WASHINGTON - Republican Senate Banking Committee leaders expressed strong doubts Thursday about Fannie Mae's credibility and accused the company of acting as an obstacle to passing a bill to create a new regulator for the government-sponsored enterprises.
Chairman Richard Shelby and Sen. Chuck Hagel also sharply questioned whether Daniel H. Mudd, Fannie's chief executive officer, was fit to lead the GSE, arguing that he played a role in its accounting scandal.
Their comments came as a top Treasury Department official provided more details on how the agency could limit GSE debt and said the process would include the Federal Home Loan banks in addition to Fannie and Freddie Mac.
Several Senate Democrats responded by accusing their GOP colleagues and the Bush administration of attempting to strong-arm Fannie into compromising on the legislation, including agreeing to a provision that would limit their mortgage portfolios.
Sen. Shelby directly challenged Mr. Mudd's credibility, disputing the CEO's argument that Fannie has changed its lobbying approach during the past year.
"We have not seen any evidence in change of tone that you talked about," Sen. Shelby said.
To enact a bill, he said, "we're … going to need the help of Fannie Mae, and Mr. Mudd knows that, and so far we haven't gotten it."
Sen. Mel Martinez, R-Fla., asked Mr. Mudd why Fannie continues to oppose a provision in the Senate bill that would require a new regulator to reduce the GSEs' mortgage portfolios - the primary source of contention between Republicans and Democrats on the bill.
"Why can't we get your complete support for our bill?" Sen. Martinez asked. "Shouldn't it be obvious that portfolio limits are needed?
"Even if you have to swallow hard and accept the portfolio limits," maybe it is time to truly change the culture and accept the Shelby bill, "because you still do have friends" in Congress, Sen. Martinez said.
But Mr. Mudd and Senate Democrats showed no signs of compromise.
In response to Sen. Martinez, Mr. Mudd said Fannie was comfortable with a bill that would increase the safety-and-soundness powers of a new regulator, but not one that would change the mission of the GSEs. He reiterated arguments that the portfolios help maintain liquidity in the secondary mortgage market.
Democrats responded that the administration and Republicans were acting inappropriately.
Sen. Tom Carper, D-Del., said Sen. Martinez should not ask Mr. Mudd to support the Senate bill, which was passed by the committee 11 to 9 in July but has been stalled since.
"I don't know if it is appropriate for you to endorse either bill," Sen. Carper told Mr. Mudd. "It's our job to decide."
Securities and Exchange Commission Chairman Christopher Cox questioned why the New York Stock Exchange allows Fannie to continue to be listed despite the fact it has not filed an earnings report since 2003, and is still restating past earnings.
"The NYSE amended its general delisting rules to provide a unique exemption for Fannie Mae," Mr. Cox said. "Since NYSE put this new rule in place, questions have been raised about whether this exemption is appropriate… My view [is] that this exemption must be temporary, only for the purpose of allowing Fannie Mae to come into initial compliance with Exchange Act reporting."
Mr. Cox said the SEC has "encouraged the NYSE to amend its rule to put an expiration date on this exception, so that Fannie Mae - and its investors - understand that we expect Fannie Mae, like any other listed company, to remain in full compliance with NYSE's listing standards."
Mr. Cox recommended that the GSEs be required by statute to register their stock with the SEC. Both the Senate and House GSE reform bills include such a requirement.
Sen. Chuck Schumer, D-N.Y., accused the administration of a concerted effort to force Fannie to yield. He noted a speech Tuesday by Randal Quarles, the Treasury under secretary for domestic finance, that discussed limiting GSE debt, and a pledge from Housing and Urban Development Secretary Alphonso Jackson to require the companies to disclose more about their investments.
"There seems to be this coordinated effort to go after Fannie and Freddie," Sen. Schumer said.
The Treasury continued its press its case Thursday. At a speech before the hearing, Emil Henry, the department's assistant secretary for financial institutions, said its review process would examine the GSEs' total outstanding debt, its pricing, and maturity, among other factors.
Last year the Treasury said that it had the legal authority to limit GSE debt, but Mr. Quarles said Tuesday that the agency was actively reviewing its process for doing so.
Mr. Henry said Thursday, "We have made no conclusions, and we have no presumptions about whether or when or how the process will change, but let me say this: Everything is on the table."
Asked if the GSE debt review would include the Home Loan banks, Mr. Henry said yes.
One Republican urged restraint at Thursday's hearing. Sen. Robert Bennett, R-Utah, who reluctantly voted for the Shelby bill last year and has opposed portfolio limits, warned colleagues not to "overreact" to a report the Office of Federal Housing Enterprise Oversight released May 23 that criticized Fannie's management, board, accounting, and internal controls.
"Fannie Mae is taking its lumps," Sen. Bennett said. "Fannie Mae is paying a very large fine. Fannie Mae is under a very, very strong microscope, but it is still operating. No criminal charges have been filed."
Sen. Hagel was among the most vocal critics on the panel. The Nebraska Republican raised his voice several times during the hearing, telling Stephen Ashley, Fannie's chairman, that "you failed, and the entire board failed," to exercise appropriate oversight. He later accused Mr. Ashley of dodging his questions about potential conflicts of interest on Fannie's board.
"That is not my question, and you know it," Sen. Hagel responded at one point. "Part of the problem we have is that your institution - you don't give straight answers."
Sen. Shelby also repeatedly questioned Mr. Mudd about what he knew about fraudulent accounting when was Fannie's chief operating officer, before taking over as the CEO in December 2004.
"How is it you were not aware of any of these practices?" Sen. Shelby said. "Did you ever question how the company could achieve such stable earnings?"
When Mr. Mudd answered he was not aware, Sen. Shelby replied, "You should have been."
Mr. Mudd later told Sen. Martinez, "I became aware of the problem … the day that you did: the day that the SEC announcement was made" in December 2004. "I was shocked and stunned."
Asked after the hearing if Fannie should fire Mr. Mudd, the Alabama Republican told reporters, "He answers to the board - but there are a lot of people on the board who probably ought to look in the mirror, too."
Mr. Mudd said Fannie would complete its restatement this year.
