3 Strikes and You’re Out
Summary Judgment, Again
The “Mighty Casey” got three swings and after three strikes he was out, living only as a vague literary memory dragged out occasionally during baseball season.
Part of me wishes that becomes the fate of those remaining people who dislike or hate Fannie Mae, since much of their anger is based on trumped up allegations just now being exposed by the bright light of judicial action.
Last week, Judge Richard Leon (United States District Court for the District of Columbia) figuratively threw a third strike past a different “Mighty Casey” (my metaphorical Fannie haters) when he issued a summary judgment ruling for Leanne Spencer--Fannie Mae’s former Comptroller--removing her from an eight year old shareholders’ lawsuit, alleging Ms. Spencer, CEO Frank Raines, and CFO Tim Howard engaged in accounting and securities fraud.
Weeks before, Judge Leon had dismissed Raines and then Howard, sequentially, from the same suit for the same reasons. (Links to all three decisions are at the blog’s end.)
“Summary Judgment” is the Judge’s conclusion that a reasonable jury could not find sufficient facts or merit in the lawsuit’s thousands of documents, totaling 66 million pages of hearing records, to find the defendants guilty of any of the charges.
While I am most happy for my three former Fannie Mae colleagues, I remain troubled by the amount of systemic chaos the long hanging charges produced--clearly intended by those who manipulated the lawsuit’s existence-- and the fact that so little has been made of the efforts to sully the people charged as well as the place where they worked.
OFHEO Engaged in Politics Not Regulation
This 2004 law suit was based on a tortured finding by Fannie Mae’s safety and soundness regulator, the Office of Financial Enterprise Oversight (OFHEO) as it was known then, but now renamed the Federal Housing Finance Agency (FHFA), that senior company officials had engaged in securities fraud.
The history is, there was respect or love lost between Fannie and its regulator. Fannie believed the agency long was incompetent implementing the new risk based capital (RBC) mandate, called for in the 1992 law that created both the agency and a new capital design.
The statute called on the new regulatory entity to complete that RBC job in two years. OFHEO ultimately took 10 years, making a colossal mess of the project, often asking the two companies it was created to regulate to clean up and correct OFHEO’s technical failings and computer runs.
The “fraud” claim was a frustrated OFHEO’s suggestion that Fannie Mae, intentionally, had violated a new accounting regulation designed to “mark-to-market” asset backed securities, the price of which could fluctuating with interest rates many times during a business day.
But, in reality, the charge represented another clumsy institutional retaliation against Fannie, as well as some agency guerilla tactics, designed to bring Fannie’s management to heel. (In the same era and vein, there was a damming HUD Inspector General’s review critical of OFHEO maneuvering to bring down GSE share prices.)
Helped by SEC
Also in 2004--before the Fannie shareholders brought their suit--OFHEO’s finding was seconded by an even more bogus Securities Exchange Commission (SEC) “corroboration,” when the SEC acted as a vengeful White House political weapon.
Organized Fannie opponents made GSE disdain easier when they “helpfully” (to their cause) suggested to Congress and the media that what OFHEO and the SEC discovered was “Fannie Mae cooking their books and paying themselves millions in bonuses.”
After those incendiary charges hit and with no challenges to them--except from Fannie Mae--public officials ran from 20 years of Fannie and Freddie mission support or joined the lynch mob. Two decades of solid consumer and industry relationships, not to mention bipartisan political backing, quickly drained away from both companies.
Fannie business and ideological opponents used the reports to batter the corporation and—in a bizarre way--set up the crushing event sequence which bankrupted Fannie in 2008. Raines, Howard, and Ms Spencer had been forced out of Fannie Mae by the end of 2004, but--as now is well known--their successors engaged in very risky and questionable investments, buying billions in poorly underwritten Alt A and private label mortgage securities which failed miserably.
Until the recent Leon decisions exposed the hollowness of the OFHEO and SEC regulatory reports, only Fannie Mae--when the reports first were filed--and later Raines, Howard, Spencer and their lawyers battled the charges.
The Congress and even this White House may still have or share flawed GSE memories which fresh facts might disturb. Yet, at some point soon, these same policy makers claim they will make decisions about the future of the nation’s secondary mortgage market, Fannie Mae and Freddie Mac, and that means the continued availability of the 30 year fixed rate loan.
Ironically, with all of the talk of replacing F&F, it’s safe to say that Fannie Mae and Freddie Mac are going to be around awhile because they are needed, witness their heavy usage now even as government facilities.
When the government finally gets around to trying to help deserving cash strapped families, steadily paying on their underwater loans, it will be Fannie and Freddie assisting the Congress and the Administration--assuming the companies FHFA regulator doesn’t continue to oppose those actions--because so many of those mortgage are on Fannie’s and Freddie’s books.
With both companies generating solid revenue, now would be the time to help those underwater mortgagors since the companies could cover any marginal losses.
Read the Leon Decisions and Learn the History
Policy makers should understand the true history of the shareholder lawsuits, why there was little truth in the charges and why they were rejected by Judge Leon.
Knowing those answers should provide insight to those who will struggle mightily with the matter, if they remain clueless and don’t understand modern mortgage finance and/or still see Fannie Mae and Freddie Mac as evil doers.
As most in Washington know, “clueless” is not an uncommon or infrequent circumstance in the Congress (even among Democrats!), since many Members and Senators often are in the dark about issues on which they opine and then vote.
Let me throw a lifeline to those struggling in the waters of doubt and darkness, at least with regard to Judge Leon’s findings and why there exists so little familiarity with them.
One main reason is that DC’s leading newspaper, the Washington Post, has not reported on any of Judge Leon’s three pronouncements.
I’ve asked some of the Post reporters and even their Ombudsmen the reason for the “radio silence” on this positive development—especially since the Post has always been quick to editorialize against most things Fannie Mae—and I have received zero responses from any of them.
The Real Answer for the Minimal Media Coverage is…?
I did get a thoughtful opinion from a good friend who observed:
“From forty thousand feet, the interesting thing about this case is that OFHEO simply made up its fraud accusations for political reasons. All they had to do was to convince the media that their accusations were credible, which wasn't hard. Plaintiffs' lawyers filed their lawsuit thinking what OFHEO had alleged was factual. They had no idea it wasn't until very deep into the case, and by then it was too late for them to do anything other than to come up with the lame sorts of "proofs" that Leon eviscerated in his summary judgment opinions.
“In retrospect, it's no mystery why no one in the media wants to highlight Leon's rulings. The media was the group who got duped the worst by OFHEO's charade.”
Come on you in the national/political media, do you care to take a swing at any of these pitches?
In doing so, you could repair some damage done to people who were personally and professionally maligned and who suffered reputation and human losses.
You also might see the institution in a different light and unmask how much of the ugly tales spun successfully about Fannie Mae and its business operations, before the frantic 2005-2006 subprime purchases, were manufactured.
It’s not too late to fix this flawed understanding.
A falsehood may travel around the world while the truth just is getting its shoes on in the morning, but that doesn’t mean good people still can’t reveal it as a lie.
(Thanks DF for the links.)