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Paul Hastings
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Paul, Hastings, Janofsky & Walker LLP
875151h Street, N.W.
Washington, DC 20005
telephone 202-551-1700 • facsimile 202-551-1705 • www.paulhastings.com
1(202) 551-1728
jameswareham@paulhastings.com
January 27, 2011
57799.00012
VIAE-MAIL
Ms. Sarah Knaus
FINANCIAL CRISIS INQUIRY COMMISSION
Suite 800
1717 Pennsylvania Avenue, NW
Washington, DC 20006-4614
Re:
FCIC Staff Memo ofinterview of Daniel Mudd
Dear Ms. Knaus:
This letter responds to your email of Jan. 26, 2011, requesting our views as Mr. Mudd's
counsel concerning the possible release of the 26-page FCIC's Staff Memorandum of the
Interview of Daniel Mudd on March 26, 2010 ("Interview Memo"). Your message notes
that "general objections will not be helpful." Notwithstanding that remark, we do have
objections to the release of the Interview Memo which are set forth below. In addition,
we set forth below a multitude of corrections that should be noted before the Interview
Memo is provided publicly.
01Jera!! Reaction
As a general matter, the Interview Memo is replete with statements identified as quotes
with quotation marks. The putative quotes are not taken from a transcript prepared
during the interview by a court reporter. Under these circumstances, there is a strong
likelihood that human error affected the accuracy of the Interview Memo. Moreover,
more than ten months have passed since the interview, so it is not possible for anyone to
adequately review at this late date the accuracy of the quoted language. We believe that
presenting these statements as quotations creates the impression of complete accuracy
when, in fact, due to the passage of time, we cannot assure the accuracy of the statements
with certainty. Indeed, our view on this point coincides with the introductory sentence to
the Interview Memo, which states, "This is a paraphrasing of the interview dialogue and is
not a transcript and should not be quoted as such." (emphasis original). Thus, in our
view, quotation marks should not be used to represent paraphrased statements.
The Interview Memo also does not attempt to quote the specific questions that led to the
responses from Mr. Mudd. Thus, the complete context of Mr. Mudd's statements is not
presented in the Interview Memo. In prior correspondence with the Staff, we have noted
our concern with the problem of taking the statements attributed to Mr. Mudd out of
Paul Hastings
Ms. Sara Knaus
January 27, 2011
Page 2
context. In addition, at times, lengthy quotes attributed to Mr. Mudd in the Interview
Memo are actually combinations of Mr. Mudd's responses to a series of questions. For all
of these reasons, we do not think that it is advisable for any of the statements to be
presented as verbatim quotations and the Interview Memo should be modified to remove
all quotation marks regarding any statement by Mr. Mudd.
At a minimum, any public release of the Interview Memo should be accompanied by a
public release of this letter in a readily available manner and clearly identified as related to
the Interview Memo to ensure that our concems with this method of proceeding are
made public.
With regard to business confidential information in the Interview Memo, Fannie Mae is
the entity whose business confidences may be reflected in the Interview Memo. We
assume you have consulted with Fannie Mae for its views on your proposed release of the
Interview Memo.
Specific Corrections
In an effort to clarify some of the information in the Interview Memo, here is a listing of
specific corrections that, at a minimum, should be made. This list is not an exhaustive
catalog of every error we identified.
On page 1, 2nd full paragraph, line 24, remove "summers" and insert "a summer"
On page 1, 2nd full paragraph, line 27, remove "in the defense and finance ministries" and
insert "half the year at a financial services company and half the year in the Defense
Ministry."
