Monday, April 21, 2008

OFHEO Begs Raines Not to Embarrass Them

Well, it wasn’t quite that bad for OFHEO, but very close.

The Office of Financial Enterprise Oversight (OFHEO) wrapped up its clunky and less than sterling legal case against Frank Raines and two other former Fannie officials last week, when all parties reached agreement to resolve the case leaving a “he said, she said” finale, which reflected a major weakness in the government’s case.

To accurately describe the ending, between OFHEO and three Fannie Mae former officials with Raines in the forefront, I’ve borrowed a boxing allegory. Through the allegory of boxing and the wonders of TIVO/slow motion, I’ve managed to capture the final seconds of the match, just before the decision was announced.

As they warily circled in the caged media “ring of death,” the pugilists glared at each other. OFHEO first struck a smiling Raines, slamming their jaw into his fast moving right hand. The agency quickly followed up, smacking a now laughing Raines with their stomach on his driving left fist. Staggered but not out, OFHEO employed its coup de gras, bollixing an openly guffawing Raines in his knee with their groin!

Final score: Raines and team—10; OFHEO--0. Game, set, match. (Can you say, "Here's a Greyhound bus ticket, Lockie?")

Caveats to Their “Win”

From its back on the ring mat, OFHEO announced their win was unprecedented and significant. In very fine print and in quiet whispers, they added the disclamer qualifications, “Decision is such, when all of the following conditions occur: when said federal agency takes at least three years, wastes untold millions but fails to trap a former GSE Chairman and CEO, who also was a former head of OMB under Bill Clinton; when the actions' denouement occurs in an even numbered year, also featuring a presidential election; and when the defendant grew up in Seattle, in which his father built by hand.” (Legal scholars furiously researched OFHEO’s claim and found only one case—the current one—in which all of those conditions apply, thereby making everything which occurred “unique and unprecedented.”)

OFHEO officials assured the world that they didn’t let Raines and his team dazzles them. And while the Harvard educated lawyer did not do that old “escaping while chained from a locked safe, sunk in the Potomac River” trick, Raines did find a way to prestidigitate and “monetize” underwater stock options and use them to pay some doughty OFHEO fine/penalty.

OFHEO’s acceptance of same made dozens of former and current Fannie officials wildly optimistic that some value may still exist in those $72 stock options, when the company’s stock is trading at less than $30 a share.

In using “underwater options” (those with a strike price below the current trading price and therefore valueless), Raines successful logic obviously was, “If you are going to sue me using bogus numbers, I’ll pay you in equally phony dollars.” So, Raines paid most of the “fines” cited by OFHEO in securities with no cash value—in the real world—stock options which OFHEO accountants and lawyers accorded sufficient worth to wipe out millions the agency claimed Raines owed it.

Bravo, Maestro!

Hello Safeway and Giant

In my next visit to Safeway, I going to say to the cashier, “I’d like to pay for those eggs and milk, with these January 2000 Fannie Mae stock options. They are only about $34 ‘wet.’ But, OFHEO’s Director, Mr. James Lockhart, believes they are currency, so…!”

This legal case’s rightful end—hardly worth the word “resolution”--strongly argues that the government should never have brought it. And OFHEO —and their Administration political puppet masters-- wouldn’t have brought it had the GOP not been trying to nab some prominent Democrat and suggest that he was a law breaker. (In previous blogs, I’ve written why I thought his entire accounting case against the GSEs, starting with the catalytic SEC finding, featured far more smoke than fire. Especially now when history reveals that hundreds of corporations made major mistakes trying to implement FAS 133, the infamous Financial Accounting Standards Board mark-to-market accounting principle which the GSEs supposedly violated.)

In the process of the Raines witch hunt, OFHEO blew through millions (provided by the GSEs which underwrite all of the agency’s expenses), wasted valuable staff and resources, but did earn itself some judicial brickbats for withholding reams of files from litigants. But hey, that’s GSE regulation under the Bush Administration.

