The behind-the-scenes push to get rid of Edward DeMarco
December 15, 2010
A couple weeks ago I was having a beverage with a former comrade from the trenches of mortgage research (He's now a big money manager). My comrade took me to task for criticizing outgoing Federal Housing Finance Agency Acting Director Edward DeMarco's performance at a September congressional hearing on the GSEs. What did I expect? he asked. Congressional Banking Committee leadership had just sandbagged DeMarco for courageously going after the banks that issued the private-label mortgage securities rotting in Fannie and Freddie's portfolios. Sandbagged? How'd I miss that? I'm no Lois Lane, but I do love a scoop. Sure, he explained, right after the banks got those 64 subpoenas, Dodd, Frank & Co. pressured President Obama to get a permanent FHFA director. Wow. I called for another beverage. It had not struck me that those subpoenas were an act of courage. And I'd missed all signs of congressional activity. Gosh, slapped by big guns of both parties. As my friend had intended, I felt sympathy for DeMarco, outrage on his — and our — behalf, and remorse that I'd missed a good story. So, I retorted, what about the nominee for permanent FHFA head? He looked blank. I felt so much less flat-footed. The North Carolina banking commissioner, I said. (The Senate Banking Committee this week approved President Obama's nominee, Joseph Smith, as director of the FHFA, the conservator of government-sponsored enterprises Fannie Mae and Freddie Mac.) So, my friend asked, he'll be a shill for the banks? He always did have that pessimistic streak. Or is it realistic? Is the government — both sides of the aisle in Congress and the administration, too — that biddable where the banks are concerned? That's a rhetorical question. Thousands upon thousands of words can be written illustrating that government is biddable, buyable and sneaky in the service of the financial industry. Let's focus on the matter at hand, what I like calling the "DeMarco affair." DeMarco makes himself a target On July 12, acting as GSE conservator, FHFA "issued 64 subpoenas to various entities, seeking documents related to private-label mortgage-backed securities (PLS)" in which the two GSEs had invested. By documents, FHFA meant loan files and other transaction documents. Apparently, the GSEs had been working "for many months" to obtain documents that would permit them to determine if the loans and/or the servicing of the loans met required standards. "The documents will enable FHFA to determine whether PLS issuers and others are liable to the enterprises for certain losses they have suffered on PLS. If so, the conservator expects to recoup funds, which would be used to offset payments made to the enterprises by the U.S. Treasury." The subpoenas were issued under authority granted FHFA by Congress. Entities subpoenaed had 30 days to comply. If they refused, FHFA would consider its legal options. "Congress granted the conservator broad powers to enforce its subpoenas." Those powers, by the way, were granted by The Housing and Economic Recovery Act of 2008 (HERA). Purely speculation on my part, but I wouldn't be surprised if an angry Congress wasn't thinking more about subpoenaing GSE employees than private issuers. The New York Times' Gretch Morgenson heralded the agency's move as "unusually aggressive" for Washington. She didn't see trouble ahead, but she did note that "while some in Washington have continued to coddle the big banks even after they drove our economy into the ditch, this agency seems serious about recovering money for taxpayers by holding bad financial actors to account." There was a letter Finding hints from Internet-based media and blogs that congressional banking pols pulled the rug out from under DeMarco is tough, but it is there — in a letter. Senate Banking Committee Chairman Chris Dodd (D-Conn.) and ranking member Richard Shelby (R-Ala.) wrote the president on July 28 to urge him to find a permanent director for FHFA. However, although it was a letter, signed by banking bulldogs from both of the warring parties, and clearly was meant seriously, it was not accompanied by a press release. Ponder this: Press releases and grandstanding before cameras and microphones are about all we mere citizens see of the shenanigans in the halls and bars of power in our nation's capital. Without C-SPAN and hearings, we'd be blind. Think of all the phone calls, e-mails and cables, the meetings and negotiations between staffs, the variety of contacts with lobbyists that we, and the media that give us "the news," never ever get wind of. We — the taxpaying electorate — just see the tip of the iceberg. Dodd & Shelby’s main points:
- It has been two years since the Federal Housing Financing Regulatory Reform Act of 2008 created FHFA, and as yet it has no permanent director.
- The acting director, who acts under the terms of the conservatorship with all the powers of the shareholders, directors and officers of the GSEs, has "served well under difficult circumstances," but a permanent director should be appointed and confirmed.