SID-04-0034-T MEMORANDUM OF INTERVIEW On August 12, 2004, Stephen A. BLUMENTHAL Deputy Director, Office of Federal Housing Enterprise Oversight (OFHEO), 1700 G Street, NW, 4" Floor, Washington, DC, (202)-414-3801 was interviewed by Assistant to the Special Agent in Charge (ATSAC) Anthony G. Medici and Attomey Advisor Bryan Howell, U.S. Department of Housing and Urban Development (HUD), Oflice of Inspector General (OIG), Special Investigations Division (SID), at the SID office, 400 Virginia Avenue, Suite 120, Washington, DC. BLUMENTHAL was apprised of the identity of the interviewing ATSAC and Attorney. ‘The interview commenced at approximately 9:12AM. The interview was tape-recorded. A court reporting service subsequently transcribed the interview based on the tape-recording made during the interview, A copy of the transcript, dated August 12, 2004, is Attachment A. Page numbers and line numbers, respectively, shown in brackets, e.g. (I: 1}, refer to the transcript (Attachment A). Prior to tape-recording, BLUMENTHAL was notified of the reporting ATSAC’s intention to tape-record the interview, and he agreed to the interview being tape-recorded. BLUMENTHAL ‘was also advised on the record of the tape-recording, and he again consented to the tape- recording [5: 14-21], ‘The reporting ATSAC read to BLUMENTHAL a “Kalkines Advisement of Rights” (Attachment B) with the following notification: ‘The purpose of this interview is to obtain your responses to questions concerning allegations at [sic] OFHEO. Information may have been improperly released; that such release may have violated confidentiality provisions related to OFHEO; that such release may have been an attempt to influence Congress in its deliberations; and, regarding possible abuses in the decision-making and enforcement processes connected with OFHEO’s oversight of government sponsored enterprises Fannie Mae and Freddie Mac (6: 17-22; 7: 1-7] BLUMENTHAL executed the Advisement of Rights [8: 19-21]. ‘The original Advisement of Rights is being maintained in the SID Official Case File. BLUMENTHAL was then put under oath, and the remainder of the statement was provided as wom testimony [9: 9-17]. BLUMENTHAL provided the following information. BLUMENTHAL provided a description of his professional background [10: 3-20]. BLUMENTHAL stated, “I’m a securities lawyer by profession” [10: 6]. BLUMRNTHAL held various posts in and out of government. BLUMENTHAL entered on duty with OFHEO in or about July 2002 (11: 1-2], initially as counsel to the Director. [11: 8-9]. BLUMENTHAL identified the Director, OFHIEO, as Armando FALCON [11: 22]. BLUMENTHAL became Deputy Director in December 2003 [12: 11-13] iby spe seermined oer USCA HuD0000580 Confidential‘SID-04-0034-— BLUMENTHAL BLUMENTHAL maintained that he had not had any discussion with other OFHEO staff regarding the substance of the investigation or the matters under investigation; BLUMENTHAL had only discussed with OFHEO General Counsel Alfted Pollard “the process of the examination” [13: 17-20} BLUMENTHAL advised that he had been contacted by two OFHEO employees about the HUD- OIG investigation, Len Reid and Andrew Varrieur, and he furnished an ¢-mail received from Reid (Attachment C) and a memorandum conceming Varrieur’s inquiry (Attachment D) BLUMENTHAL stated he had not been advised, coached or instructed to answer questions in any way and had no fear of retaliation for testifying [16: 7-10, 19-20]. BLUMENTHAL first learned of the present HUD-OIG investigation from a Dow Jones ‘Newswire reporter, Dawn Kopecki [17: 12-14]. According to BLUMENTHAL, on May 13, 2004, Kopecki provided to OFHEO a copy of a letter (Attachment E), from Senator Christopher Bond to HUD Inspector General Kenneth Donohue (17: 16-20; 18: 5-11]. BLUMENTHAL also provided a copy of a letter, dated June 10 [2004] from Ronald Hosking, HUD-OIG, concerning an unrelated HUD-OIG matter (Attachment F).. BLUMENTHAL also introduced for the record an article by Kopecki regarding a HUD-OIG “probe” of OFHEO (Attachment G). BLUMENTHAL also provided a group of three e-mails (Attachment H), between himself and Corinne Russell, identified as an OFHEO press relation consultant and staff member. BLUMENTHAL stated, “with the exception of the Director, I'm probably the individual unquestioningly, the individual at the agency who has most knowledge about the events, the facts, most of the context of this” (23: 5-9]. BLUMENTHAL