On page 2, line 1, remove "first as a Vice President, and later as General Manager of the
Company's international equity group" insert "where he worked in mergers and
acquisitions. He also spent time working in the International Equipment Group and was
the Managing Director of the European Transportation Group. He became CEO of GE
Capital-Asia Pacific"
On page 2, 1st full paragraph, line 5, remove "and eligibility requirements"
On page 2, 2nd full paragraph, line 16, remove "his group" and insert "Fannie Mae"
On page 2, 3rd full paragraph lines 29-30, remove "on participating in [those product
lines]" and insert "and more process"
On page 3, 3rd full paragraph, line 15, after "some loans" insert "in measured amounts"
On page 3, 3rd full paragraph, line 17, after "product" insert "as a pilot"
Paul Hastings
Ms. Sara Knaus
January 27, 2011
Page 3
On page 3, 3rd full paragraph, line 17, after "to" insert "some"
On page 3, 3rd full paragraph, line 17, after "lender customers" insert "and build it out
over time"
On page 3rd full paragraph, line 26, remove "is with these" and insert "was moving
towards''
On page 4, 1st carryover paragraph, line 3, remove", or sell"
On page 4, 3rd full paragraph, line 18, remove "Choices" and insert "Crossroads"
On page 4, 3rd full paragraph, line 24, after "was that" insert "[Citi saw)"
On page 5, 1st full paragraph, line 5 remove "more lax underwriting standards" and insert
"less docu1nentation"
On page 5, 1st full paragraph, line 5 remove",' he said. 'The way I think about is, it's"
and insert "was"
On page 5, 1st full paragraph, line 7, remove "do you get for it, and how do you deal with
the risk" and insert "is it earning, what is being done to mitigate the risk"
On page 5, 1st full paragraph, lines 7-10, remove "As we went more broadly [into NTM
products], the fees were higher because the loss line would be higher, so we had to charge
a higher G fee, and then above and beyond the charter mission, we would purchase
incremental mortgage insurance to cover uncertainty and risk" and insert "When looking
at a product that is new to the business, you start with the portfolio, then loans, then you
identify seller-servicers; then as you go more broadly, the fees were higher due to the
recognition that the loss line would be higher; so you charge higher gfees, then purchase
mortgage insurance to cover the uncertainty risk"
On page 5, 2nd full paragraph, line 17, after "charged fee" insert "There is a model fee,
charged fee, and actual fee. For example, for a price, product, and volume, you get a fee
of 20, but three years later, you would have seen the actual product and volume delivered,
and it could produce a fee that is slightly different."
On page 5, 3rd full paragraph, line 18, remove "Mudd" insert "Seefer"
On page 5, 3rd full paragraph, line 19, remove", and so" and insert". Mr. Mudd
responded that"
Paul Hastings
Ms. Sara Knaus
January 27, 2011
Page 4
On page 6, 3rd full paragraph, line 19, after "say that the" insert "quality of the"
On page 6, 5th full paragraph, line 30, remove "And there was danger to profitability" and
insert "Mr. Seefer asked if it was profitable. Mr. Mudd said, yes, "
On page 7, line 3, remove "- i.e. Fannie Mae-"
On page 7, 1st full paragraph, line 15, remove "So" insert "Mr. Mudd agreed generally to
Chris' statement that"
On page 7, 1st full paragraph, line 16, remove the end quote symbol after "customers."
On page 8, 4th full paragraph, line 30, before "NTM" remove "riskier,"
On page 8, 4th full paragraph, lines 31-32, remove "some [riskier products]" and insert
"some [NTM products]"
On page 8, 4th full paragraph, line 33, remove "contrary" and insert "contributory"
On page 9, 1st full paragraph, line 3, after "money." remove "He" and insert "Chris asked
if goals was a reason why Fannie Mae purchased NTM products. Mr. Mudd"
On page 10, before the 1st paragraph, insert "Chris asked in addition whether there was
also concern about the accuracy of the model fee anyway. Mr. Mudd said if there was
uncertainty about pricing correctly, Fannie Mae would not have priced it at all. The issue
was that there was less certainty than in other areas."
