More on the Fannie Ethics Meltdown

We have more clarity today on why pretty much the entire internal ethics team at Fannie Mae was fired two weeks ago. The reasons are as bad as you’d expect, and a grim sign for ethics and compliance at the mortgage giant going forward.

As you might recall, Fannie’s senior leadership fired at least a dozen employees in its ethics and investigation unit on Oct. 30; and had fired chief ethics officer Suzanne Libby and general counsel Danielle McCoy the week before that. The housecleaning happened on orders from Bill Pulte, director of the Federal Housing Finance Agency and political hatchet man for President Trump.

On Monday afternoon the Washington Post ran a story on why Pulte fired the ethics team: because they had been looking into complaints against “a high-ranking officer close to him,” which Pulte didn’t like. So out on their rear ends everyone went.

Specifically, the Post says that Fannie’s ethics team started looking into multiple complaints about this mysterious high-ranking officer close to Pulte sometime this fall. Then word came on Oct. 23 from “leadership within the investigations unit” telling the team to cease those investigations. The Post article doesn’t identify who the leader giving that order was — but Oct. 23 would roughly coincide with when Libby (ethics chief) and McCoy (general counsel) were shown the door. 

Then more Fannie staffers made more complaints, this time alleging that Pulte directed the firings of Libby and others for investigating the high-ranking officer. That second batch of complaints about Pulte prompted him to fire the whole ethics team, apparently.

For the record, the Federal Housing Finance Agency denies all this. The Post article cites unnamed FHFA spokesmen who dismiss the allegations as “fake news from disgruntled anonymous sources.” 

OK, but Radical Compliance can now disclose that I’ve heard these same allegations for two weeks from people close to Fannie Mae and its sister company, Freddie Mac; I just couldn’t get enough confirmation to report it myself. (Libby declined to comment to me when I asked her about it, and the FHFA press office never replied to an email I submitted two weeks ago asking who actually is running the ethics function at Fannie now.)

Deeper Fannie Governance Questions

Aside from these allegations about Pulte gutting the ethics team, other questions loom about his oversight of Fannie and Freddie more generally.

For starters, Pulte is the regulator of Fannie and Freddie in his role as director of the FHFA, but he also named himself chairman of the board for both firms when he took office earlier this year. (Pulte can do that, given that Fannie and Freddie are under government conservatorship and their boards aren’t autonomous like you’d see at regular for-profit enterprises.) Then he started firing people. 

Pulte claims that’s because he wants to make Fannie and Freddie more efficient ahead of an eventual exit from conservatorship. That’s a nice pretext, but consider all this from the perspective of the typical Fannie or Freddie employee. People brought complaints about a Pulte crony to the ethics team, and the ethics team got fired. 

So what’s an employee supposed to do now when he or she sees misconduct? Especially if it involves a Pulte crony or Pulte himself?

You can’t bring that concern to the ethics team because there isn’t one; at least, not in any serious sense of the term. Maybe you could bring your concern to the internal audit department or the financial crimes team, but neither one is as well-versed in ethics and compliance matters as, ya know, an ethics and compliance team. Plus, they just saw their colleagues get the broom. Do you really think they’re going to risk their careers investigating Pulte-adjacent allegations now? 

In normal corporations where a whistleblower didn’t trust internal compliance teams, that whistleblower could try writing a letter directly to the board. Except, as we noted earlier, Pulte is chairman of the board. Yes, Fannie does list a mechanism for whistleblowers to report concerns directly to the audit committee, supposedly sealed off from the rest of the board; but if you were a whistleblower, would you trust Fannie or Freddie’s audit committee to keep your matter confidential? 

Remember, in his role as regulator of Fannie and Freddie, Pulte also has broad powers to replace board directors as he deems necessary. He did exactly that in March when he declared himself chairman, pushing out numerous other directors at the same time. 

In that case, your final recourse as a whistleblower might be to approach the inspector general of the FHFA itself. Typically an inspector general is more concerned about misconduct within his or her regulatory agency rather than at the businesses that agency oversees — but hey, our hypothetical whistleblower is desperate here; it’s worth a shot, right? 

Wrong. President Trump fired the FHFA inspector general last week, the latest in a string of illegal firings of inspectors general throughout the federal government.

So there’s no effective internal ethics function, no trustworthy board committee, and no inspector general. There’s nobody. There is currently nobody competent or independent enough to investigate allegations of misconduct against Pulte or any of his favorites at Fannie or Freddie.

Ethical Culture Withers Away

I can only imagine the anger and frustration that the fired ethics and investigations employees must feel these days. They worked hard to build ethics programs at Fannie and Freddie that focused on strong cultures and commitment to good conduct. Now along comes Pulte, an outsider to both firms, smug and self-righteous, taking a wrecking ball to everything they’ve done. It’s sad.

As for Pulte himself — he’s the one behind the bogus mortgage fraud charges filed against New York attorney general Letitia James and Federal Reserve governor Lisa Cook. Both cases are likely to fail because they don’t come within a million miles of a factual basis. Pulte also streaked across the headlines this weekend with the cockamamie idea of a 50-year mortgage, which he talked Trump into tweeting about without telling anyone else. It’s a terrible idea that will die even more quickly than the James and Cook prosecutions. 

Quite simply, Pulte is a clumsy political operative with hyper-partisan focus. That’s the guy who’s supposed to guide Fannie and Freddie forward? He’s the one employees are supposed to trust? 

Yeesh.