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I am a retired accountant, having spent the early years of my career in the insurance industry and the later part in the field of accounting. My insurance experience has given me the willingness to accept investment risk if I feel the return justifies it; also, an interest in applying risk... More
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  • The 64 Subpoena Question 0 comments
    Nov 21, 2010 5:11 PM | about stocks: FNMA, FMCC

    On July 12, the Federal Housing Finance Agency (FHFA), as Conservator of Fannie Mae and Freddie Mac (the Enterprises), issued 64 subpoenas to various entities, seeking documents related to private-label mortgage-backed securities (PLS) in which the two Enterprises invested. From the press release:

    Before and during conservatorship, the Enterprises sought to assess and enforce their rights as investors in PLS, in an effort to recoup losses suffered in connection with their portfolios. Specifically, the Enterprises have attempted to determine whether misrepresentations, breaches of warranties or other acts or omissions by PLS counterparties would require repurchase of loans underlying the PLS by the counterparties and whether other remedies might be appropriate. However, difficulty in obtaining the loan documents has presented a challenge to the Enterprises’ efforts. FHFA has therefore issued these subpoenas for various loan files and transaction documents pertaining to loans securing the PLS to trustees and servicers controlling or holding that documentation.

    Was it cause and effect? In a touching display of unity, Senators Chris Dodd and Richard Shelby on July 28 issued a joint letter to President Obama, calling for the nomination of a new director for FHFA, a permanent replacement for Acting Director Edward J. DeMarco. One can imagine the subpoenas showing up in the corner offices of the big banks, followed in short order by the phone calls, the e-mails, the text messages - all directed to one purpose: the removal of the offending regulator.

    Issuing subpoenas doesn't always work well. Chris Cox, at the height of the meltdown, issued subpoenas in an effort to investigate the short and distort phenomenon, the coordinated attacks by CDS and naked short-selling that dropped major financials like dominos. Nothing came of it: the SEC had exceeded its authority, we are told; they had no right to expect that hedge funds or anyone involved with CDS would even keep records. Cox faded into invisibility, a non-entity during his lame duck tenure. So much for regulators who inconvenience the wrong parties with unpleasant and unnecessary legal harassment.

    After the midterm elections, President Obama announced the nomination of North Carolina Banking Commissioner Joseph A. Smith to replace DeMarco. There has been speculation that Smith will not be as aggressive in the putback arena as his predecessor.

    FHFA is also the regulator of the 12 Federal Home Loan Banks, four of which are involved in putback litigation against a host of big banks. It is unclear to what extent FHFA can or should affect decisions by these banks to pursue legal remedies for losses caused by PLS.

    Smith's Credentials

    In addition to serving as North Carolina Banking Commissioner from 2002 to the present, Smith served as 2009-2010 Chairman of CSBS, the Conference of State Bank Supervisors. He is respected by his peers and represented their viewpoints capably in testimony before Congress.

    Speeches and Testimony

    Smith's testimony in his capacity as a spokesman for CSBS reveals a plain-spoken regulator with no excessive fondness for the big banks, a resolute defender of the states' role in financial regulation, and a consumer advocate. Here is a selection of excerpts from Congressional testimony:

    Last year, the Federal government took unprecedented steps to protect the financial system by providing capital investments and liquidity facilities to our largest institutions. Financial holding company status was conferred on a number of major investment banks and other financial concerns with an alacrity that was jaw-dropping. We trust the officials responsible took the action they believed necessary at that critical time. However, Federal policy has not treated the rest of the industry with the same expediency, creativity, or fundamental fairness.

    From where the members of CSBS sit, with years of financial services supervisory and regulatory experience and with a real-time appreciation for the impact of the current crisis on consumers and communities, it is clear that some form of financial regulatory reform is necessary. The legacy of this crisis could be a highly concentrated and consolidated industry that is too close to the government and too distant from the consumer and the needs of our communities. That need not be the result -- but it is the course we are on. To avoid that outcome, Congress needs to realign the regulatory incentives around consumer protection and directly address and end “too-big-to-fail.” To prevail through the next crisis, we need a diverse industry, not a handful of mega-banks.

    We believe that effective regulatory restructuring should promote and maintain a financial services industry that is safe, sound, diverse, and competitive and that provides a broad range of borrowers with access to sustainable credit. This industry must serve consumers with a diverse universe of understandable financial services and products that meet a wide range of financial and borrowing needs, and these consumers need to have confidence in a legal and regulatory structure that protects them from abusive products and providers. The regulatory structure must create incentives for innovation and prudent growth, but it also must have robust safeguards to prevent growth driven by excessive risk taking and leverage and to protect taxpayers from potentially unlimited liability.

    The 64 Subpoena Question

    Smith's credentials are good, and there is every reason to expect that he will be assertive if confirmed in his proposed role. But the questions remain open:

    What information did those 64 subpoenas produce? Will the GSE's pursue putbacks on private label mortgage securities? Will they attempt to compel the repurchase of entire MBS? Will the taxpayers get a fair shake, or will the misdeeds of the big banks be buried in a common grave with Fannie and Freddy?


    Disclosure: No positions
    Stocks: FNMA, FMCC
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