Shelby Releases GSE Regulatory Reform Legislation

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Late Friday, Senate Banking Committee Chairman Richard Shelby unveiled details of his long-awaited bill to create a new independent regulator for Fannie Mae, Freddie Mac, and the Federal Home Loan banks.

In addition to containing a controversial receivership provision that would allow the supervisor to shut down the government-sponsored enterprises in a severe financial crisis, the bill would require the GSEs to register their stock under the Securities and Exchange Act of 1934.

The agency would be run by an executive director appointed by the President, and confirmed by the Senate, to a six-year term. It would have control over the GSEs' minimum and risk-based capital requirements and approval authority over new programs, and the GSEs would have to give it notice when they start any new activity.

Of most concern were the details on the receivership provision, which caused concern in the capital markets last week as many debated whether it signaled Congress was trying to distance itself from the GSEs.

Sen. Shelby's bill would allow the agency to close a GSE if it were critically undercapitalized and in danger of default with no reasonable chance to replenish its resources. The provision was patterned after similar language in the Federal Deposit Insurance Act.

The bill also contains a so-called bridge provision that would give the regulator the right to run an enterprise for up to two years if necessary. The regulator could extend that authority with up to three 1-year extensions but could not run a GSE for longer than five years in all.

Sources say Sen. Paul Sarbanes, the committee's lead Democrat, and several of his panel colleagues are likely to oppose the receivership provision. …