Was OFHEO Chief's Fate Sealed by A GSE Deal?

Article excerpt

When the Bush administration announced plans last week to replace Armando Falcon Jr. as the chief regulator of Fannie Mae and Freddie Mac, most people figured the government-sponsored mortgage firms had used their considerable political influence to arrange his ouster.

While there is little doubt that the GSEs were gunning for Mr. Falcon, the Office of Federal Housing Enterprise Oversight director created his own problems within the administration by pursuing an increasingly activist agenda.

The beginning of the end for him may have been a late-summer meeting in room 180 of the Eisenhower Executive Office Building. Senior White House and administration officials met to discuss a rule that OFHEO had proposed to implement a headline-grabbing agreement under which Fannie and Freddie pledged to comply with the registration and disclosure requirements of the Securities and Exchange Act of 1934.

Under the July 12 deal, the GSEs would register their equity securities with the Securities and Exchange Commission and would make the same financial disclosures as other publicly traded companies. (Fannie and Freddie are exempt from the securities laws enacted in 1933 and 1934.) The deal, produced by intense negotiations among the Treasury Department, the SEC, and the two GSEs, was seen as a big win for the administration, including Treasury Under Secretary for Domestic Finance Peter Fisher.

For the deal to work, OFHEO needed to issue a rule allowing the SEC to assume enforcement authority over GSE disclosures. In exchange for accepting SEC authority over disclosures, the GSEs were assured that they would not have to register their mortgage-backed securities.

But according to an internal OFHEO memorandum obtained by American Banker, the agency had not expected to be relegated to providing a rubber stamp for the transmission of GSE disclosures to the SEC. As late as the first week of July senior OFHEO personnel expected the final deal to require Fannie and Freddie to submit their registration and disclosures directly to OFHEO.

Furthermore, it was also exploring the possibility of a modified form of registration for the GSEs' debt securities -- a move that Fannie and Freddie adamantly opposed.

Presented with a deal that would not only have given enforcement authority over GSE disclosures to the SEC but might also head off the possibility of increased disclosure for debt securities, Mr. Falcon balked.

"Some players came to the table with the impression that OFHEO was a weak regulator and would simply roll over," said K. Philippa "Pippa" Malmgren, a former member of the White House National Economic Council who participated in the discussions. "When they didn't, there was some surprise."

As that negotiations progressed, it became clear that OFHEO would not give up potential new disclosure requirements for Fannie's and Freddie's debt, and the issue was removed from the negotiations with an agreement to relegate it to a study. (The study, released Feb. 3, did not recommend that GSE debt be registered, but it did suggest a number of increased disclosures for mortgage-backed securities, which Fannie and Freddie endorsed.)

Administration officials and executives at the GSEs cut a deal on the remaining issues. But when negotiators assembled in the executive office building a few weeks later, they found the rule that OFHEO had submitted to the Office of Management and Budget had not made the wholesale delegation of authority to the SEC.

According to individuals familiar with the proceedings, participants were worried that the rule, as written, did not fully transfer the necessary authority to the SEC -- and left OFHEO with more jurisdiction over GSE disclosures than negotiators expected. …