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All Is Quiet On the Freddie Mac Front

Posted by Larry Doyle on October 23, 2009 12:03 PM |

The twists and turns along the landscape of the Uncle Sam economy remain ever challenging. How so?

What is an investor to do if he desires to sue an entity that is now part of Uncle Sam’s portfolio? If that is not challenging enough, how does one proceed with the process of discovery if those who could and want to share information have a gag order imposed upon them? What is going on here? Welcome to the world of Freddie Mac investors circa 2009.

In the process of failing, did Freddie Mac’s management engage in illegal and fraudulent activities by misrepresenting the overall health of the company? Did they misrepresent the risks embedded in the portfolio? Many investors believe that to be the case and are considering bringing suit. Who possesses a lot of very useful information? Former employees. Not unlike former employees of many companies, Freddie Mac employees were required to sign departure agreements which compelled them to not share company information. If the employee does speak, he runs the risk of losing his severance. This experience is very common in corporate America. That said, Freddie Mac’s failure hardly represents corporate America. The New York Times addresses this legal and financial entanglement by writing, Freddie Mac’s Secrecy Pacts Face Court Test:

One year after the government took over and bailed out Freddie Mac, the giant mortgage finance company, federal regulators are blocking former employees from revealing information to investors who are suing the company for fraud, lawyers for shareholders say.

The Treasury has propped up Freddie Mac with more than $50 billion in taxpayer money since the company nearly collapsed more than a year ago, and officials warn that the company will probably need additional billions in the months ahead.

Federal prosecutors in Virginia and the Securities and Exchange Commission are already investigating whether the company misled investors about the risks it was taking with securities backed by subprime mortgages and no-document loans.

But in a battle that will surface on Friday in a federal courtroom in New York, the company and its primary government overseer, the Federal Housing Finance Agency, are trying to enforce secrecy agreements that scores of former employees signed as a condition for receiving severance payments when they left the company.

In their class-action lawsuit against Freddie Mac, three big union-based pension funds charge that Freddie Mac executives defrauded investors by concealing the company’s exposure to high-risk mortgages, its mounting losses and its inadequate capital position.

At the hearing on Friday, lawyers for shareholders will argue that Freddie Mac’s secrecy agreements amount to buying silence from willing witnesses who may have crucial information about what the company’s top executives knew at the time they were assuring investors that all was well. The lawyers will ask a judge to invalidate the restrictions, a move that Freddie Mac and federal regulators will say the court has no right to do.

“Federal dollars are being used to bribe people, to buy their silence,” said David George, a lawyer representing the pension funds in a class-action lawsuit.

Wow. Our country is sinking to new depths when we have an arm of the government openly working to prevent the truth from being revealed. To this point, the blockage of the truth would typically take place behind the scenes.

For those Freddie Mac employees who would like to share the truth as to what transpired, are they wondering ‘where did my country go?’

LD

  • Is it possible that this was one of the reasons why the CFO of Freddie Mac committed suicide earlier this year?

  • Larry Doyle

    Matt,

    I did not know the CFO personally, but I certainly knew him professionally. He truly was a decent human being. I am sure the pressure he felt was overwhelming.

    That pressure obviously broke him. Very sad.

  • Aaron Kramer

    Nothing like being a politician or political appointee and know that every crime you commit will be covered up. In addition, even when the government goes after crime in the private sector, it continues to engage in or endorse similar reckless behavior themselves. The hits just keep on coming and this administration plays for keeps. Did you know Rahm was on the the Freddie Board from 2000 – 2002? The cover up grows and the payouts continue, I implore you to read both links.

    http://i.abcnews.com/Blotter/story?id=6201900&page=1

    http://www.footnoted.org/market-meltdown/taxpayer-funded-signing-bonus-at-freddie-mac/

    • Larry Doyle

      Aaron,

      Your point is very well taken. Mr. Emanuel had a very short stint on Wall Street and was paid very handsomely for it. One may ask if he was overpaid. Did those who paid him know those monies would help ‘grease the wheels’ in the years ahead?

      I would put Mr. Emanuel’s comp in the category of “How Does Wall Street Buy Washington?” For more on Mr. Emanuel’s abbreviated financial career:

      After serving as an advisor to Bill Clinton, in 1998 Emanuel resigned from his position in the Clinton administration and became an investment banker at Wasserstein Perella (now Dresdner Kleinwort), where he worked until 2002.[29] In 1999, he became a managing director at the firm’s Chicago office. Emanuel made $16.2 million in his two-and-a-half-year stint as a banker, according to Congressional disclosures.[29][30] At Wasserstein Perella, he worked on eight deals, including the acquisition by Commonwealth Edison of Peco Energy and the purchase by GTCR Golder Rauner of the SecurityLink home security unit from SBC Communications.[29]

      Emanuel was named to the Board of Directors for the Federal Home Loan Mortgage Corporation (“Freddie Mac”) by then President Bill Clinton in 2000. His position earned him at least $320,000, including later stock sales.[31][32] He was not assigned to any of the board’s working committees, and the Board met no more than six times per year.[32]

      During his time on the board, Freddie Mac was plagued with scandals involving campaign contributions and accounting irregularities.[32][33] The Obama Administration rejected a request under the Freedom of Information Act to review Freddie Mac board minutes and correspondence during Emanuel’s time as a director.[32]

      The Office of Federal Housing Enterprise Oversight (OFHEO) later accused the board of having “failed in its duty to follow up on matters brought to its attention.” Emanuel resigned from the board in 2001 when he ran for Congress.[34]






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