Bill Black: The Whistleblowers’ Third Lemon Award is to Fannie and FHFA

By Bill Black, the author of The Best Way to Rob a Bank is to Own One and an associate professor of economics and law at the University of Missouri-Kansas City. Originally published at New Economic Perspectives

The Bank Whistleblowers United’s third weekly lemons award is made jointly to the Federal Housing Finance Agency (FHFA) and Fannie Mae (with a dishonorable mention to the federal judiciary). The award goes for these entities’ indifference and even hostility to whistleblowers. On September 6, 2008, the FHFA placed Fannie and Freddie into conservatorship in conjunction with the largest public bailout in global history. Fannie and Freddie failed in an orgy of fraudulent mortgage loans.

Fannie had suffered enormous losses in the early 2000s from a variant of “accounting control fraud.” Those frauds were brought to the attention of the public and the FHFA’s predecessor agency (OFHEO) by a Fannie Mae whistleblower, Roger L. Barnes. The Washington Post reported:

Two exhaustive investigations have backed up Roger L. Barnes’s allegations that Fannie Mae’s financial statements could not be trusted and that accounting managers manipulated numbers to meet rising earnings targets.

Naturally, Barnes experienced retaliation that destroyed his career at Fannie Mae, though he was the person doing everything right according to the law and Fannie’s own policies. Fannie’s regulators forced out its CEO and CFO in response to the securities fraud. Paragraph 2 of the SEC complaint against Fannie Mae for securities fraud explicitly charged that the purpose of the fraud was to produce hundreds of millions of dollars in bonuses to Fannie’s officials.

At the end of 1998, senior management manipulated the Company’s earnings in order to obtain bonuses they would otherwise not have received….

Fannie’s early forms of accounting control fraud that were addressed by the SEC’s complaint led to regulatory restrictions on growth that shifted Fannie’s new senior managers towards a new form of accounting control fraud using liar’s loans that caused losses so large that Fannie failed. (Freddie was also sued by the SEC for accounting control fraud at the same time as Fannie and its new managers reacted in the same fashion as Fannie’s new managers and produced the same kind of failure.)

In these circumstances, one might have thought that Fannie and FHFA would do everything possible to encourage whistleblowers by rewarding them rather than retaliating against them. One might even be tempted to board a flight of fantasy and believe that the courts would act zealously to protect whistleblowers at Fannie. Alas, given that this a Whistleblowers’ lemon award, the perceptive reader has already guessed that a mere $189.5 billion pubic bailout of Fannie and Freddie would not cause a fundamental change in their senior managers or the FHFA’s senior managers.

Fannie is continuing to retaliate against whistleblowers during the conservatorship. Fannie’s managers are continuing to prevent whistleblowers from even going to court to secure relief when they are the victims of retaliation. The courts are allowing these abuses, designed to intimidate whistleblowers, and barring whistleblowers at Fannie who are retaliated against from being able to have their day in court. This is occurring even though the Dodd-Frank Act sought specifically to bar this abuse of arbitration clauses that Fannie’s managers used for the purpose of intimidating whistleblowers.

In Taylor v. Fannie Mae, the court acknowledged that Dodd-Frank had deliberately amended the prior whistleblower protection provisions of the Sarbanes-Oxley Act, which had allowed employers to force whistleblowers to give up their normal rights to have their claims of retaliation heard in court.

While Sarbanes–Oxley claims were arbitrable at the time the law was originally enacted, the recent Dodd–Frank Act, enacted in July 2010, amended Section 1514A to prohibit arbitration of Sarbanes–Oxley claims. 18 U.S.C. § 1514A(e)(2) (“No predispute arbitration agreement shall be valid or enforceable, if [it] requires arbitration of a dispute arising under this section.”). As the defendants are attempting to enforce a dispute resolution policy over a Sarbanes–Oxley claim, the question before the Court is whether the Dodd–Frank Act applies retroactively to arbitration agreements that existed prior to July 2010.

Note that the Congress and the President in signing the Dodd-Frank Act had the benefit of years of experience with Sarbanes-Oxley’s effort to protect whistleblowers from retaliation. They realized, correctly, that corporate frauds were using arbitration clauses to aid their ability to silence whistleblowers through intimidation. They determined that this was terrible public policy that caused horrific losses to our Nation.