also stated, in regard to the Donohue letter (Attachment E) and the Kopecki article (Attachment G), that he believed that Senator Bond’s office had been involved in “sending materials to the press” (23: 19] and commented, “we're being accused of leaking information by people who are sending stories to the press...” [24: 10-11]. BLUMENTHAL was shown a copy of a letter, dated February 24, 2004, from BLUMENTHAL to Franklin D. Raines, Chairman of the Board and Chief Executive Officer, Fannie Mae, the ‘opening sentence of which states, “The special examination of accounting policies and practices at Fannie Mac is ongoing” (Attachment I). The letter expresses OFHEO's concerns over Fannie Mae's SFAS-149 accounting system, and its reliance on manual systems and their potential for error [27: 9-20]. BLUMENTHAL was familiar with the letter (Attachment I) and possessed a ‘copy [27: 21; 28: 4] Asked how the letter (Attachment I) came into being, Blumenthal provided the following “is apo te propery oe Onc tivsigatan cons ler anannos or enhions ois tir oper Genser Ran comes Eiibiy uses unia suse ps. ‘oon fps > Hup0000581 Confidential‘SID-04-0034-1 BLUMENTHAL explanation, BLUMENTHAL stated: “Fannie Mae put out an 8-K [financial report), which contained a billion dollar error in the calculations. And then in the period between their 8-K and their 10-K [financial report], they corrected it, but, of course, they had to go public. Now, this is an SEC [Securities and Exchange Commission] matter. It was a mistake made in an SEC filing But it raised safety and soundness issues for OFHEO. And that is, how could they make a billion dollar error in an SEC filing? So we sent examiners up to Fannie Mac to examine the FAS-149 systems” [29: 17-22; 30: 1-6]. According to BLUMENTHAL, the OFHEO examiners “came back and reported to us that these systems were literally — not part of the main computer banks of Fannie Mae, but that these were being run on personal computers, separate from the main computer body. In talking to our chief accountant, Wanda DeLeo [...] she told me this is, apparently, not uncommon, even in the largest of companies...” [30: 6-15} ‘Asked when OFHEO first became aware of the computing error at Fannie Mae, BLUMENTHAL stated, “The answer to your question is I did not become aware of the error in the SEC filing until it was made public” [32: 7-9], which according to BLUMENTHAL occurred “in the middle of ‘November, but I don't remember specifically” [32: 13-14]. BLUMENTHAL stated that OFHEO examiners were “literally immediately” sent over to Fannie Mae to examine the problem (32: 21- 2 BLUMENTHAL further explained the background of the Raines letter of February 24, 2004 (Attachment I): “They refer to the separate systems as end-user systems. The fact that this practice is frequently done, though, did not end the inquiry. We went, and our examiners looked at it. And then came back, and said that, basically, the error had been made because someone without authorization had gone into this personal computer, into this Excel spreadsheet, changed the formulas, and the result was a billion dollar error. Well, our examiners, of course, continued to examine. And they came back and reported to us that there were 70 such systems like this. And, consequently, the Director's response was the letter of February 24th. And that ‘was to say to Fannie Mae that, fine; you've got an SEC filing, but there's a safety and soundness issue here, And, accordingly, I order you to submit a plan of remediation, that is outlined in the letter” (33: 1-21]. BLUMENTHAL described the issuance of the Raines letter (Attachment 1) a5 a “prompt supervisory action” (34: 5-6]. BLUMENTHAL described this action as “a final act” rather than an interim act (34: 7-12]. BLUMENTHAL reiterated: “This was the final act with regard to this FAS-149 problem. And that was that we sent our examiners out, concluded there was a problem, and ordered Fannie Mae to correct it. They have come up -- well, we subsequently had several meetings with them, and now it’s part of the regular OFHEO examination process and oversight of this enterprise” (34: 13-21]. BLUMENTHAL acknowledged that, if Fannie Mae had not responded, or its response was “Tasers poor oth On of atonal ecumenanns oconmusara oes Otc apecarGowral anderen Hup0000882 Confidential‘SID-04-0034-1 BLUMENTHAL explanation. BLUMENTHAL stated: “Fannie Mae put out an 8-K [financial