LFTC - Federal Force & Fraud

A Wednesday Washington Post front-pager details two instances in which the Federal Housing Finance Agency (FHFA) pressured Freddie Mac--whose acting CFO, David Kellerman, recently committed suicide--to withhold information from the securities and Exchange Commission, in order to minimize financial liability for the federal government.

First, the WP reports:

In March, Freddie Mac executives, including Kellermann, had tussled with FHFA over whether to disclose to investors that government management was undermining profitability and may cost the company about $30 billion, sources familiar with the dispute said. The regulator had urged Freddie not to do so, three sources said. The company threatened to appeal to the SEC and ultimately disclosed the possible cost. An FHFA official has said that it did not try to prevent the disclosure.

This potential expense was related to the Obama administration's housing recovery program, for which Freddie Mac playing a part in modifying the mortgages of homeowners facing foreclosure. Many of these loans had been bundled into securities. So to modify the mortgages, Freddie Mac has to pluck them out of the securities, which entails reassessing the value of the loans and marking them down to their current market price. The company might then have to record a charge to reflect these decreased values.

Based on Dec. 31 figures, Freddie Mac said it might have to incur "an initial pre-tax charge" of $30 billion. That loss would be covered by taxpayer dollars.

The WP notes a second instance:

Kellermann prepared a memo to the SEC known as a "pre-filing," sources recounted. In this document, Freddie Mac would discuss its interpretation of accounting regulations, explain why the firm wouldn't need to take the charge and review other possible accounting interpretations.

FHFA, which reviews the firm's contacts with the SEC, became concerned, source said. That's because one of the alternate accounting methods that Freddie Mac planned to review was the one currently used at Fannie Mae. Freddie Mac was preparing to argue it could not use this accounting method.

According to sources, officials at FHFA and Fannie Mae worried that such a claim could lead the SEC to question whether Fannie Mae was doing its accounting properly. Fannie Mae was also involved in carrying out the administration's housing efforts and, using separate reasoning, had also concluded it would not have to take a charge. If Fannie Mae after all did have to report the loss, the tab to the taxpayers would run into the billions of dollars.

FHFA asked Freddie Mac to submit a "pre-filing" to the SEC that did not discuss other alternate accounting methods, but only its own, sources said. Kellermann and Freddie Mac's accounting team refused, afraid that sending such a memo could open up the company and its employees to allegations of impropriety.

The WP reports that the SEC told Freddie Mac on April 21 that neither Fannie Mae nor Freddie Mac need take a charge.  Kellerman committed suicide on April 22.  A Wednesday WSJ front-pager adds more detail to this appalling story.

BOA Chairman Ken Lewis's testimony to NY State Attorney-General Andrew Cuomo now rings true, in light of this latest example of bully-boy tactics.  Lewis apparently was pressured to defraud his own shareholders by inflating BOA's estimate of the value of Merrill Lynch assets in order to induce BOA shareholders to vote for the BOA acquisition of Merrill.  (In legal parlance, fraud is "tort"; in English, this translates as an act that is a civil wrong.)

Now we see FHFA regulators pressuring Freddie Mac's CEO to lie to another federal agency--a felony violation under any circumstances.  Michael Barone calls this (aptly) "Gangster Government":

But my sadness turned to anger later when I heard what bankruptcy lawyer Tom Lauria said on a WJR talk show that morning. “One of my clients,” Lauria told host Frank Beckmann, “was directly threatened by the White House and in essence compelled to withdraw its opposition to the deal under threat that the full force of the White House press corps would destroy its reputation if it continued to fight.”

Lauria represented one of the bondholder firms, Perella Weinberg, which initially rejected the Obama deal that would give the bondholders about 33 cents on the dollar for their secured debts while giving the United Auto Workers retirees about 50 cents on the dollar for their unsecured debts.

This of course is a violation of one of the basic principles of bankruptcy law, which is that secured creditors — those who lended money only on the contractual promise that if the debt was unpaid they’d get specific property back — get paid off in full before unsecured creditors get anything. Perella Weinberg withdrew its objection to the settlement, but other bondholders did not, which triggered the bankruptcy filing.

After that came a denunciation of the objecting bondholders as “speculators” by Barack Obama in his news conference last Thursday. And then death threats to bondholders from parties unknown.

The White House denied that it strong-armed Perella Weinberg. The firm issued a statement saying it decided to accept the settlement, but it pointedly did not deny that it had been threatened by the White House. Which is to say, the threat worked.

Bottom Line.  There is no excuse for thuggery practiced by regulators to coerce private parties towards desired political ends.  Forcing commission of a private tortious act is bad enough; forcing commission of a criminal act is even worse.  this is neither socialism (public ownership of private property) nor is is simple corporatism (public-private partnerships).  It is neo-Mussolini jackboot thuggery.