(Additional background information after the jump.)
Background information:
Rahm Emanuel was appointed to the board of Freddie Mac in February of 2000 by Bill Clinton, after serving as White House political director where he was a vocal defender of Mr. Clinton during the Monica Lewinski matter. He served there until leaving to run for Congress in 2001, which qualified him for $380,000 in stock and options and a $20,000 annual fee.
According to the Chicago Tribune, during his tenure the board was notified by executives of their plans to misstate the earnings of Freddie Mac: "On Emanuel's watch, the board was told by executives of a plan to use accounting tricks to mislead shareholders about outsize profits the government-chartered firm was then reaping from risky investments. The goal was to push earnings onto the books in future years, ensuring that Freddie Mac would appear profitable on paper for years to come and helping maximize annual bonuses for company brass." (3/5/2009)
The Tribune further reported that "during his brief time on the board, the company hatched a plan to enhance its political muscle. That scheme, also reviewed by the board, led to a record $3.8 million fine from the Federal Election Commission for illegally using corporate resources to host fundraisers for politicians. Emanuel was the beneficiary of one of those parties after he left the board and ran in 2002 for a seat in Congress from the North Side of Chicago."
In December 2003, a report (PDF) was written by Armando Falcon Jr., head of the entity charged with oversight of Freddie Mac, the Office of Federal Housing Enterprise Oversight (OFHEO). The report asserts that company executives "demanded whatever level of earnings management was necessary to achieve steady rapid growth in Enterprise profits." It also "provided evidence that non-executive members of the Board were aware, and supportive of, management in this regard, including the use of derivatives to improperly manage the earnings of Freddie Mac," citing notes from a June 2, 2000 meeting of the Board of Directors (p. 24).
The OFHEO report concluded that board had "failed in its duty to follow up on matters brought to its attention." The SEC filed a complaint (PDF) saying that Freddie Mac had "misreported profits by billions of dollars in order to deceive investors between the years of 2000 and 2002," per ABC News.
In Congress, Rahm Emanuel worked to pass a bailout of Fannie and Freddie, cosponsoring the Housing and Economic Recovery Act of 2008, which also dissolved OFHEO. It moved their regulatory authority to the Federal Housing Finance Agency (FHFA), which took Fannie and Freddie under conservatorship in September 2008. The same act abolished the Federal Housing Finance Board (FHFB) and replaced it with the FHFA.
After Mr. Emanuel was named Chief of Staff, the White House denied a Chicago Tribune Freedom of Information Act request for information on his Freddie Mac activities: "The Obama administration rejected a Tribune request under the Freedom of Information Act to review Freddie Mac board minutes and correspondence during Emanuel's time as a director. The documents, obtained by Falcon for his investigation, were "commercial information" exempt from disclosure, according to a lawyer for the Federal Housing Finance Agency." However, at the time of the request Freddie Mac was no longer a "commercial" enterprise, having been taken over by the government in September of 2008.
According to ABC News, the Justice Department is in possession of these records, yet no indictments have been forthcoming: "Freddie Mac records have been subpoenaed by the Justice Department as part of its investigation of the suspect accounting procedures" they reported in November 2008.
When the OFHEO and the FHFB were abolished, FHFB employees were automatically transferred to the FHFA and retained their "same status, tenure, grade, and pay." Ed Kelly, who had been the Inspector General for the FHFB, was looking into the wrongdoing of Fannie and Freddie at the FHFB when the Justice Department, using the authority of the 2008 law Emanuel cosponsored, stripped him of Inspector General authority and removed him from oversight of Fannie and Freddie.
The Huffington Post obtained copies of an internal memo (PDF) on the ruling by the Justice Department's Office of Legal Counsel. They report that "the ruling came in response to a request from the Federal Housing Finance Agency itself -- which means that a federal agency essentially succeeded in getting rid of its own inspector general."
The memo states that "Congress did not intend for the FHFA to have an Acting or interim IG pending the confirmation of a PAS IG." But according to the Huffington Post, "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."
According to Neil Barofsky, the Special Inspector General overseeing the TARP bank bailout: "It's a serious gap in oversight," Barofsky told HuffPost of Ed Kelley's loss. "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."
The Huffington Post further reports that it is the White House's failure to appoint an Inspector General that has stalled the process: "Federal Housing Finance Agency officials insist[] 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," they report.
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