Freddie and Fannie Outside Supervisor Ousted

A new bit of chicanery illustrates why it’s a lousy idea for the government to allow wards of the state like the GSEs and AIG to operate like kinda-sort private enterprises. When banks were nationalized in Sweden and Norway, the top brass and the boards were fired, and they were given strict goals and operating targets, required to report frequently, but not micro managed.

Instead, we have these government charges playing all sorts of games to slip the leash. One reader commented yesterday that AIG has three PR firms in its employ. And how much of their effort is going to discredit Feinberg and government oversight? I would bet a non-trivial amount.

Similarly, we have Freddie and Fannie, which are nationalized in an economic sense, but with no independent audit from its overseer, FHFA. But the bizarre bit here is that the regulator FHFA is undermining its own oversight authority. Huh?

It appears that at least one, maybe two factors are at work. First is that the now neutered inspector general Ed Kelley was working with SIGTARP. The Administration has taken a decidedly hostile stance towards the agency. Second is that Kelley was looking into fraud relating to some of the foreclosure reduction programs. Hhhm. Maybe Kelley was getting too close to something really embarrassing? As Huffington Post reports:

There is no independent auditor overseeing the federal agency responsible for some $6 trillion in home mortgages, because the Department of Justice’s Office of Legal Counsel ruled that the agency’s inspector general didn’t have authority to operate, according to internal memos obtained by the Huffington Post.

The ruling came in response to a request from the Federal Housing Finance Agency itself — which means that a federal agency essentially succeeded in getting rid of its own inspector general…

In September, the Department of Justice ruled that FHFA Inspector General Ed Kelley did not have authority to investigate wrongdoing or other abuses related to the agency, according to an internal DOJ Office of Legal Counsel memo signed by Deputy Assistant Attorney General Daniel Koffsky….

Kelley now heads the Office of Internal Audit and he said he has two employees: an office administrator and a person who oversees the contractors who review financial records. He estimated his budget for contractors was between $100,000 and $150,000.

As IG, he ran into trouble the way most independent investigators do — by investigating things people didn’t want investigated.

Kelley’s office had been working with SIGTARP Neil Barofsky, the Special Inspector General overseeing the bank bailout — the Temporary Asset Relief Program — when the agency head challenged his authority to operate and asked the FHFA General Counsel’s office to look into it.

“I hate to use the word challenge, because the question they raised was whether the statute was clearly established at the Office of the Inspector General,” said Kelley.

He declined to get into the specifics of investigations that were cut short. “I don’t really want to get into some of these, but obviously there are some programs out here. There’s the TARP IGs that are heavily involved in looking at criminal activity surrounding the Make Home Affordable program and different other aspects in the programs they’ve rolled out [to address] foreclosures and so forth,” said Kelley.

“Many of those are projects that would be worth jointly investigating between the TARP office and the IG’s office here at FHFA.” Kelley’s office was starting to do just that when “the question of whether or not we were legally the IG’s office came up, and we had to withdraw,” he said.

Notice the complete lack of any investigation into fraud in the financial crisis? And notice the flurry of activity to bust insider traders? Yes, insider trading is a serious abuse and should be prosecuted, but that is mere side show compared to the abuses in the credit markets. No one wants to let anyone look under that hood.