Should a former high-profile derivatives industry lobbyist be put in charge of the federal agency that regulates Freddie Mac ( FRE) and Fannie Mae ( FNM)? 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 ( JPM) managing director to putting a "fox in charge of the henhouse."
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.
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.