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White House Told 'Multiple Times' Fannie, Freddie Had No Watchdog

First Posted: 03/18/10 06:12 AM ET Updated: 05/25/11 03:50 PM ET

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Whose fault is it that the federal agency that oversees five trillion dollars in mortgages hasn't had an independent inspector general for months? Not ours, say Federal Housing Finance Agency officials, insisting that they notified Congress about the problem and pressed the Obama administration "multiple times" to appoint someone to the position tasked with rooting out wrongdoing at Fannie Mae, Freddie Mac and the Federal Home Loan Bank.

In a letter to Rep. Darrell Issa (Calif.), the top Republican on the House Oversight and Government Reform Committee, Alfred Pollard, the FHFA's top lawyer, writes that two of the agency's heads - former Director James Lockhart and acting director Edward DeMarco -- had alerted Congress to the absence of an inspector general. (Read the letter here.)

But the IG in question, Ed Kelley, was removed only after Lockhart challenged Kelley's legal authority to operate. At the time Kelley told Congress that there was no IG -- on June 3, 2009 -- Kelley was, in fact, locked in a battle with Lockhart and was still serving as acting IG with legal authority that stemmed from a previous legal opinion.

It's highly unusual for an agency head to challenge the legal authority of his own IG, as it undermines the watchdog's independence.

More than a month later, Kelley met Lockhart, the deputy director and Pollard to discuss the feud. At the meeting, Lockhart suggested allowing the Department of Justice's Office of Legal Counsel settle the dispute. Kelley, in a separate letter to Issa, writes that he agreed -- assuming that the DOJ would agree with him.

He was wrong. On Sept. 8, the OLC offered the opinion that Kelley did not have authority to act as the IG. The back story is here, but, in short, the agency and the OLC claimed that because Congress didn't specifically say that the law turning the Federal Housing Finance Board (FHFB) into the FHFA mentioned an acting IG, then there wasn't an IG until the president appointed a new one. He has yet to do so.

The chairmen of the House and Senate banking committees, Rep. Barney Frank (D-Mass.) and Sen. Chris Dodd (D-Conn.), both told HuffPost that Congress had no intention whatsoever of revoking Kelley's authority to operate as an IG. Rep. Dennis Moore (D-Kan.), who chairs the oversight subcommittee with responsibility for FHFA, plans to introduce legislation to make that clear.

The current acting-director of the FHFA inherited the current situation and told the Senate Banking Committee in October that there was no IG and that the agency desperately needed one. "As the acting director of FHFA, I'd like to be very clear I want an inspector general. I would like it, and I would like it now, because I, in fact, believe, Senator, that inspector generals can be very important elements of the functioning of a federal regulatory agency," DeMarco said in response to a question from Sen. Jim Bunning (R-Ky.) about the lack of an IG.

"But, Senator, the answer to your question why we don't have one is that there is a requirement in the statute that the inspector general be presidentially appointed and Senate confirmed. So this position is awaiting a presidential nomination for the IG."
Bunning pushed back. "Well, I understand that, but you as the acting head of the -- you could at least make suggestion to the administration that this is a critical position that needs to be filled."

DeMarco said that he had. "Senator, I've had that communication with the administration multiple times," he said.

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.

In his letter to Issa, Kelley says that the agency's successful assault on his authority required him to pull out of such cooperative investigations.

"It's a serious gap in oversight," Barofsky told HuffPost. "It does impact what we do. Ed was a member of our TARP IG council and a partner in our investigative work." Barofsky said he still investigates areas of FHFA, but his mandate only covers "a sliver of what they do."

Issa isn't buying FHFA's rationale. "A federal entity that is at the epicenter of the nation's subprime mortgage meltdown is currently operating without an Inspector General and independent oversight," he said in a statement to HuffPost. "At a time when the federal government now owns more than half of all the mortgages in the United States, for reasons beyond comprehension, the Obama Administration and the Democratic Congress have left Fannie and Freddie without any oversight. There is no way that Congress intended for there to be no IG for the FHFA and the Administration should nominate a permanent Inspector General immediately."

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