On page 10, 4th full paragraph, line 26, remove "Mr. Mudd said, 'I think the best I can say
at this point is that there was a huge amount of uncertainty about if the model fee was at
the right level or not."' and insert "Mr. Mudd responded that the concern was that the
model fee might be too low, plus one way to correct for the uncertainty factor was to buy
(mortgage insurance], so that was one of the factors."
On page 10, 6th paragraph, line 34, remove "with OFHEO" and insert "with Fannie
Mae"
On page 11, 5th full paragraph, line 29 after "schizophrenic" insert "quality to the"
On page 11, 5th full paragraph, line 32 after "melt down" insert "and"
On page 12, 1st carryover paragraph, line 3, change "borrows" to "borrowers"
Paul Hastings
Ms. Sara Knaus
January 27, 2011
Page 5
On page 12, 1st full paragtaph, line 11, after "a package of loans" insert "in which there
would be 5%"
On page 12, 2nd full paragraph, line 15, remove "could" and insert "had the infrastructure
to"
On page 12, 2nd full paragraph, lines 16-19, remove '"The areas were being developed.
Part of what the plan called for was to develop incremental strategies we would need to
implement that [overall] strategy. Mr. Mudd clarified that the project he just described
was the Risk Transformation Facility, which never got off the gtound." and insert "Mr.
Mudd said it was being developed in some areas. In areas where it was already developed,
it was appropriate to take the risk. Part of the plan in the document called for building
and developing it in other areas. Mr. Seefer asked if this tied into the risk transformation
facility. Mr. Mudd said it did."
On page 12, 2nd full paragraph, line 21, after "capabilities." insert "There were some areas
where the capability was developed and was expressed principally through [mortgage
insurance]."
On page 12, 3rd full paragtaph, lines 26-27, remove "to allow [Fannie] to take more risk"
and insert ", willing to absorb this kind of risk for a reasonable price."
On page 12, 4th full paragtaph, line 33 after "he said." insert "Fannie Mae began to
increase price, reduce eligibility, and apply adverse market fees to accomplish this."
On page 13, 4th full paragtaph, line 22, after "map of' remove "the" and after "US"
remove "with" and insert "home price"
On page 14, 1st carryover paragraph, line 4, remove "moral"
On page 14, 2nd full paragtaph, line 17, after "Mr. Mudd" remove "said that" and insert
"agreed with Chris that it was"
On page 14, 2nd full paragraph, lines 19-20, after "goals" remove "and because the NTM
market provided a way for the Company to make money" and insert "Chris stated that
Fannie Mae also wanted to make money as well. Mr. Mudd said yes."
On page 14, 2nd full paragraph, line 28 after "and then" insert", if prudent,"
On page 15, 1st full paragtaph, line 5, after "classification" insert "[for whole loans]"
Paul Hastings
Ms. Sara Knaus
January 27, 2011
Page 6
On page 15, 1st full paragraph, line 5, after "disclose" remove "the originators" and insert
"subprime or Alt-A based on who the originator is or how the originator classified it"
On page 15, 1st full paragraph, line 7, after "mortgages" and insert "so investors could
decide for themselves"
On page 15, 4th full paragraph, line 33, remove "reply" and insert "rely"
On page 16, 1st full paragraph, line 4, remove "tension" insert "attention"
On page 16, 3rd full paragraph, line 13, after "Fannie Mae's own" insert "models"
On page 16, 4th full paragraph, line 22, remove "giving" and insert "given"
On page 16, 5th paragraph, line 37, remove "particularly during the validation process"
and insert "and management went through the same process of validations and checking"
On page 17, 3rd full paragraph, line 23, remove " ... and you saw the share snap back."
On page 17, 5th full paragraph, line 35, remove "making" and insert "make"
On page 18, 2nd full paragraph, line 14, after "we" insert "probably" and after "ahead of
it" remove "again"
On page 18, 5th full paragraph, line 37, remove "securities book" and insert "private label
securities book owned by Fannie Mae"
On page 18, 5th full paragraph, line 37, remove "market" and insert "PLS market
performance, where Fannie Mae's securities performed twice as well."
