———— FINANCIAL POLICY FORUM ————

DERIVATIVES STUDY CENTER

rdodd@financialpolicy.org 1660 L Street, NW, Suite 1200

202.533.2588 Washington, D.C. 20036

Advice for Choosing the Next Head of OFHEO

(Office of Federal House Enterprise Oversight)

The financial policy debate over the future of mortgage titans Fannie Mae and Freddie Mac is at a critical junction. This situation demands nothing short of excellence in leadership at their regulator – the Office of Federal House Enterprise Oversight. Even during normal times, OFHEO serves on the front lines in the formal battle between public and private interests. Now it also finds itself amidst a dirty guerilla war – fought house to house – between the private interests of the mortgage titans and giant banks that want a bigger piece of their market. The fighting extends to the House and Senate where the different private interests have their representatives accusing and defending the titans for getting rich from government subsidies, taking huge speculative bets on interest rates and misusing hundreds of billions of dollars of derivatives. The conflict has sometimes taken hypocrisy and hyperbole to new levels and has left the debate void of fact and clarity.

The importance of this issue cannot be overstated. Housing has been the only bright shining light in a dim U.S. economy. Yet many worry that the threats to the existence of Fannie and Freddie will reverberate throughout the mortgage market and choke the real estate boom.

Bringing matters to a head is the recent revelation that Freddie Mac has made massive errors in their accounting treatment of securities trading and derivatives positions. This, in turn, has aggravated the reaction to reports of large derivatives losses by Fannie Mae (large losses by GAAP accounting methods but not by their own pro forma methodology).

This situation requires nothing less than extraordinary leadership at OFHEO – leadership that the next head of OFHEO must provide. There needs to be a clear, articulated vision of the public interest that sets the rules governing the private participants in the U.S. mortgage market. The federal supervisor of these rules needs to be perceived as a fair arbiter in the disputes between private interests and a respectful representative of the public interest. After all, this financial policy is the larger part of U.S housing policy and ramifications for the housing market and the ability of people to buy homes.

The head of OFHEO must know the "art of the feasible" so as to fashion a measured, workable agreement between all the parties in order to make these markets more efficient in the present and in the future. A person with an extreme, ideological mindset will prove ruinous.

Unfortunately, the nominee by President Bush to lead OFHEO -- Mark C. Brickell -- falls short of possessing the leadership qualities necessary for so demanding a job. Brickell has no experience in public serve and has never worked in a public office. He is a long-time lobbyist for the derivatives industry and what is now the world's largest derivatives dealer J.P. Morgan Chase. He is thus inextricably linked to one of the narrow private interests in the conflict. As such, he will never be perceived as a fair minded policy maker that will respect the various competing private interests. Similarly, he has exhibited no precedent for supporting the public interest in the prudential regulation of these large and important markets. In contrast, he has a long track record of being a lobbyist in opposition, in each and every case, to any regulatory standard for financial markets.

Moreover, he has demonstrated a mindset that is driven by an ideology of unrelenting laissez-faire treatment of financial markets. None of the derivatives related fiascos of the 1990s tempered his views. He even promoted the extreme idea for further deregulating derivatives markets to allow retail level swaps derivatives trading. This mindset, taken together with his lack of experience in public service, would make a deadly combination. The Senate should not act in haste, and should insist on the opportunity to consider other suitable nominees before taking responsibility for confirming new leadership.

Randall Dodd(for identification purposes only) is the Director of the Financial Policy Forum, a non-profit research institute funded by the Ford Foundation.