I can see Jim Lockhart telling the agency flaks, “Now gang, we wound up with squat and most of that on our face, but write the press release real tough. That will show them!” Except the new stories which followed the OFHEO announcement seemed to nail the story pretty accurately, suggesting that OFHEO produced a whole lot of nothing. (See links at the end of the blog.)

Jackson, HUD, and John McCain

It’s a shame that Jim Lockhart didn’t get the top HUD job, as the many rumors earlier this month suggested would happen. If his remaining few months in town were spent running that agency—often called “11 floors of basement”—it would have been just reward for his regulatory debasement of Fannie and Freddie.

Former HUD Secretary Alphonso Jackson is headed out of town or already has left.

HAZMAT crews reportedly were seen trying to scour the remaining grime and stench of dirty politics left from his office.

It is times like these when one wishes we had something of a parliamentary system and a vote of “no confidence” in the current Administration would have sent President Bush, Jackson, and others back to Texas. The President could then have done the nation one honest good turn and given ranch jobs to all those hack appointees he brought to the Nation’s Capital.

Bathroom, WC, The Loo, Shhh, Who’s Saying What?

I wonder if any senior Administration pol would have recommended then Assistant Secretary Alphonso Jackson to become the next Secretary, if they had heard his address to a Fannie Mae National Advisory Council about five years ago. Would they have realized then, possibly, that he wasn’t a man for future Cabinet employment, or maybe even the job that he held at the time?

Jackson had just come to town and, along with then HUD Secretary Mel Martinez, who subsequently became Senator Martinez of Florida, leaving a vacancy which Jackson later filled. They were the Bush Administration’s “new housing leadership team.”

That night was Jackson’s formal introduction to Fannie Mae and its National Advisory Council, which met three times yearly at the corporate headquarters and always had a prominent outside speaker. The audience was composed of the 40 person NAC, men and women in leadership positions from all facets of housing and from all parts of our nation. Also regularly attending were DC people from mortgage finance, local government, the Hill, Fannie’s senior officers, and a gaggle of housing officials, lobbyists and lawyers.

In introducing Jackson, Frank Raines made reference to the fact that—among other things—Jackson in his teens was a Texas high school sprinter.

When Jackson spoke, he decided to lay claim to some Texas and world sprint times, which still haven’t been achieved by anything with just two legs. But, unless you were truly into sports performances, his hyperbole was just mostly ignored.

But, it was when Jackson described his steely hand on the controls at HUD, as Martinez’ man and chief operating officer that eyebrows should have gone up (and many did).

Jackson proudly described his methodology for collecting valuable intelligence to defend Secretary Martinez and HUD from surprises and possible embarrassment.

I am paraphrasing now, but just a little. After assuring the NAC crowd that as HUD’s #2, he did have his own private bathroom, Jackson said, “I spend a good deal of my day in the stalls of HUD’s public restrooms, listening to what the employees are saying and what issues are on their minds. That’s how I stay ahead of what could be problems.”

Holy porcelain, Batman! And this was long before Larry Craig’s actions suggested a variety of non-traditional bathroom uses.

Intelligence gathering, huh?

In retrospect, I guess Jackson’s approach was a pretty good way for Bush Cabinet-officials-in-waiting to spend their time, considering how crappy…….Oh, dear readers, I won’t even finish that line. I’ll let you do it in the comments section of the blog.

If you need one more reason to vote for Barack Obama or Hillary Clinton, no matter how non-Bush John McCain might appear to you, Jackson’s uninspiring, less than pedestrian, and possibly criminal tenure at HUD provides it.

The “moderate Republican talent pool” isn’t very deep. It likely would fill the average 7-11, with space leftover. So a “President McCain” would have to turn to the same personnel source that George W. Bush did for all the eager GOP candidates that McCain would need staff those federal agencies.

And that’s where whatever tiny glimmer one might see in a possible McCain Administration breaks very bad.

Our country cannot afford and should urgently reject the return of the crew, which we’ve seen for 8 sorry years and which has just started to slither away. The nation’s voters should not invite them take over the reins of government for another presidential term or more.

