Critics Assail Congress for Using Subpoena Powers and Strong-Arm Tactics
Investors are facing increasing pressure from Congress — including threatening letters, subpoenas and stiff legislation — that some critics say is a case of representatives strong-arming the people they serve.
(FOX NEWS) On Oct. 23 last year, William Frey, the president of a company that puts together mortgage-backed securities, told the New York Times that he had been contacting banks and threatening to sue them if they renegotiated mortgages for homeowners facing foreclosure.
Providing better terms for homeowners, Frey explained, would mean reducing the value of the mortgage-backed securities held by investors like himself.
“Any investor in mortgage-backed securities has the right to insist that their contract be enforced,” Frey, president of Greenwich Financial Services, told the Times.
Before the day was out, Frey received a letter from six members of the House Financial Services Committee who said they were “outraged” by what he’d said.
“Your decision is a serious threat to our efforts to respond to the current economic crisis,” wrote Democrats Barney Frank of Massachusetts, Maxine Waters of California, Luis Gutierrez of Illinois, Paul Kanjorski of Pennsylvania, Carolyn Maloney of New York, and Melvin Watt of North Carolina.
Then they demanded that Frey testify before Congress in three weeks. And to make sure he got the point, they added:
“If this cannot be arranged on a voluntary basis, then we will pursue further steps.”
Some critics say that message was a case of representatives strong-arming the people they serve. But they were well within their constitutional rights. Congress has the power to force witnesses — including private citizens — to testify on just about anything.
“Congress can more or less subpoena private citizens about anything they have the power to legislate on,” Dr. Josh Chafetz, a law professor at Cornell University, told FOXNews.com.
Chafetz said that complaints about political misuse of the congressional subpoena come up frequently, but that “those are political complaints, not really legal complaints about whether Congress has the authority.”
Frey said he was happy to testify — but the tone of the letter made him worry that the representatives might take further steps to force him to stop sending letters to banks. Only his clean record prevented that, he said.
“Clearly [the letter] was trying to intimidate me, but given the way I run my business, I knew they did not have any outside lever to force me to comply with their wishes,” he told FOXNews.com.
A spokesman for Congressman Frank defended the letter to Frey, saying the committee members were doing what they could to help homeowners stay out of foreclosure.
“The hedge funds were speculators in the market for mortgage-backed securities based on the riskiest subprime mortgages,” Frank’s spokesman, Harry Gural, told FOXNews.com. “They were interfering with efforts by the Bush administration and Congress to stem the wave of foreclosures which threatens our economy.”
Gural added that the committee members sent the same letter to another company, Braddock Financial, which the Times article reported was doing the same thing as Frey’s firm. That company, he said, “conceded that we were right.”
Braddock Financial President Harvey Allon did not respond to requests for comment.
The congressional letter coincides with other incidents of purported government strong-arming. Documents obtained by the public interest group Judicial Watch, for instance, show that former Treasury Secretary Hank Paulson told banks at an Oct. 16 meeting that they had no choice but to take TARP funds.
In February, Bank Of America CEO Ken Lewis testified that Paulson and Federal Reserve Chairman Ben Bernanke had threatened to get him fired if his firm did not go through with a plan to buy Merrill Lynch. Bank of America went through with the purchase.
But Frey says that, despite congressional strong-arming — and having to contend with hundreds of protesters at his home, scattering furniture in his yard — he is going to do what he can to keep the value of his assets from falling.
“In my public letter to Barney Frank, I didn’t say ‘I’m sorry.’ It was unambiguous, I was going to continue to enforce my contractual rights . . .
“If you want to change the contract, call me. And if you don’t do that, you’ll be talking to a judge. That’s how it works in a civilized society.”
From his perspective, Frey said, banks that service loans are too likely to renegotiate mortgages, because they are the ones who have to pay to evict homeowners. But reducing interest payments hurts investors like Frey who own mortgage-backed securities.
Still, some experts say that the congressmen may have had good reason to be upset at Frey’s threats to banks.
“In my opinion, the conflict of interest between homeowners, servicers, and bondholders is so out of whack, with so many homeowners defaulting, that the contracts don’t really make that much sense in our current environment,” said John Geanakoplos, a Yale Economics professor and managing director of Ellington Capital, a hedge fund.
On Wednesday, President Obama signed the “Helping Families Save their Homes Act of 2009,” giving banks and other servicers legal immunity from lawsuits alleging that they broke contracts with securities owners like Frey.
For his part, Frey sees that as an unconstitutional abrogation of his contractual rights.
“The U.S. government is now putting a bounty on renegotiating loans and providing [servicers] safe harbor protection from lawsuits — basically, telling servicers to ignore their contracts.
“If you can’t tell me that’s disturbing,” he said, “welcome to Zimbabwe.”