On page 18, 5th full paragraph, lines 37-38, remove "and it's not that bad ... on an
absolute basis, maybe that doesn't matter, though"
On page 19, 1st full paragraph, line 6, remove "surplus" and insert "surcharge"
On page 19, 3rd paragraph, line 20, remove "should be at the minimum" and insert
"requirements should move back down"
On page 19, 4th paragraph, line 26, remove "put through" and insert "pass the difference
along in the form of'
On page 19, 5th paragraph, line 28, after "jumbo and" insert "non-jumbo"
Paul Hastings
Ms. Sara K.naus
January 27, 2011
Page 7
On page 19, 6th paragraph, line 33, after "the mortgage market" insert "similarly to other
institutions"
On page 20, 1st carryover paragraph, line 1, after "Making the regulator part of' insert
"Treasury
or~'
On page 20, 1st carryover paragraph, line 2, after "as stark as] "' remove "do nothing or"
On page 20, 1st carryover paragraph, line 3, after "capital" remove the punctuation and
''insert "or"
On page 20, 4th paragraph, line 19, after "Mr. Mudd" remove "the" insert "a" and after
"chart'' insert "generated by the FCIC"
On page 20, 4th paragraph, line 22, remove "different scenarios" insert "a variety of
procedures, made sure that they understood the pricing and other variables as it attempted
to assign the right amount of capital."
On page 20, 5th paragraph, line 29, after "job" insert "as CEO"
On page 20, Footnote 1, after "accuracy" remove the period and insert", noting, as an
example, that the columns did not actually add up."
On page 21, 1st carryover paragraph, line 2, remove "restatement" and insert "intention to
restate"
On page 21, 1st carryover paragraph, line 5, remove "81" and insert "80 some odd"
On page 21, 1st carryover paragraph, line 7, after "30%" insert "requirement"
On page 21, 1st carryover paragraph, line 15, remove "human" and insert "hue and"
On page 21, 1st full paragraph, line 23, after "onus was on" insert "all of'
On page 21, 3rd full paragraph, line 32, remove "what Mr. Lockhart's view was of the
negotiations." insert "Mr. Mudd what he perceived Mr. Loclthart's view to be."
On page 21, 3rd full paragraph, line 33, remove "cap surplus" insert "capital surcharge"
On page 21, 4th full paragraph, line 35, remove "Mr. Steel's position was" and insert "Mr.
Mudd's perception of what Steel's position was"
Paul Hastings
Ms. Sara I<naus
January 27, 2011
Page 8
On page 22, 2nd full paragraph, line 8, after "email" insert "(which Mr. Mudd was not a
recipient of/'
On page 22, 3rd full paragraph, line 15, after "process" remove";" and insert". If there
was a cheaper loan that the borrower could access in the same originatll)g institution, the
originator would have to refer the borrower to that." and capitalize the "W" in the words
"we" that follows
On page 22, 4th full paragraph, line 21, remove "initial" and insert "internal"
On page 22, 4th full paragraph, line 21, remove "simple" and insert "sole"
On page 22, 6th full paragraph, line 27, remove "Tom asked if Mr. Mudd knew if
Countrywide charged Fannie Mae higher prices for its product, and" and insert "Tom said
that Fannie Mae had its box of criteria and that Countrywide would send packages of
loans within that box but they would all be towards the bottom, and asked if that
surprised Mr. Mudd."
On page 22, 6th full paragraph, line 29, after "found" insert "a way to get"
On page 23, 1st carryover paragraph, line 6, after "discussions." insert "Chris asked if
there were discussions in which Countrywide said that it was Fannie Mae's largest
customer and told Fannie Mae to back off. Mr. Mudd said not that he is aware of."