Maloni, 4-21-2008

Statement of Franklin D. Raines

Tuesday, April 1, 2008

Give It All to the Fed

For the past several days, Treasury Secretary Paulson had been previewing his plan to revamp financial services regulation.

Monday, it formally went public.

Little of the Paulson plan helps today’s problems or the families stuck with a bad mortgage and facing mounting payments or falling property values. Those will need another plan. But, he moves in the right direction, just not far enough, if you are trying to fix systemic problems.

The Secretary’s ideas also are not new, many have been discussed before. But the recent Wall Street/subprime meltdown created a new urgency, audience and demand for such changes, most of which require congressional approval.

Never forget that the flawed SEC/FDIC/OTS/NCUA/OFHEO/CoC/Fed financial services regulatory mélange that we have today mainly is the result of the individual industries convincing Congress that each deserves its own distinct regulator and the financial industries getting their way.

Congress has reaffirmed those institutional regulatory delineations time and time again. Those same regulated financial interests will weigh in again on Paulson’s plan and related ideas. Let’s see if history has made them any less selfish, now that Paulson has spoken.

Forget about anything happening in this even numbered year, especially with the quadrennial electoral bash coming in November. This issue will be a matter for a new Administration and those running Capitol Hill in 2009 to hash out.

All financial institutions--from the local credit union, through the GSEs, insurance companies, investment and commercial banks, and hedge funds--do the same thing. They borrow money at one rate, invest it at a higher one, and work like hell to maintain as much of that positive margin as possible.

And while they go about some of their business differently, the goal of financial regulatory standardization and uniformity—and whatever desire there still is for unique pockets of “industry understanding and knowledge”—can be accommodated by a single regulatory agency, with various subunits.

My thinking is to give it all to the Fed (which might fight taking it, but that’s for another blog).

One single financial regulatory agency, with deputy directors (or whatever you want to call them) to coordinate the necessary disparate industry oversight and operating rules, would be sufficient, as long as the Fed Chairman (and monetary policy) are perched at the top.

But would the Fed on steroids still be “The Fed,” meaning the all powerful, acknowledged ultimate financial voice in town, if it monetary policy authority was deemed to be diluted, by other weighty responsibilities?

Would it lose any of its aura and elan?

Great minds can disagree, but at the end of the day, if you can “print money,” you have the power. If the Fed Chairman’s whims and wants were quickly disseminated through his new organization—as they are now with the current Federal Reserve—and implemented simultaneously on all bank holding companies, depositories, mortgage lenders, investment banks, insurance companies, hedge funds and others, than the answer is, “Yes, the Fed on roids still would be THE FED!”

The key to Fed power, in part beyond the way it nurtures its own history, is the 14 year terms of the Fed governors, meaning they serve longer than the President who named them. Keep those lengthy appointments for the Fed, only, and you maintain the central bank’s “independence,” although historically the Fed has given most Presidents the monetary policy they wanted.

Secretary Paulson isn’t proposing anything as audacious as what I am suggesting, but he should. Aim short—and such mini-consolidations is what he is proposing—and you just are putting band aids on a serious slash wound. You don’t solve the problems.

Despite their rhetoric, no financial firm wants to be closely regulated. It cuts down on their discretion and chance to earn profits. But, tough noogies!!

Bigger isn’t always better, but sometimes it is.

A single federal financial regulator would cut down on a lot of the regulatory duplication as well as regulatory vacuum which exists (who watches GE or AIG?), and the “regulator shopping” and playing off state and federal regulators, which inevitably occurs. And just think, it will save (or cut) lawyers fees as the attorneys and lobbyists would have fewer places to turn and try and stop actions they oppose—except the Treasury which still would have its traditional role and be the unambiguous voice of the President on financial matters.

If Congress really got bold, at least on the mortgage side, it would figure out how to bring non-federally sanctioned appraisals and the wasteful title insurance industry into the federal regulatory orbit.

Yes, I would bag some of the “checks and balances,” which we love as a nation and which are used and abused by the financial services industries, but you either fix the problems or add to the mess.

Maloni April 1, 2008