report], which contained a billion dollar error in the calculations. And then in the period between their 8-K and their 10-K [financial report), they corrected it, but, of course, they had to go public. Now, this is an SEC [Securities and Exchange Commission) matter. It was a mistake made in an SEC filing But it raised safety and soundness issues for OFHEO. And that is, how could they make a billion doliar error in an SEC filing? So we sent examiners up to Fannie Mae to examine the FAS-149 systems” [29: 17-225 1-6] According to BLUMENTHAL, the OFHEO examiners “came back and reported to us that these systems were literally —- not part of the main computer banks of Fannie Mae, but that these were being run on personal computers, separate from the main computer body. In talking to our chief accountant, Wanda DeL-o [...] she told me this is, apparently, not uncommon, even in the largest of companies...” (30: 6-15]. Asked when OFHEO first became aware of the computing error at Fannie Mae, BLUMENTHAL stated, “The answer to your question is I did not become aware of the error in the SEC filing until it was made public” [32: 7-9], which according to BLUMENTHAL occurred “in the middle of November, but I don't remember specifically” (32: 13-14]. BLUMENTHAL stated that OFHEO examiners were “literally immediately” sent over to Fannie Mae to examine the problem [32: 21- 2 BLUMENTHAL farther explained the background of the Raines letter of February 24, 2004 (Attachment I): “They refer to the separate systems as end-user systems. The fact that this practice is frequently done, though, did not end the inquiry. We went, and our examiners looked at it. And then came back, and said that, basically, the error had been made because someone without authorization had gone into this personal computer, into this Excel spreadsheet, changed the formulas, and the result was a billion dollar error. Well, our examiners, of course, continued to examine. And they came back and reported to us that there were 70 such systems like this. And, consequently, the Director's response was the letter of February 24th. And that was to say to Fannie Mae that, fine; you've got an SEC filing, but there's a safety and soundness issue here. And, accordingly, I order you to submit a plan of remediation, that is outlined in the letter” (33: 1-21], BLUMENTHAL described the issuance of the Raines letter (Attachment I) as a “prompt supervisory action” [34: 5-6]. BLUMENTHAL described this action as “a final act” rather than an interim act (34; 7-12]. BLUMENTHAL reiterated: “This was the final act with regard to this, FAS-149 problem. And that was that we sent our examiners out, concluded there was a problem, and ordered Fannie Mae to correct it. They have come up ~ well, we subsequently had several meetings with them, and now it's part of the regular OFHEO examination process and oversight of this enterprise” (34: 13-21]. BLUMENTHAL acknowledged that, if Fannie Mae had not responded, or its response was Tar rpetis popry ot ics of natn os pir maznmrdains o cvcuans ais ce ates ama Handi one ‘oy rote repecrs mtu arto pei. Ti Mpot FOR OFPIIAL Use OMY ed nln founad fears poea, Pe Halo ots comma ase USeS SS 0 ed | : HuD0000583 Confidential‘SID-04-0034- BLUMENTHAL deemed inadequate, further action might be taken by OFHEO (36: 16]. Asked if OFHEO could take further control of Fannie Mae in such a situation, BLUMENTHAL stated: “We are a safety and soundness regulator. We are in, in effect, a bank regulator. We can put additional capital requirement on them because of operational problems” [37: 13-17]. BLUMENTHAL acknowledged that issuing the supervisory letter (Attachment I) was a serious step, “Oh, without question” [38: 1-2] BLUMENTHAL was asked who was the primary author of the Raines letter (Attachment 1) (38: 10-11]. BLUMENTHAL stated, “I think this letter was produced in the regular way, which would probably be the General Counsel's office. I don't actually have an answer to you. I don't know who produced the letter, but it would characteristically be produced in the General Counsel's office, reviewed by the most-senior officers; the Director, maybe General Counsel, anyone else who was relevant. For example, I'm certain-- I would assume-- I'm assuming that the chief accountant, Wanda DeLeo, would have reviewed it [...] and ultimately, the Director signs off.” [38: 12-22; 39: 1-3]. Asked what his role was in the