On page 23, 2nd full paragraph, line 11, remove "particularly with low-doc loans"
On page 23, 2nd full paragraph, line 19, remove "a large" insert "an"
On page 23, 3rd full paragraph, line 24, remove "from risk management" and insert
"across the board"
On page 24, 1st canyover paragraph, line 1 after "coming here" insert "[from JP
Morgan]"
On page 24, 1st full paragraph, line 7, after "frustration about the" insert "budget"
On page 24, 1st full paragraph, line 8, after "progress" remove"- we weren't 'not even
close.m
On page 24, 2nd full paragraph, line 12, remove "a homeownership" and insert "the
affordable home"
Paul Hastings
Ms. Sara I<.naus
January 27, 2011
Page 9
On page 24, 2nd full paragraph, line 19, remove "world" insert "[map of home price
appreciation and declines]"
On page 24, 3rd full paragraph, line 27, after "things within" remove "its" and insert "[the
government's]"
On page 24, 3rd full paragraph, line 27, remove "it's helpful" and insert "it would have
been helpful for government"
On page 24, 3rd full paragraph, line 28, after "clear about" insert "expectations for
liquidity"
On page 24, 4th full paragraph, line 32, remove "then 'here are some suggestions that we
Fannie Mae have that would be helpful to our ability to operate in the market'' and insert
"discussing suggestions of ways in which Fannie Mae could be helpful to operating in the
market.''
On page 24, 4th full paragraph, line 36 after "September" remove "6" insert "5"
On page 25, 2nd full paragraph, line 6, remove "reverses" and insert "effectively reversed"
On page 25, 2nd full paragraph, line 7, remove "ability to stay above the capital surplus"
and insert "capital position"
On page 25, 2nd full paragraph, line 9, remove"," and insert"."
On page 25, 3rd full paragraph, line 13, remove "directors, etc .. ," and insert "the Director
ofOFHEO"
On page 25, 3rd full paragraph, line 15, capitalize the "H" in "hill"
On page 25, 3rd full paragraph, line 15, after last remove "cap" and insert "capital"
On page 25, 3rd full paragraph, line 18, remove "of the" and insert "and"
On page 25, 3rd full paragraph, lines 19-20, remove "like first warning: flx it; second
warning: flx it; dllt:d warning: you're out of here" and insert "an initial warning with an
opportunity to flx the problem, a second warning with a warning letter, and then a third
warning to say it's over."
On page 25, 3rd full paragraph, line 21, remove "with no warning in between"
Paul Hastings
Ms. Sara Knaus
January 27, 2011
Page 10
On page 25, 3rd full paragraph, line 24, remove" ... " and insert "I would have liked to
have been"
On page 25, 3rd full paragraph, line 27, after "capital" insert "in late 2007 and 2008"
On page 25, after 3rd full paragraph, line 28, insert "Chris noted that there had been an
August 22, 2008 OFHEO letter stating that Fannie Mae was adequately capitalized, and
then an interim letter stating that it was not adequately capitalized. Mr. Mudd stated that
all of the events were compressed."
On page 25, 5th paragraph, line 34, remove "was the Domestic Undersecretaty, so ... "
insert "were deputy undersecretaries of domestic fmance and their staffs."
On page 26, 1st paragraph, line 4, remove "said" and insert "asked the government"
On page 26, 1st paragraph, line 4, after "anymore" add a single end quote mark
On page 26, 1st paragr-aph, line 6, remove "historically" and insert "ahistoric"
On page 26, 2nd paragraph, line 19, remove "fixed-rate"
On page 26, 2nd paragraph, line 20, after "that kind of market" insert "[with primarily
20% down, 30 year mortgages]"
On page 26, 2nd paragraph, line 20, remove "unanswerable at the time" and insert "a
source of debate"
End of Specific Corrections List.
Thank you for the opportunity to make our views known to the Commission and its Staff.
Sincerely,
J
es D. Wareham
fPAUL, HASTINGS,JANOFSKY &WALKERLLP
JDW
LEGN~_US_E
# 9152,1825.1
@FedFRASER