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Legislative Updates

November 8, 2006

I. Congressional Elections and the 110th Congress — Impact on Policy Outlook

A. Results

The House: Democrats gained at least 29 seats in the House, well above the 15 required to gain control. Ten seats are currently still in flux. There were no changes in the West Virginia or Delaware delegations, but Pennsylvania lost four Republican incumbents (Melissa Hart, Curt Weldon, Mike Fitzpatrick and Don Sherwood).

The House Financial Services Committee in the 110th Congress will have a number of new faces. Republicans not returning include retiring Chairman Mike Oxley (R-OH), resigned member Bob Ney
(R-OH) and defeated incumbents Jim Leach (R-IA), Jim Ryun (R-KN), Sue Kelly (R-NY), Mike Fitzpatrick (R-PA) and Katherine Harris (R-FL), who ran unsuccessfully for the Senate.

Rep. Barney Frank (D-MA) will be the chair of the full committee, and Rep. Paul Kanjorski (D-PA) will be the chair of the GSE subcommittee. The ranking member of the full committee will be either Rep. Richard Baker (R-LA) or Spencer Bachus (R-AL).

The Democrats are expected to restructure the committee in terms of the number of subcommittees and subcommittee jurisdiction. This will be decided over the next several weeks as the Democrats start organizing for the 110th Congress.

The Senate: Democrats had picked up five of the six seats needed to gain control of the Senate. The Virginia race is not settled although Democrat Jim Webb is ahead by 7,000 votes, and most observers do not expect a recount to change the outcome. Within the district, Sen. Rick Santorum (R-PA) lost to Bob Casey.

The Senate Banking Committee will have two key changes with the defeat of Sen. Santorum and the retirement of Ranking Minority Member Paul Sarbanes (D-MD). The lead Democrat will be Sen. Chris Dodd (D-CT).

B. Impact on FHLBank Policy Deliberations

The control of either or both chambers of Congress by Democrats will change some of the basic dynamics of the GSE debates while leaving other issues unchanged.

Changed Dynamics: The administration has used the focus on safety and soundness of GSEs to also address a long-term goal of getting Fannie and Freddie to shrink their market presence (a different issue entirely). The Democrats and many Republicans have not shared that goal. Look for Democrat-initiated discussions in the next Congress to focus to a larger degree on GSE mission. The desire to get an affordable housing fund from Fannie and Freddie would be the driving motivation on the part of Democrats to get a bill.

Constants in Future Debates: One thing that will not have changed is the recognized need to address the inherent weaknesses of the Office of Federal Housing Enterprise Oversight (OFHEO), the regulator of Fannie and Freddie. These include subjugation of that regulator to the appropriations process and the lack of full powers generally employed by other safety and soundness regulators.

Another thing that will not change is the threat from the administration to limit the issuance of GSE debt and the willingness of OFHEO to keep the regulatory pressure on in the hopes of facilitating a legislative result.

Outlook for Action: Chairman-to-be Barney Frank has said that, should he take the chair, he would hold a quick hearing on the House-passed GSE bill and then have the House pass the bill before the spring congressional recess.

II. Status of Finance Board Proposals

The proposal to establish a retained earnings minimum was not on the agenda for today's Finance Board meeting, and it is unclear whether or not it will be considered at the December meeting.

III. FHLBank Appointed Directors: Sarbanes Writes to Finance Board

There are no indications the Federal Housing Finance Board (Finance Board) is going to appoint public interest directors this year, although there has been significant pressure from legislative leaders to do so. The latest development in this regard is a letter to Chairman Ronald Rosenfeld from retiring Sen. Paul Sarbanes asking that the appointments be made. The letter quotes Chairman Rosenfeld's response to a question from an April 2005 hearing that, "after conducting a thorough search and after our careful deliberations are complete, my board colleagues and I intend to fulfill our statutory obligation by appointing the right people to serve as public interest directors on the boards of the Banks."

The primary obstacle to new appointments appears to be White House opposition.

IV. FDIC Implements Risk-based Deposit Insurance Premiums

On November 2, the FDIC Board approved a final rule providing for risk-based deposit insurance assessments. The final rule does not include FHLBank advances.

In the preamble to the rule, the FDIC notes, "In the NPR (Notice of Proposed Rulemaking), the definition of volatile liabilities did not include Federal Home Loan Bank advances, but the FDIC asked for comment on whether it should. The FDIC received 569 comments on this issue. All but one argued that the definition of volatile liabilities should not include Federal Home Loan Bank advances; one argued that the definition should include these advances. The final rule does not include the volatile liability ratio."