production of the Raines letter (Attachment 1), BLUMENTHAL stated, “I reviewed it, and was part of meetings’ [39: 11-12]. BLUMENTHAL did not recall writing any of the text of the Raines letter (Attachment I) (39: 2 22) Asked if the examiners who had conducted the special review of the SFAS 149 accounting system had produced a report of their findings, BLUMENTHAL stated: “I haven't seen it, but the examiners, who were sent, would report to either the chief accountant if they were those 5, of to the chief examiner, who at this time I guess was Scott Calhoun” (40: 19-22; 41: 1-2], BLUMENTHAL reiterated, “I've not seen it” [41: 4] BLUMENTHAL acknowledged that the Chief Accountant, DeL.eo, reported directly to him (41: 9-11, and that DeLeo had provided the examiners’ report [41: 8]. Asked, “Did you sit down with her and say, okay, explain to me what's going on at Fannie Mae, and explain what the problem is, and so on?” and BLUMENTHAL responded, “Not me alone, but she reported to us in a meeting ‘what were the findings of the examination” [41: 16-22]. Asked again, “Are you saying that you didn't review such a report?” BLUMENTHAL stated, “No. It wasn't necessary” (42: 7-10]. BLUMENTHAL acknowledged that the information in the Raines letter (Attachment I) derived from the examiners” report; “That would all come from Ms, DeLeo's examination done by her staff” [43: 2-4]. BLUMENTHAL stated that he received an “oral report” from DeLeo regarding the situation at Fannie Mae [44: 3], and he had been told: “That there were 70 such systems. That there were clearly inadequate controls; that there was a need for a comprehensive review to determine which of these systems were critical, and needed to be integrated into the main computer systems, or to have significantly better controls, and which of those systems it was okay to handle on this exception basis” [44: 7-15]. Subsequently, through talks with Fannie Mae, it was found that not all of the 70 systems were “critical” accounting systems (45: 12-18]. "os ovo ney es ene, ara reeds chs Oc ethane Oro agin Eagbieycbeseumnesunse USC aee 4 HuDo000584 Confidential(034-2 ‘BLUMENTHAL Asked if OFHEO had allowed Fannie Mae a chance to review the examiners’ findings prior to issuing the Raines letter (Attachment I), BLUMENTHAL acknowledged that had previously been the practice, but that, “I object to that process” [46: 1-8]. BLUMENTHAL stated that, based on his experience in conducting the special examination of Freddie Mac, “it was my opinion there was much too collegial a relationship between our examiners and the regulated. entity” [46: 17-22; 47: 1]. BLUMENTHAL acknowledged that, typically, auditors will obtain input from the audited entity prior to releasing their findings, but BLUMENTHAL reiterated, “I object to that process” [47: 7-20] Instead, BLUMENTHAL preferred the approach taken by the SEC, “what's referred to as a ‘well submission’, And that is the SEC will examine a broker for two years, and then they'll come in —- before the well submission process, boom, they'd hit you with an enforcement action, Subsequently, it was decided that, no; look. Before they do that, they ought to sit down with the entity and show what they have, and get the input from the entity, and then either be satisfied or say, look, we don't agree. Either sign a consent order or we proceed with enforcement action ‘That kind of a process, the well submission -- in other words, after the agency has done its work but prior to taking enforcement action, to sit and get the kind of input is one thing” [47: 22; 48: 1-17] BLUMENTHAL commented that, based on his perception of the Freddie Mac case, OFHEO’s approach had been “...much more collegial than that. It was, did we get it right? It was as if the exam was being done on a cooperative basis, rather than a government agency making its determination, and then seeking input from the entity as to any obvious errors or something like that, We're talking about a difference of degree. So when I say I object to the process, I don't object to the process of getting the input from the enterprise if there something wrong, but [ object to any form of collegial type of regulation” (48: 17-22; 49: 1-13]. ‘Asked if OFHEO had given Fannie Mae any indication that the supervisory letter (Attachment I) was forthcoming, BLUMENTHAL stated, “No, but I think it would be improper to do so” {50: 9-13} BLUMENTHAL reiterated that he believed that