By Theodoric Meyer, ProPublica, Nov. 21, 2012

Getting the agencies responsible for national security to communicate better was one of the main reasons the Department of Homeland Security was created after the Sept. 11, 2001, terrorist attacks.

But according to a recent report from the department's inspector general, one aspect of this mission remains far from accomplished.

DHS has spent $430 million over the past nine years to provide radios tuned to a common, secure channel to 123,000 employees across the country. Problem is, no one seems to know how to use them.

Only one of 479 DHS employees surveyed by the inspector general's office was actually able to use the common channel, according to the report. Most of those surveyed — 72 percent — didn't even know the common channel existed. Another 25 percent knew the channel existed but weren't able to find it; 3 percent were able to find an older common channel, but not the current one.

The investigators also found that more than half of the radios did not have the settings for the common channel programmed into them. Only 20 percent of radios tested had all the correct settings.

The radios are supposed to help employees of Customs and Border Patrol, the Transportation Security Administration, the Coast Guard, Immigration and Customs Enforcement, the Federal Emergency Management Agency, the Secret Service, and other agencies with DHS communicate during crises, as well as normal operations.

DHS officials did not immediately respond to questions from ProPublica about what effect the radio problems could have on how the agency handles an emergency.

The $430 million paid for radio infrastructure and maintenance as well as the actual radios.

In a response letter to the report, Jim H. Crumpacker, the Department of Homeland Security's liaison between the Government Accountability Office and the inspector general, wrote that DHS had made "significant strides" in improving emergency communications since 2003. But he acknowledged that DHS "has had some challenges in achieving Department-wide interoperable communications goals."

The recent inspector general's report is the latest in a string of critical assessments DHS has received on its efforts to improve communication between federal, state and local agencies. The Government Accountability Office reported in 2007 that the Department of Homeland Security had "generally not achieved" this  goal.

DHS has assigned a blizzard of offices and committees to oversee its radio effort since 2003, which the inspector general's report claimed had "hindered DHS' ability to provide effective oversight."

Also, none of the entities "had the authority to implement and enforce their recommendations," the report concluded. Tanya Callender, a spokeswoman for the inspector general, said the current office overseeing the effort hadn't been given the authority to force agencies to use the common channel or even to provide instructions for programming the radios.

The inspector general recommended DHS standardize its policies regarding radios, which DHS agreed to do. But it rejected a second recommendation that it overhaul the office overseeing the radios to give it more authority.

"DHS believes that it has already established a structure with the necessary authority to ensure" that its various agencies can communicate, Crumpacker wrote in his response letter.

NYC Mayor Michael Bloomberg told a reporter on Monday that forcing the NYPD to submit to oversight from an inspector general would destroy the city of New York:

Appointing an inspector general to oversee the NYPD is a recipe for disaster, Mayor Bloomberg warned yesterday.

“I think if you want to bring crime back, let’s go politicize control of the Police Department,” the mayor said, responding to a reporter’s question about a new City Council bill requiring an IG for cops getting a hearing tomorrow.

“The last thing we need is some politician or judge getting involved with setting policy, because you won’t be safe anymore. But today, you are. Think about that when you write your story,” Bloomberg added.

Who the hell is safe in NYC? It sure wasn't this teenager who was forced to submit to the NYPD's version of 'Stop and Frisk':

Continue reading »

By Cora Currier, ProPublica, Sept. 26, 2012

Mortgage giant Freddie Mac did not keep homeowners trapped in high-interest loans in order to boost profits on billions of dollars' worth of complex financial bets it had made. That's the conclusion reached in a report released today by the inspector general that oversees the agency in charge of Freddie Mac.

Last January, ProPublica and NPR reported that Freddie had dramatically expanded its holdings of mortgage-backed securities that would profit if homeowners stayed in their existing high-interest-rate loans. At the same time, the company had taken steps that made it harder for homeowners to refinance at lower interest rates. Our report stated that there was no evidence of a coordinated attempt to bet against homeowners' ability to refinance. The inspector general's report concludes that there was none.

But the inspector general left a key stone unturned: It did not independently evaluate the firewall within Freddie Mac designed to keep Freddie's investment arm from profiting from insider information about the mortgage giant's plans to tighten or loosen homeowners' access to credit. Instead, the inspector general relied on the word of employees it interviewed and conducted no further investigation. It also reported that the agency that oversees Freddie has not tested the firewall's integrity.

Freddie Mac and its sister company Fannie Mae were bailed out by taxpayers after the financial crisis and are now controlled by the Federal Housing Finance Agency. Freddie and Fannie guarantee most of the mortgages in the U.S., and they have a mission to make home loans more affordable. But Freddie also has a massive investment portfolio and has to protect against losses. Sometimes, those two goals can conflict.  

Beginning in 2010, Freddie Mac expanded its portfolio of a particular kind of mortgage-backed security known as an "inverse floater." The company offered investors a relatively safe bond with a floating interest rate. It then kept on its books what is called an "inverse floater," which pays out the highest returns if borrowers stay in their mortgages. When interest rates dropped (as they did during that period), Freddie Mac stood to profit on its inverse floaters, because the rates being paid by the pool of borrowers were higher than the prevailing market rates. Inverse floaters lose that advantage the more that homeowners in the pool refinance at the lower rates. 

