All the Devils Are Here [110]
Yet one of the leading Fannie haters in the Bush administration wasn’t some anonymous White House economist; he was the head of OFHEO. His name was Armando Falcon Jr. and he was Fannie and Freddie’s regulator.
Like Raines, Falcon was a product of the meritocracy. The son of an aircraft technician from San Antonio, Texas, Falcon had gone to the University of Texas law school, and then Harvard’s Kennedy School of Government, before landing a job in 1990 as general counsel of the House banking committee. After losing a race for Congress, Falcon was nominated to head OFHEO. He was in his early forties when he ran the agency, a seemingly shy, hesitant man who liked poker and cigars. He lacked the charisma and brilliance of someone like Frank Raines. He was easy to underestimate. As he came to understand just how difficult the GSEs were to deal with—and how powerless OFHEO was to do anything about them—he first became frustrated and then deeply angry.
Every year, it seemed, OFHEO’s proposed budget was cut, either by Congress or the White House. When Falcon first took office, he later recalled, he discovered that some risk examinations were being put off because the agency didn’t have the manpower to conduct them. The agency estimated that it needed sixty examiners to do its job properly; it had seventeen. OFHEO’s entire budget, which ranged between $19 million and $30 million, was less than the total compensation of the four top executives at Fannie and Freddie.
In 2000, the year after he took the job, “Representative Maurice Hinchey bravely offered an amendment on the floor of the House to increase OFHEO’s budget,” Falcon would later testify. “The amendment was angrily opposed by the chairman of the VA, HUD appropriations subcommittee, who lashed out at me personally for encouraging the amendment.” It didn’t pass.
Given its live-and-let-live attitude toward the GSEs, the Bush White House was not an early supporter of OFHEO. Nevertheless, in 2002, Falcon decided to initiate a study on the systemic risks posed by the GSEs. It would be hard to imagine a more important topic for OFHEO to tackle. It would also be hard to imagine a topic more likely to inflame Fannie Mae.
By early 2003, OFHEO was set to release its report. In truth, it wasn’t all that tough. “The possibility of either Enterprise failing or contributing to a financial crisis [is] remote,” it concluded. But it also raised the possibility—small though it was—that Fannie or Freddie could get into trouble and “cause disruptions to the housing market and the financial system.”
Most companies would have accepted such mild criticism with, at most, a press release rebuttal. But, according to Falcon, Raines and Fannie Mae immediately went into overkill mode. A few days before the report was set to be issued, Raines called Falcon and asked him not to issue it. “When I reaffirmed my plans,” Falcon later said, “he threatened to bring down me and the agency.” Fannie lobbyists then called Treasury and other regulatory agencies, asking them to press OFHEO not to release the report. (Raines calls Falcon’s allegations “totally made up.” Although he called Falcon to tell him that “it was highly unusual for a regulator to issue a report saying its regulated companies might bring down the financial system,” he insists there was no threat.)
Fannie was just getting started. February 4, 2003, was the day Falcon had set for releasing the report. He had flown to New York to give a speech outlining its findings. As he waited to give the speech, he got a call from the White House personnel office informing him that the administration was about to announce his replacement. It was none other than Mark Brickell, the former J.P. Morgan derivatives lobbyist. Although Falcon’s term still had a year and a half to go,