the Raines letter (Attachment 1) was written primarily by the OFHEO General Counsel [55: 17-18], but, “If it wasn't written by the General Counsel's office, the only other people who would have written it — the major substance of the letter would come out of the chief accountant's office. I know I didn't write the letter, if that's where we're going” [56: 9-15] BLUMENTHAL was advised that other testimony received by HUD-OIG indicated that BLUMENTHAL was more involved in the preparation of the Raines letter (Attachment 1) that he had indicated, including personal contact and “some e-mail exchanges, in which you directed the drafting of this letter, and the time of issuance, and so on” [59: 1-9]. BLUMENTHAL stated, “I Hupo000585 Confidential‘SID-04-0034-1 BLUMENTHAL don't remember that” [59: 12] BLUMENTHAL commented: “The way we handle it -- and this is also part of my involvement ‘and my contribution to this agency--is that when a problem is identified and we do an examination, we do not wait until the end of the examination, and take all the issues that have been raised, and then address them. But rather ~ because we're a safety and soundness regulator, particularly dealing with a regulated public company. And when we identify a problem, we wrestle it to the ground immediately, and take action, if that's what's appropriate” (60: 1-13] BLUMENTHAL commented, “...what I'm rather saying is that nothing goes out of this agency, because we are so small and so tightly knit, without the most-senior officers having significant input into it. It would be the chief accountant. It would certainly -- the point I made before about the General Counsel. Ifhe didn't draft the letter, fine. But it wouldn't go out until it was signed off by the General Counsel, nor would it go out until it was signed off by the Deputy Director, or and ultimately by the Director. So my involvement would be that’s regular way. What you're describing is regular way, not that this was any special handling” (61: 12-22; 62: 1-5] BLUMENTHAL recalled that the idea of having Fannie Mae provide a remediation plan within 30 days, as specified in the Raines letter (Attachment I), was that of the Chief Accountant (62: 8- uy BLUMENTHAL was asked if any OFHEO staff member involved in the SFAS 149 examination had objected to this issuance of the Raines letter (Attachment I), “the issuance of this letter, of a supervisory letter, under the circumstances that existed at the time this letter went out?” and BLUMTHAL responded, “If they did, Iwas unaware of it” (62: 16-22]. Asked, “No one expressed to you reservations or objections?” BLUMENTHAL responded, “No” (63: 1-3] ‘Asked if Fannie Mae had already taken corrective action regarding these manual accounting, systems, BLUMENTHAL stated, “I wasn't aware of it; that it wouldn't surprise me at all, but neither would it satisfy me. I wouldn't have done anything different; that we would hardly leave it to Fannie Mac to determine whether there had been a safety and soundness violation “{63: 18- 22; 64: 1-5}. Asked the rationale for a supervisory letter (Attachment I) when the regulated entity has already begun corrective action [65: 8-13], BLUMENTHAL stated, “What we're doing is we're planting a regulatory flag. And that is, i's very nice that Fannie Mae -- understanding that it's inevitable that they have to correct it might initiate their own actions. That's good. That goes to whether or not OFHEO would determine that there are additional penalties, something beyond a plan of remediation, and that it should be penalizing them because they failed to do it” [65: 21-22; 66: 1- 8]. BLUMENTHAL commented, “The regulatory process, it would be wholly inappropriate, in my opinion, for us to say, okay, let's see what Fannie Mae does, and then we'll examine it and see if that's satisfactory. Rather, this is an OFHEO initiative. It’s a more aggressive regulatory stand. Seisany cote dteminad ses S64 SS, (at200 pee z Hupo000586 Confidential‘SID-04-0034-1 BLUMENTHAL And that is, from day one, we're still deferring, in a great extent, to the enterprise and saying, you come up with the plan, But this is not a voluntary effort. It's not your own initiative. You're being ordered by your regulator to take these actions” (67: 22; 68: 1-12] BLUMENTHAL acknowledged that he prefers to take a “more aggressive approach,” and a “more public approach” to oversight functions (68: 13-17]. BLUMENTHAL