WASHINGTON - To say Armando Falcon Jr.'s six years as the director of the Office of Federal Housing Enterprise Oversight have been a crucible is no understatement.
He has announced plans to resign twice, has had a figurative bounty put on his head, and has been attacked by lawmakers, the companies he regulates, and outside critics. Various conspiracy theories have pegged him as secretly in cahoots with Fannie Mae and Freddie Mac, intimidated by them, or working with the Bush administration to bring them to their knees.
Through it all, Mr. Falcon, who is scheduled to leave Friday, said he and his colleagues have been worried only about "doing our job." Since he took office in September 1999, OFHEO has transformed itself from an obscure agency that could not complete its most important task - creating a risk-based capital rule for Fannie and Freddie - into one of the drivers of reform at the two government-sponsored enterprises.
"We are light years away from where we were six years ago when you look at the size of the agency, the budgetary resources, the issues before the agency," Mr. Falcon said in an interview Monday. "Six years ago we were grappling with inadequate resources, trying to establish the right working relationship with the two companies we supervise, and really still trying to mature as an agency."
Establishing the right working relationship with Fannie and Freddie has been a big theme for Mr. Falcon. The two GSEs were known for their highhanded style and were not shy about running to Congress or the White House when a regulatory action challenged their agenda. Mr. Falcon said that their accounting problems altered the balance of power.
"In the past the two companies frequently, rather than trying to deal with us as a regulator working on oversight issues, would try to deal with us as if we were some trade association that just needed to be steered in some right direction," he said. "That's changed."
Still, his attitude toward Fannie appears to have softened in just the past two months. In a March interview, Mr. Falcon said Fannie was "slowly" changing its corporate culture, but made it clear he was not confident it had changed for good.
He was decidedly more positive in the interview Monday. "There will be bumps - and there have been bumps along the way - but the fact that they get resolved in a way that is satisfactory to us, I think, is a reflection of a new willingness at the company to have a good relationship with us," he said.
He also said that two months ago OFHEO and Fannie were in a disclosure fight; Fannie was asserting privilege on documents OFHEO had requested during a special accounting exam. Though he would not specify the nature of the documents, he did say Fannie eventually gave in.
"The benefits of getting us that information outweighed a certain legal claim that they thought they had," Mr. Falcon said.
But OFHEO continues to look at several issues, he said, as are Fannie's auditor, Deloitte & Touche, and internal investigators led by former Sen. Warren Rudman.
As OFHEO's profile rose, so did its share of controversy.
When it alleged in September that Fannie had violated generally accepted accounting principles, Fannie and its allies did not lie down. At a House Financial Services Committee hearing Oct. 6, several Democratic lawmakers excoriated Mr. Falcon and accused his agency of trying to destroy Fannie, while top Fannie officials said they did nothing wrong. The Securities and Exchange Commission later backed up OFHEO by demanding that Fannie restate its earnings.
The hearing was ironic on many levels. Mr. Falcon, a Democrat appointed by President Clinton, was vigorously defended by Rep. Richard Baker, R-La., who a few years earlier had been one of Mr. Falcon's harshest critics. Meanwhile, his former defenders had turned on him.
"I think a lot of those accusations were the result of members getting bad information … from Fannie Mae and its army of consultants," Mr. Falcon said.
The White House, which eventually would support Mr. Falcon, nominated a successor in 2003 and then changed its mind after the Freddie accounting scandal broke. (Mr. Falcon submitted a letter of resignation pending the approval of his successor, who was never confirmed.)
"Director Falcon led OFHEO with skill and resolve under extraordinary circumstances, and without a hint of partisanship," said Reginald Brown, a former special assistant to President Bush who played a key role in developing the administration's views on GSE reform, and now a partner at the law firm Wilmer, Cutler Pickering Hale & Dorr LLP.
"His job was one of the toughest and most thankless in Washington, and he managed to not only survive, but to establish himself in the end as one of the town's most savvy and effective regulators. It will be tough to find a successor of his caliber," Mr. Brown said.
The signs that Mr. Falcon is finally ready to leave are not hard to spot. His desk, which two months ago was cluttered, now has just two neat stacks of paper. His walls are decorated only with hooks where pictures used to hang. Mr. Falcon himself appears slightly more relaxed than usual, and he said that even though he has not selected his next job yet, he is looking forward to a fishing trip back in Texas with friends next week.
But some things still burn him.
One is the series of investigations by the Department of Housing and Urban Development's inspector general that were requested by Sen. Christopher "Kit" Bond, R-Mo. The most widely publicized findings, released after OFHEO's report on Fannie's accounting, painted a bleak portrait of the agency. It cited former employees, some anonymous, who said Mr. Falcon and his deputy were biased against Fannie and working to undermine them.
"The fact is if you look at that report, it was nothing but innuendo, hearsay, speculation," Mr. Falcon said. "There was absolutely no basis to that. And I always felt it was just a purely politically motivated effort to try to intimidate the agency. But we weren't going to let it have that effect."
As a result of the report, Sen. Bond inserted an appropriations rider that withheld $10 million of OFHEO's budget until Mr. Falcon departed. OFHEO officials derided the provision as a "bounty" on Mr. Falcon, and it was dropped from the final appropriations bill.
OFHEO also faced criticism for not finding the problems at the GSEs earlier. Sheila Bair, a former Treasury official in this administration, said she felt OFHEO was too easy on Fannie and Freddie at first.
"You read the reports year after year - they were giving glowing examination reports," said Ms. Bair, now a professor at the University of Massachusetts, Amherst. "I don't think there was enough scrutiny going on."
But she also said that Mr. Falcon had "stepped up to the plate" once the problems at Freddie were revealed. "He stuck with it, and he did a lot to restore the credibility of the agency."
Mr. Falcon said Enron Corp.'s collapse ultimately triggered a change in the GSEs' fortunes. Freddie fired its auditor, Arthur Andersen & Co. (which had also handled Enron), but the new auditor, PricewaterhouseCoopers, uncovered Freddie's accounting mistakes.
"What got our attention was the problems that were found at Freddie Mac," he said. "Those problems would probably not have been found but for the change in auditors."
Mr. Falcon said his agency did not have the resources at the time to detect Freddie's problem. However, because of congressional funding boosts, it has acquired more expertise and created offices to oversee accounting and compliance. Since Mr. Falcon arrived, OFHEO's budget has quadrupled, to $64.2 million, and the number of employees has tripled, to 215.
"One of the key things we've been doing here in the last two years is not just fixing problems, but trying to identify what steps can we take to ensure there isn't a repeat of these problems," he said. "It involves corporate governance changes and internal control changes at both companies, as well as a corporate culture dedicated to high ethical standards."
Mr. Falcon recommended that his successor - whether his deputy, Steve Blumenthal, takes his place, a new OFHEO director is appointed, or a new agency is created - should stay focused.
"Do your job as objectively and at times as forcefully as necessary, and don't bow to political whims, because, as these past five years have demonstrated, your critic today could be your friend tomorrow," he said.
