The chief counsel of the government’s huge housing-finance agency decided early on that private lawyers would be better able to investigate banks dealing in questionable mortgage-backed securities, a previously confidential letter to a key House member has revealed.
The letter from Alfred Pollard, the general counsel of the agency that oversees Fannie Mae and Freddie Mac, declared that “few government attorneys possess expertise in mortgage-backed securities.” The seven-page letter was sent in October 2011 to Rep. Darrell Issa, the California Republican who heads the House Oversight and Government Reform Committee, to explain why the Federal Housing Finance Agency was turning to outside legal help rather than rely on DOJ lawyers.
In his letter, Pollard “also expressed concerns that resource and budget restraints would prevent the Justice Department from tackling cases involving complex financial instruments,” according to a report by Nate Raymond of Reuters. And so, Pollard said, his agency was turning to lawyers at Quinn Emanuel Urquhart & Sullivan and Kasowitz Benson Torres & Friedman rather than government lawyers in 18 lawsuits against banks that sold that sold Fannie Mae and Freddie Mac some $200 billion in mortgage-backed securities.
“The FHFA, according to Pollard’s letter, hardly even considered using the Justice Department to prosecute its securities claims against the banks that sold MBS to Fannie and Freddie,” Raymond reported, although the agency did make what Pollard called “a courtesy phone call” to Assistant Attorney General Tony West, then the head of the DOJ Civil Division, before the suits were filed.
Reuters reported that, from August 2010 to November 2011, before most of the bank suits were even filed, Pollard’s agency paid private lawyers an estimated $16.5 million, according to Issa’s committee.
Pollard told Issa that the FHFA’s civil suits required not only litigation expertise but also an “in-depth familiarity” with mortgage-backed securities, Reuters said. “Only private law firms have both,” Pollard wrote.
Given the complexity of some mortgage-backed securities — a complexity that some critics of the banking industry say was intentional obfuscation — it may not be surprising that legal expertise on these instruments is short supply. (It might also be worth noting that former Fed Chairman Alan Greenspan has admitted that the exotic nature of creative financial instruments baffled even him.)
So the fact that the government is turning to outsiders is not necessarily a bad reflection on the DOJ. As Raymond noted, the recruiting of outside help is likely to be “highly relevant” given the suit filed by the DOJ on Monday against Standard & Poor’s in connection with its ratings of mortgage-backed securities.