill is unveiled later this month, they said current plans are to create a board that is purely consultative, having no role in day-to-day operations, approval of regulations, or congressional testimony.
The issue, they say, is to ensure that the executive has enough power. Giving the advisory board some kind of veto power could stall decisions and lead to the kind of infighting among various constituencies that has plagued the Federal Housing Finance Board.
"What you want is a strong executive director," said one Senate source, who spoke on condition of anonymity. "When you have an executive board, you're inevitably asking for problems where you can, in essence, divide and conquer. You have a group of people with different viewpoints, and that can lead to conflict and an inability to act decisively."
Too strong an advisory board could discourage the best candidates for executive director from seeking the job, the source also said.
"If you are going to have a strong executive, you don't want to put that person in a situation where on a day-to-day basis they are having to go to cabinet officials to sign off on things," the Senate source said. That would "limit the pool of people who are interested in taking that role on, and you really want to attract a high-stature candidate."
Sen. Shelby's advisory board would almost certainly include representatives from the Treasury Department and the Department of Housing and Urban Development. Another likely possibility is a representative of the Securities and Exchange Commission.
The Senate source said it was uncertain what role the General Accounting Office might play, but indicated that the GAO would likely be involved in some fashion with the new agency. The Senate source said the agency's executive director would likely also be the advisory board's chairman.
Some outside observers praised the idea of a purely advisory board, arguing that an executive board with members of cabinet agencies could prove problematic. But others disagreed, and wondered if the Bush administration could support such an arrangement.
Bert Ely, a consultant in Alexandria, Va. and a longtime critic of the housing government-sponsored enterprises, said an advisory board with no power would be of little use, since the executive director could disregard any of its recommendations.
"I can't imagine the administration can be supportive of it," Mr. Ely said. "An advisory board can be ignored or not. I just don't think the advisory board idea is going anyplace."
L. William Seidman, a former chairman of the Federal Deposit Insurance Corp. and now a commentator with CNBC, said he had mixed feelings as well about a consultative board.
"An advisory board is free advice which is probably worth about what you pay for it," Mr. Seidman said.
Though he said he preferred a board structure like the FDIC's - which includes the Comptroller of the Currency and the director of the Office of Thrift Supervision - Mr. Seidman acknowledged that an advisory body "could be helpful in providing a better sounding board."
But the Senate source and others said advice from the authoritative officials whom Sen. Shelby is considering could help ensure the new agency stays on track.
"I don't think they can be ignored," the Senate source said. "You are going to have to take their viewpoints into consideration. The board will come up and testify before Congress, which will give them an avenue or a platform to make their concerns public."
Richard Carnell, a Treasury official in the Clinton administration and now a professor at Fordham University School of Law in New York, agreed, saying there would be valuable give and take between the executive director and the board.
"A blue-ribbon advisory board could provide high-quality oversight and advice," Mr. Carnell said. "The agency head would have incentives to consult and share information with the board. Board members would have incentives to make sure the agency did its job well."
Additionally, many industry representatives said they are concerned about the alternative to an advisory board. They said that standard boards can often become dysfunctional unless the chairman has the necessary stature and authority to command respect.
"The important thing is that it be a strong regulator," said Edward Yingling, the executive vice president of the American Bankers Association. "That means in some fashion it has to have a strong, independent leader, whether in the form of a single regulator or a SEC-type model where the chairman does have a lot of authority.
"What you don't want is a board where the responsibility is not clearly ultimately on one person."
