Fair Game: The Man in Charge of Fixing Fannie and Freddie Knows Them All Too Well

2017-04-09 10:19:02

 

Fair Game: The Man in Charge of Fixing Fannie and Freddie Knows Them All Too Well

You may not know much about Craig S. Phillips, special counselor to Steven Mnuchin, the United States Treasury secretary. Because Mr. Phillips was not a political appointee, he did not face congressional scrutiny before he began directing our nation’s housing policy, one of his main tasks.

Getting to know Mr. Phillips and his background is a worthwhile exercise, especially because he’s determining the Trump administration’s path forward on Fannie Mae and Freddie Mac, the mortgage finance giants that remain in conservatorship.

Mr. Phillips certainly knows a thing or two about Fannie and Freddie. As the leader of Morgan Stanley’s mortgage desk during the peak mortgage-mania years of 2004 and 2005, he ran the operation that bundled loans and sold them to the two government-sponsored enterprises. When those loans blew up and the government sued Morgan Stanley, Mr. Phillips was a named defendant in the initial case — a case that resulted in the firm paying a $1.25 billion settlement.

But first things first.

Mr. Phillips’s landing at Treasury is peculiar from a political standpoint. He contributed over $100,000 to Hillary Clinton’s presidential campaign last fall.

Much more germane is the work he’s done on Wall Street, much of it in the mortgage arena.

According to regulatory records, Mr. Phillips has spent 38 years at an array of Wall Street firms, including Credit Suisse First Boston, Morgan Stanley and, most recently, BlackRock, the huge asset manager. While there, he headed the financial markets advisory and client solutions teams at BlackRock Solutions, the powerhouse advisory unit; he left in January.

Perhaps most salient on Mr. Phillips’s résumé are his years at Morgan Stanley, where he led the firm’s mortgage securities unit. He started in the company’s fixed income division in 1994 and rose to global head of securities products. He was also the chief executive of Morgan Stanley ABS Capital I Inc., signing mortgage securitization documents filed with the Securities and Exchange Commission.

As head of securities products, Mr. Phillips directed the unit of Morgan Stanley that packaged and sold billions of dollars of home loan bundles to Fannie Mae, Freddie Mac and other investors. Some of these securitizations blew up in the financial crisis, generating billions of dollars in losses to the investors who bought them.

Although he left the firm in May 2006, when the mortgage securitization machinery was starting to sputter, he is identified in lawsuits filed by investors who bought the toxic Morgan Stanley loan bundles. Two of those investors were Fannie and Freddie, the companies he is now charged with fixing.

In 2011, the Federal Housing Finance Agency, the overseer of Fannie and Freddie, sued Morgan Stanley on their behalf, naming Mr. Phillips as a defendant. The F.H.F.A. contended that Morgan Stanley had misled Fannie and Freddie about the quality of the loans it had pooled and sold to them. (A subsequent version of the lawsuit dropped Mr. Phillips from the defendants’ list but still cited him and his role at Morgan Stanley.)

In 2014, the firm paid $1.25 billion to the federal agency to settle the case.

Another financial crisis lawsuit filed against Morgan Stanley describes Mr. Phillips’s role at the firm, detailing his close association with New Century Financial, one of the wildest of the Wild West subprime lenders. Until New Century collapsed in a heap in early 2007, Morgan Stanley was its biggest financier and enabler.

Michael J. Missal, then a partner at the law firm K&L Gates in Washington, was the bankruptcy examiner in the New Century case. In his report, he described the firm’s “brazen obsession with increasing loan originations, without due regard to the risks associated with that business strategy.”

Morgan Stanley helped feed that obsession by purchasing New Century’s loans. But it also provided the lender with the crucial money it needed to operate — known as warehouse funding. By August 2004, the Wall Street firm was offering a line of $3 billion to New Century, up from $400 million three years earlier, court documents show.

Both firms were enriched by the relationship. New Century generated “the most revenue for the warehouse lending group from 2004 through 2007” at Morgan Stanley, a lawsuit stated.

Mr. Phillips was the Morgan Stanley employee with primary responsibility for managing the New Century relationship in 2005, court filings show. The firm inserted itself into “almost every strategic decision that New Century makes in securities products,” according to an internal document dated October 2004 cited in the case.

“They certainly are extremely open to our advice and involvement in all elements of their operation,” Mr. Phillips wrote of New Century in a November 2004 email to the head of Morgan Stanley’s trading desk.

Well after Mr. Phillips had left Morgan Stanley, the firm’s shareholders paid dearly for the New Century relationship. Loan bundles whose documents were signed by Mr. Phillips figured not only in the $1.25 billion settlement with the F.H.F.A., they were also cited in the $2.6 billion Justice Department settlement the firm struck in February 2016.

Mr. Phillips spent two years at a firm he created to conduct real estate lending in India. But in August 2008, just as the mortgage tsunami was about to hit, he joined BlackRock Solutions.

His stint there may complicate his current work on the future of Fannie Mae and Freddie Mac because at that time, his BlackRock unit was acting as a consultant to F.H.F.A., analyzing Fannie and Freddie’s loss and capital projections. The companies were taken into conservatorship by the government over Labor Day weekend in 2008.

It is unclear what the BlackRock analyses showed. But it must be interesting reading given the great efforts the government has made to keep the documents from seeing the light of day in a lawsuit brought by shareholders of Fannie and Freddie.

The suit involves the government’s abrupt decision in 2012 to seize all the companies’ profits every quarter. The BlackRock Solutions analyses from 2008 are among thousands of documents the government has asserted are covered by privileges associated with the deliberative process and bank examinations.

I wanted to talk with Mr. Phillips about his long career on Wall Street, but a Treasury spokeswoman said he was not willing to chat. Given that he is the government’s point man on how to handle Fannie and Freddie, I had hoped to ask him where he stands on the topic.

We do know that he has been conducting meetings on the issue with people including officials from the Mortgage Bankers Association and think tanks, as well as low- and middle-income housing advocates who want to ensure that Fannie and Freddie remain available as a source of mortgage funding.

Mr. Phillips has also met with Jim Parrott, a former Obama administration housing official who is a fellow at the Urban Institute and owner of Falling Creek Advisors. Mr. Parrott was involved in the former president’s decision to begin taking all of Fannie and Freddie’s profits in 2012.

Mr. Parrott has proposed replacing Fannie and Freddie with a private-sector solution that would benefit the nation’s biggest banks. In an email, Mr. Parrott said he was not sure what Mr. Phillips thought of his proposal. “We have discussed broader questions of housing policy, though, and he seems pretty knowledgeable,” he added.

Mr. Phillips also traveled to Capitol Hill recently for a sit-down with Senator Bob Corker, the Tennessee Republican. In the past, Mr. Corker has put forward legislation on Fannie and Freddie that would have benefited too-big-to-fail banks. Mr. Corker’s spokesman did not return a call seeking comment.

Michael Calhoun, the president of the Center for Responsible Lending, said he was uncomfortable with the plans Mr. Parrott and Mr. Corker had been pushing.

“We are concerned with models that result in higher pricing for moderate-income families and worse pricing for small lenders like community banks,” Mr. Calhoun said. The critical issues in any reform of Fannie and Freddie, he added, were “who pays, and how much.”

That’s for sure.

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