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Legislative Updates

December 27, 2005

I. End of the First Session of the 109th Congress —
   Look at Second Session

The Congress was completing its work this year in what appeared to be typical fashion, bringing all pieces of unfinished business together in one or two big packages to finish as members left for the holidays. At some point, this plan fell apart. When Congress did finally adjourn, it left unresolved for next year some very controversial issues including billions of dollars in cuts to social programs and tough choices on reauthorizing the Patriot Act.

The schedule for next year, as an election year, will be light on days in Washington. The House leadership released a schedule with one form of recess or another for approximately six months. The weeks it is in session, the House will be meeting from late Tuesday until late Thursday. This schedule reflects the need of members to campaign in their districts. This means there are only about 70 days or so when Congress will be meeting in hearings and markups with the other regular aspects of legislative activity. It will be, as is often the case in election years, an uphill battle for nonessential legislation to get sufficient time on the calendar.

At this point the following pieces of legislation of interest are known to be in play next year.

• Government-sponsored Enterprise (GSE) Reform: This is covered in more detail in the next item.
• A tax bill: While Congress enacted a number of tax provisions to help in the recovery from Hurricane Katrina, many other tax matters were put off until next year.
• HR 4100, legislation to create a Louisiana Recovery Corporation: The bill did not get added to omnibus appropriations legislation in the closing weeks of 2005. The bill's author, Rep. Richard Baker (R-LA), has indicated he will continue to work very hard for this bill next year and the Senate Banking Committee has indicated it will look at it in March.
• Reg Relief: This bill, an annual package of regulatory relief provisions for the financial services industry, has passed the House. Staff of the Senate Banking Committee has indicated this will be a priority bill for the Senate Banking Committee this spring.
• Deposit Insurance Reform: This bill was to be included in the budget reconciliation legislation that was delayed until next year (see third item).

II. GSE Reform Status Report

The GSE policy battle is currently in a stalemate, with the most significant issue being the controls on the size on the portfolios of Fannie Mae and Freddie Mac. At this point, neither side in this debate is willing to strike the compromise necessary to get movement on the legislation. The bill has passed the House and awaits full Senate action. Due to the impasse over portfolio limits, action by the Senate is unexpected. Should the parties be willing to compromise, an agreement could be reached and a bill passed very quickly.

During the legislative stalemate, some parties in the Senate have offered amendments on the Senate floor to other legislation affecting Fannie Mae and Freddie Mac. One amendment would subject these GSEs to registration under the Securities Act of 1933. Another would remove their tax exemptions at the state and local level. Neither amendment was put to a vote.

Blumenthal Speech: Another interesting development was remarks given by Stephen Blumenthal, acting director of the Office of Federal Housing Enterprise Oversight, before a group of institutional investors in Hong Kong on November 16. Blumenthal offered some observations on the efforts to limit the portfolios of Fannie Mae and Freddie Mac that suggested the motive was privatization. He said, "Other commentators suggest that the real goal of the proposed portfolio limits is privatization. This view says the way to address systemic risk satisfactorily is to privatize the GSEs, and portfolio limits are the means to that end. In this scenario, it could be argued, portfolio limits reduce the market share of GSEs and over time, as the market grows, their competitors gain a larger and larger share of the market. Eventually the segment left to the GSEs becomes uncompetitive. In effect, the competitors of the GSEs slowly liquidate them in the marketplace. At some point in the future, as the GSEs become much smaller companies, they can be allowed to go into any business without Congress fearing they will immediately dominate those industries."

Blumenthal also raised the point that the legislation is not needed to address systemic risk posed by Fannie Mae and Freddie Mac. He said, "[T]here are a number of existing safeguards available… First, the Treasury Department has the authority to limit debt issuance by the GSEs. … Second, federally chartered financial institutions may invest in GSE securities in unlimited amounts. The Federal Reserve and other federal bank regulators could reduce demand for those securities by imposing limits on the amount of agency debt that can be held as bank capital. ... Third, the securities of the GSEs are eligible for Federal Reserve open market purchases, as collateral for most state and local deposits, and as collateral for loans from the Federal Reserve and Federal Home Loan Banks. This, too, could be subject to revision."

III. Deposit Insurance Reform

Deposit insurance reform passed the House and Senate in slightly differing versions of budget reconciliation legislation that will be put to a House vote late next month.

The reform will merge the Bank Insurance Fund and the Savings Association Insurance Fund, authorize the FDIC to revamp its risk-based deposit insurance premiums and enact a number of other changes. Deposit insurance coverage on individual deposits is kept at $100,000, but starting in 2010, the FDIC may index coverage based on a number of factors. Deposit insurance coverage on municipal deposits is unchanged and retirement account coverage is increased to $250,000 with future indexing.

There is some concern among FHLBanks that the FDIC could apply its new authority in developing a risk-based deposit insurance system to penalize member banks that use FHLBank advances. To address that concern, the following report language was added to the House Committee on Financial Services version of the legislation: "The committee is concerned that the FDIC's development and implementation of a new risk-based assessment system not negatively impact the cost of homeownership or community credit by charging higher premiums to prudently managed and sufficiently capitalized institutions simply because they fund mortgages and other types of lending through advances from Federal Home Loan Banks."