The report says that Freddie's investment wing increased its holdings in inverse floaters merely because investors were demanding the floating rate bonds linked to them — not because of any strategy to exploit homeowners trapped in high-interest-rate mortgages.

Freddie Mac has an  "information wall" designed to separate the employees running Freddie Mac's investment strategy from those designing and carrying out its policies that impact the mortgage market, such as programs aimed at helping people refinance or making it more difficult for them to do so. The inspector general's report says that it found "no evidence" that the wall had been breached.

Yet, the inspector general noted that FHFA has not conducted any independent testing of Freddie's information wall. And the inspector general limited its own investigation of the wall to interviewing Freddie executives and FHFA officials and reviewing policy documents. The inspector general "did not independently evaluate the efficacy of Freddie Mac's information wall policy," the report states.

The report emphasizes that there are indeed "tensions between policies aimed at homeowners refinancing and Freddie Mac's retained investments." But it says that such tensions are not unique to inverse floaters but are "inherent throughout [Freddie and Fannie's] various business lines."

At the end of 2011, Freddie held about $5 billion worth of inverse floaters, according to the report, or less than one percent of its $653 billion investment portfolio.

The report also notes that the company hedges to balance its interest-rate risk, meaning that it places many different bets so that no matter whether interest rates rise or fall, its investments will be close to "net flat" — stay roughly the same, recording neither large profits nor large losses. Freddie does not try to balance the risk of each individual investment, but rather hedges "on its portfolio as a whole."   The report explains:

In the context of inverse floaters, although Freddie Mac may on the one hand benefit from a trend of low interest rates and reduced prepayments by homeowners, on the other hand, Freddie Mac's other investments may equally suffer from such a trend. Thus, the end result, if perfectly hedged on interest rates, is that Freddie Mac's overall position will remain the same regardless of prepayments.  

The inspector general did not independently evaluate Freddie's hedging strategies. When ProPublica and NPR first reported on these deals, it was unclear what kind of hedging, if any, Freddie Mac had performed.

The company is also supposed to be reducing its investment portfolio as part of the terms of its government bailout. In a footnote, the inspector general's report mentions that Freddie Mac told the Securities and Exchange Commission that selling the floating rate securities was a way to reduce its balance sheet. But most Freddie and FHFA officials interviewed by the inspector general said that reducing its balance sheet was not the motivation for Freddie to create inverse floaters, even if that was the result.

Separately, the way Freddie structured the inverse floaters leaves Freddie with nearly all of the risk of the assets that no longer show up on its balance sheet. The reason: As the guarantor of the mortgages that back the securities, Freddie is already on the hook if the homeowner defaults. With inverse floaters, it also retains the risks that homeowners might refinance and that overall interest rates might rise. Indeed, independent analysts told ProPublica and NPR in January that Freddie may actually have increased its risk, because inverse floaters are illiquid and hard to sell.

In its written response to the inspector general's report, the FHFA did not address Freddie Mac's statements to the SEC. When contacted by ProPublica, an FHFA spokesperson declined to comment.

The report said that FHFA issued misleading statements to the public on when it ordered Freddie to stop creating inverse floaters. According to the report, in the spring of 2011, the FHFA began a review of Freddie Mac's mortgage securities operation, in large part to determine whether the company held too many complex and risky mortgage products, including inverse floaters.

But an executive at Freddie didn't suspend inverse floaters and certain other complex securities deals until January 6, and FHFA didn't explicitly order Freddie Mac to stop selling inverse floaters until January 30, 2012, after ProPublica's story was published. In fact, according to the report, that day marked "the first time that FHFA's senior leadership met to discuss the Agency's position with respect to inverse floaters."

By then, however, Freddie had long since stopped selling floating rate securities — not because of any order from FHFA but because the market for them dried up in spring 2011 when Federal Reserve chairman Ben Bernanke indicated that interest rates would remain low for at least another year.

That's not how FHFA described what happened after our story broke. In a statement released in response to ProPublica and NPR's reports, the agency said that staff met with Freddie in December 2011 and came to an agreement then to suspend inverse floater trades. The inspector general's report concludes that statement was misleading: "prior to January 2012, neither Freddie Mac nor FHFA made a decision to halt Freddie Mac's creation and investment in inverse floaters; the market for reciprocal floating rate bonds simply disappeared. Had the market reappeared and Freddie Mac found the economics were again profitable, [Freddie] would have been free to structure floating-rate and inverse floating-rate investments."

In a response to the report, the FHFA disputed the inspector general's reading of the public statement, saying that it did not claim "that there was a specific, well-articulated FHFA policy and agreement" in December. The agency also emphasized that it did not take a position on inverse floaters only in reaction to media reports. While acknowledging that "the key stakeholders" had met together for the first time on January 30th, the day ProPublica and NPR released their original stories, the FHFA emphasizes that it had been in communication with Freddie on inverse floaters over the previous year.

The inspector general's report was requested by Senator Robert Menendez, D-NJ, last January, after our story brought the issue to light.