Secret plan to buy Freddie Mac is the focus of lobbyist lawsuits

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Two senior lobbyists for the Federal Home Loan Bank of San Francisco pushed a long-shot idea for ending U.S. control of mortgage giant Freddie Mac — a problem that's bedeviled Washington for more than a decade.

The proposal, pitched behind closed doors in 2016 by Lawrence H. Parks and Timothy Simons, called for federal home loan banks to buy Freddie using cash windfalls they won in settlements with Wall Street after the financial crisis. The plan was quickly tabled but got revived in 2017 when President Donald Trump took office and top administration officials made clear they wanted the government out of the business of running Freddie and its sibling, Fannie Mae.

The scheme ultimately unraveled and has become the focus of a legal battle that pits Parks and Simons against the San Francisco lender, which fired them in 2018. The two men say they are victims of racial discrimination, while the bank claims that they may have committed fraud.

The saga, laid out in a lawsuit Parks and Simons filed last month, reveals the jockeying for influence that's gone on as Trump's Treasury Department seeks to figure out a future for mortgage-finance companies that earn billions of dollars. Fannie and Freddie's near collapse pushed them into the government's arms almost 12 years ago. Their recovery, along with the crucial role they play in the housing market, has set off a lobbying frenzy among banks, hedge funds and other financial titans that continues to this day.

Highly paid

Parks and Simons embraced the idea of using settlement money to buy Freddie Mac while they were leading the Federal Home Loan Bank of San Francisco's office of legislative and regulatory affairs. The two men had clout. Before being fired, Parks was one of the home-loan bank's highest-paid employees, receiving $1.28 million in total compensation in 2017.

The San Francisco bank spearheaded the idea and in 2016 hired McKinsey & Co. to study it, Parks and Simons said. After hearing the proposal, the bank presidents voted not to pursue it.

Hope was rekindled after Trump was elected and the new leadership at Treasury revived efforts to end control of Fannie and Freddie, Parks and Simons said.

Parks said in an interview that he and other home-loan bank officials pitched the plan at a meeting with Treasury senior counselor Craig Phillips. He said Phillips encouraged him to continue the work and build support among outside groups.

The Treasury Department didn't endorse the approach and wasn't seriously considering it at the time, according to a person familiar with the meeting between the department and the bank.

Return home

Like Fannie and Freddie, the bank home-loan bank system is a government-sponsored enterprises and regulated by the Federal Housing Finance Agency. The plan pitched by Parks and Simons would have been a return home for Freddie, which was owned by the Federal Home Loan Bank system before being spun out to the public in 1989.

The plan ran aground in September 2017, Parks and Simons said in court documents, after another member of the San Francisco bank's lobbying team falsely told a large meeting that the bank and two other home-loan banks were close to releasing a proposal.

The contents of that meeting leaked to news reporters, leading to a mad scramble among home-loan-bank leaders, most of whom didn't know Parks had continued to pursue the plan.

Parks said he cut the employee's pay to punish him for the misstep and that he believes the employee retaliated by leveling the fraud accusations that got him and Simons fired.

Internal investigation

According to court documents filed by the San Francisco bank in a related case, an internal investigation found that Parks and Simons used bank contractors to help manage their own investment business, among other charges that the bank said amounted to "potential fraud." The bank said the inspector general for the FHFA launched an investigation into Parks' and Simons' activities.

Leonard DePasquale, the FHFA inspector general office's chief counsel, declined to comment.

Parks in the interview said that the internal investigation didn't find that he or Simons had broken any laws and that the home-loan bank's CEO was searching for a reason to fire them. He said the CEO and the bank's executives had shown a pattern of discomfort with having black executives in positions of power.

A spokeswoman for the San Francisco bank said in a statement that it denies the allegations and "will vigorously defend itself." She declined to comment on the proposal to buy Freddie. John Von Seggern, who leads the trade association that represents the home-loan banks, said that, to his knowledge, all work on the Freddie project stopped in 2016.

CEO resignation

The San Francisco bank's chief executive officer, Greg Seibly, announced this month that he will resign at the end of February to become president of another bank.

In a 2018 Securities and Exchange Commission filing, the bank said Parks' and Simons' positions were eliminated to streamline operations. It didn't mention a fraud investigation.

Parks and Simons themselves haven't left the game entirely. They now run Forethought Advisors LLC, a lobbying firm whose clients include Morgan Stanley and DCI Group, a public relations firm that represents Fannie Mae and Freddie Mac shareholders.

The abandoned plan wasn't the first time Parks helped develop an effort to end government control of Fannie and Freddie while working for the home-loan bank.

In 2015 on behalf of the Potomac Coalition, an organization that advocates on urban economic issues, he helped develop a white paper that urged recapitalizing and releasing Fannie and Freddie. In a Wall Street Journal interview, he said Fannie-Freddie shareholders, who would have reaped a massive windfall from the plan, had suggested authors for the paper and helped draft its contents. DCI Group promoted that paper.

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Court cases Freddie Mac GSEs Housing finance reform GSE reform Federal Home Loan Banks