Fannie should not have to be ordered by Congress not to deny its whistleblowers the right to go to court to vindicate their legal right when Fannie executives unlawfully retaliate against the employees. But even if Fannie’s leadership failed to do so, the federal government (FHFA) is the conservator of Fannie and Freddie. The federal government as conservator has all management powers over Fannie and Freddie. It is outrageous that the FHFA has stood by while Fannie’s managers have (1) continued to violate the law, (2) illegally retaliated against the whistleblowers who have tried to warn their superiors and the public of Fannie’s continuing crimes, (3) and invoking the arbitration clauses to deny the whistleblowers’ their right to protect their rights in the courts – the very arbitration clauses that Congress declared unlawful because they were used to intimidate whistleblowers and put our Nation at risk. We have seen the catastrophic harm that the frauds led by Fannie and Freddie’s senior managers caused and how critical a service Fannie’s whistleblowers have provided to us.

The Bank Whistleblowers United is a strong supporter of the WARN Act to protect whistleblowers from retaliation that was introduced last week by Representative Cummings. We urge the public to support the adoption of that Act.

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  1. For The Win

    Nice article.

    Hillary has former Rep. Barney Frank of Dodd-Frank advising her in this election. Exactly what he’s advising her is interesting, but apparently not for public consumption. Barney’s crimes are so many. He is the fellow, on instructions from the Obama administration, who cut out Sen. Al Franken’s amendments to Dodd-Frank to create mechanisms to improve credit agency independence and reliability, amendments which had cleared the Senate. Fanny Mae, Freddie Mac and FHFA don’t want any independence in organ set to watching them.

  2. HotFlash

    Err, um, blush, I think you meant a mere $189.5 billion public bailout of Fannie and Freddie. Back to reading…

  3. perpetualWAR

    I had a Freddie Mac loan serviced by Wells Fargo. I sent plenty of QWRs to Wells to obtain the true and lawful owner and holder of the note. They continued to reveal that the owner of the note was Freddie Mac even though I queried that FM also securitized loans. I asked did they have the note? Short answer: yes.

    Then came selling the property. Because I amended the escrow instructions (sellers have every right to do this) to mandate that prior to conveyance and upon receipt of funds, Wells Fargo must deliver the original note and deed of trust to the trustee, as per Paragraph 25 of the deed of trust. So granted, I’m just asking Wells to adhere to the f*cking contract, but they wouldn’t. So, I was forced to sign a document that I would agree to close the transaction with a Lost Note Affidavit and allow the closing agent to obtain an indemnity agreement for themselves. This was after Wells disclosed that the note was available in writing.

    My thoughts are that each and every one of us needs to hold these crooks and thugs to the contracts and sue for breach of contract when they fail, which is every time.

    I once shared a beer with a financial compliance officer who sat on a nearby bar stool. We chatted about the fact that I was suing his industry. His response to my declaration was, “Every decent American should be suing my industry.”
    Truer words, my friend, truer words.

  4. steelhead23

    I am left to ask, “Cui bono“? I sense a hidden policy here – not of thwarting whistleblowers, but a policy of trying to reflate the housing bubble. I recall that GWB urged us all to be a part of the “ownership class,” to purchase homes. Of course, this really meant incurring debt, and through price inflation, increasing that debt through time. A system evolved around this policy – lax underwriting, false appraisals, etc., etc. Of course, this was not entirely a .gov enterprise – at its heart was Wall Street and the banksters. Whistleblowers then, didn’t merely threaten those directly fingered, they threatened the system. And because threats to the system threaten “life as we know it,” it is not too surprising that politicians are willing to let a few whistleblowers dance in the wind while their friends and benefactors make a pile of money. Hence, the answer is not more laws regarding whistleblower protections, but something much more fundamental – getting money out of politics. But I’m just a tin-foil hatter.

    1. Synoia

      Housing is the largest and most secure form of Lending.

      If lending creates money (as MMT asserts) then housing creates the most money.

      That is: purchase transactions create money.

      From where else is the banking sector going to get such largess?

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