Should a former high-profile derivatives industry lobbyist be put in charge of the federal agency that regulates
That's the question facing the Senate Banking Committee after the Bush administration tapped Mark Brickell to head the Office of Federal Housing Enterprise Oversight. The issue promises to draw extra attention in light of the growing scandal over Freddie Mac's derivatives portfolio.
Critics say Brickell, while well-versed in the nuances of a complicated market, might be unwilling to take a tough stand on potential derivatives abuses. Given Brickell's long opposition to regulating the industry, one critic likened the appointment of the former
J.P. Morgan Chase
managing director to putting a "fox in charge of the henhouse."
The White House formally announced Brickell's nomination last week, just days after the accounting scandal at Freddie began making headlines. The appointment, which must be confirmed by the Senate, had been in the works for months, but the White House dragged its feet in sending the nomination to the Senate Banking Committee.
Brickell is a former chairman of the International Swaps and Derivatives Association, the derivatives industry's main lobbying group. He currently is the CEO of Blackbird, an electronic derivatives trading firm based in Charlotte, N.C., with offices in New York, London and Tokyo.
"This is a nomination the Senate would be wise to look closely at," said Frank Partnoy, a University of San Diego law professor, former derivatives trader and author of a recent book on derivatives scandals. "On the one hand, you need a regulator who understands the industry. But regulators who are true insiders often act to benefit the industry to the disadvantage of investors."
Brickell could not be reached for comment at his New York office.
Ira Kawaller, who advises companies on how to use derivatives, said Brickell, during his lobbying days, did nothing more than serve as a "forceful spokesperson" for his employer. Kawaller said he'd be concerned "if there was some crony appointed who didn't have that kind of background."
The White House has named Brickell to succeed Armando Falcon, OFHEO's outgoing director and a Clinton administration appointee. Republicans in Congress had been particularly critical of Falcon's oversight of Freddie and Fannie, even before the accounting scandal broke.
Falcon's critics have said that as a lawyer he lacked the financial background necessary for the job, given Fannie and Freddie's dependence on derivatives. Indeed, that's one reason some say Brickell is a smart choice to replace him.
"The one thing
Brickell does understand is how the
derivatives market works," said Christian Johnson, a professor at Loyola University School of Law and a derivatives expert.
Derivatives are specialized financial contracts that businesses generally use to protect themselves from fluctuations in interest rates, commodity prices and currency values. They are also sometimes used to make bets on such movements.
Freddie and Fannie, which buy mortgages from banks and resell them as mortgage-backed bonds, rely heavily on derivatives to hedge their exposure to interest rate fluctuations. In particular, both use interest rate swaps -- deals in which parties make payments to each other based on a variety of preset interest rates.
The Brickell nomination comes at a time of growing anger on Capitol Hill about the Freddie mess and whether regulators were asleep at the switch. At least one congressional committee intends to hold hearings on the matter sometime this summer. Some lawmakers are so unhappy with Falcon and the other regulators at OFHEO, they're considering asking the Treasury to take on the task of monitoring Freddie and Fannie's operations.
Federal prosecutors and the
Securities and Exchange Commission
also are investigating to see if any laws were broken at Freddie, which already has said it will restate earnings for the past three years due to changes in its accounting treatment for derivatives.
During his tenure at J.P. Morgan, Brickell was a forceful defender of derivatives and an opponent of most attempts to regulate the industry. He frequently testified on Capitol Hill on the industry's behalf. Three years ago, Brickell testified before Congress to oppose a measure that sought to impose new regulations on interest rate swaps.
He also opposed past attempts by the Commodity Futures Trading Commission to rein in the derivatives industry.
Moment to Arise
But it's not just Brickell's past lobbying work that bothers some critics.
Some say his past association with J.P. Morgan could be an issue because the bank has been a supporter of the efforts of FM Policy Focus, a group that has lobbied Congress for greater controls over Fannie and Freddie.
Others are concerned about work he's been doing the past two years at Blackbird. Critics say they want to know more about Blackbird's trading activities in the interest rate derivatives market, because that's an area in which Freddie and Fannie are most active.
Michael Greenberger, a University of Maryland law professor and former CFTC official, said the Senate should ask Brickell to provide information about the firm's trading activities and its electronic trading system before taking a vote on his nomination.
"One of the greatest criticisms of Fannie and Freddie is they need to be much more transparent," said Greenberger. "Brickell has headed Blackbird, which is a totally opaque trading facility about which there is very little information."