STATEMENT OF CONGRESSMAN JOHN D. DINGELL
RANKING MEMBER
COMMITTEE ON ENERGY AND COMMERCE

July 22, 2003

I commend both Rep. Tauzin, the chairman of the full committee, and Rep. Stearns, the chairman of this subcommittee, for opening an inquiry in early June into the accounting problems at Freddie Mac, and for asking the Minority to participate in that inquiry. To that end, staff met with representatives of Freddie Mac on June 12, the Office of Federal Housing Enterprise Oversight (OFHEO) on June 16, the Financial Accounting Standards Board (FASB) on June 17, the Securities and Exchange Commission (SEC) on June 23 and on June 26, with representatives of the Baker & Botts law firm and FTI Consulting forensic accountants who are conducting the special investigation for Freddie Mac’s board of directors (the so-called "Doty report"). The OFHEO and SEC inquiries had just begun. The committee staff has been unable to interview the PricewaterhouseCoopers accountants involved in the restatement or to review any board or accounting documents, nor have we received the Doty report yet. I look forward to these steps being completed so that we can make educated decisions on these matters and on what, if anything, these events may tell us about the efficacy of FAS 133, the accounting standard for derivative and hedge accounting.

While I welcome hearings on these issues, I believe today’s hearing is premature. I am not convinced that we have the right witnesses before us. For example, Mr. Wallison’s written statement spends roughly two pages criticizing GAAP accounting and the effectiveness of regulation in general, but all the rest of his testimony criticizes the substantive benefits and risks of the two housing GSEs and calls for (1) the privatization and breakup of Fannie Mae and Freddie Mac or (2) alternatively the constraining of their mortgage purchase and pooling activities, all matters outside the scope of our jurisdiction and the subject matter of this hearing.

FASB started studying accounting for derivatives and hedging in September 1991, and held 100 public meetings to discuss the complex issues in this project. FASB and the SEC went forward respectively with proposed accounting and disclosure rules after several high-profile losses at companies and banks and municipalities caught investors, analysts, and regulators by surprise and pointed to the urgency and need for reforms. The main purpose of FAS 133 was simple: to get derivatives on the balance sheet at their fair value and present derivative gains as assets and derivative losses as liabilities.

The FASB and SEC met strong opposition from key Senators and Representatives, as well as the chairman of the Federal Reserve Board and the Comptroller of the Currency. Legislation was introduced in the Senate to authorize the bank regulators to exempt banks from any final FASB standard. Legislation was introduced in the House to make FASB an SRO under the SEC and require explicit SEC approval of all standards issued by FASB, impose a strict cost benefit analysis and burden on competition finding on all FASB proposals, and provide for immediate federal-court challenges of final FASB standards. The American Bankers Association, ABA Securities Association, International Swaps and Derivatives Association, Securities Industry Association, The Bankers Roundtable, and The New York Clearing House Association wrote a strong letter to FASB and the SEC labeling their proposals "a radical and disruptive change" and warned them to reconsider their plans. The Administration’s nominee to head OFHEO was the chief lobbyist in the effort to tip over FASB and its proposal. Twenty-two banking, securities, insurance, and corporate executives, joined by Freddie, Fannie, and the Federal Home Loan Bank of Chicago also came together in strong opposition to the proposed standard. Twenty-three Members of the House Banking Committee wrote to FASB, urging it to consider alternative models for improving disclosure. I believe I was one of the few Members of Congress to write FASB in strong support of their goals and urging them to act promptly on this matter. Attached to this statement are copies of the aforementioned comment letters. In order to get a clear picture of FAS 133 practice, we need to look at what all of the major users are doing, not just at the GSEs.

Recent press reports, ("IASB ‘to stand firm’ following French attack," Financial Times, July 12, 2003) note that French President Jacques Chirac has written to the European Commission president in strong opposition to the International Accounting Standards Board’s derivatives accounting reforms and pressing for concessions for the European banks that oppose the effort. The push toward international convergence means we have to take a broader look at this and other accounting issues. This also highlights the push toward principles-based accounting but I, for one, am skeptical about placing more reliance on the judgments of company managers and accountants who have betrayed the trust and confidence of the American public.

Finally, I commend Fannie Mae for successfully registering its common stock with the SEC in March of this year and, since then, for complying with all of its periodic reporting responsibilities to the SEC and to investors. I encourage Freddie Mac to complete its restatement so that it too can fulfill its commitment to become an SEC-registered company. This will not be a panacea, however. The GAO reported in its October 2002 report, Financial Statement Restatements, that the number of restatements by SEC-registered companies due to accounting irregularities had grown significantly -- about 145 percent -- from January 1997 through June 2002. Those 689 publicly traded companies lost billions of dollars in market capitalization as a result. The SEC faces a number of ongoing challenges in this regard.

I look forward to learning more about these matters. And I look forward to continuing my longstanding support for FASB and for high-quality and transparent accounting.

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(Contact: Jodi Bennett, 202-225-3641)