stated, “The public approach is very important in this case in that this is an SEC-registered company; that an action by the regulator — if we don't do it publicly ~ if i's something that we do informally, then that's all itcan be, is informal. Because if we do anything formally, they have an obligation to disclose to the public in an 8-K” [68: 18-22; 69: 1-4] Regarding the issuance of the Raines letter (Attachment 1), BLUMENTHAL did not know when the letter was actually issued but assumed it was on the date of the letter, February 24, 2004 [69: 21-22], BLUMENTHAL stated that the Director authorized the issuance of the letter [70: 7] BLUMENTHAL stated that after the Raines letter (Attachment I) was issued to Fannie Mae, “Subsequent to that, and I do not know the date, we received, as part of our ongoing, congressional involvement, communications from the people up on the House Financial Services ‘Committee. The chairman of the subcommittee that oversees us is Richard Baker, Louisiana Congressman Richard Baker. And Mr. Baker and as many as a half a dozen members of his staff were provided with the letter” [71: 19-22; 72: 1-7]. BLUMENTHAL advised that furnishing the Raines letter (Attachment I) to members of Congress was part of OFHEO’s “regular way” of conducting its business [72: 20]. BLUMENTHAL also commented, “this was a public letter” in that “we sent it to Fannie Mae knowing that they had an 8-K obligation” [73: 1-2]. BLUMENTHAL then stated, “At that point, it was a private letter. Imisspoke. When it was sent to Fannie Mae, it was private, but they have a legal obligation to make it public” [73: 4-8]. BLUMENTHAL believed the Raines letter (Attachment I) was sent to Congressman Baker the day after it was issued, as typically done (73: 12-13]. Asked if there had been a prior agreement to send the letter (Attachment I) to Congressman Baker, BLUMENTHAL stated, “The previous arrangement, and that is, we provide everything to Mr. Baker [73: 17-19] BLUMENTHAL acknowledged that he works very closely with the Director in such matters (75: 1-4), and he described himself as, “I am the alter-ego of the Director” (75: 6] BLUMENTHAL was asked, “When was the letter [Attachment I} actually made public, and how ‘was it made public?” [76: 4-6]. BLUMENTHAL responded, “I~ I don't recall -- I'm sorry. 1 don't recall how it was made public” [76: 7-9]. BLUMENTHAL stated: “I'm trying to remember the events. Okay. The letter went up to Fannie Mae. The next day or so, go to Baker's people. I don't know that we ever made it public. I seemed to remember that it was made public by the Hill, by the people on the Hill” [77: 8-13]. BLUMENTHAL further recalled: ‘That we got press mace our wna pears, Tne np FOROFHOAL Wk ONLY ane econ fo ranted peas pea, Pe 7 HuD0000587 Confidential‘SID-04-0034-— ‘BLUMENTHAL who had -- some people had the letter, if I remember right. That's my --as you can see, Im trying to recall the events. But I don't ever remember us taking formal action and making it public in any way; that we sent it to the Hill, and then the press had it, And once ~- that's what happened. After the press had it, then we said, all right, put it up on the website” [77: 16-22; 78: 1-3]. Asked about public release of the Raines letter (Attachment 1) “So prior to the press getting it, id you have an intention of making that public?” BLUMENTHAL responded, “No. But when you send anything to the Hill, you assume it’s public” [78: 16-21]. BLUMENTHAL was asked, “when you issued this letter on the 24th, if T understand you correctly, there was not an intention to make it public” and BLUMENTHAL responded, “There was no intention to issue a press release or anything like that” [79: 1-6]. Asked, “You didn't release it to the media at that point, did you?” BLUMENTHAL stated, “No, not to my knowledge” [79: 7-10]. Asked ifhe had consulted with the Director about public issuance of the Raines letter (Attachment I), BLUMENTHAL stated, “No, nothing like that” [84: 2-3]. Asked, “Did he ever express to you a desire to make it public?” BLUMENTHAL stated, “No. But the ~once again —~ apologize for repeating myself. But when we send it to the Hill, we assume it's going to public” [84: 4-9]. BLUMENTHAL further stated: “In this case, I don't recall any decisions about ‘whether it was going to be made public or not, because it went to Raines. And then in the regular way, without me being involved, it would go to the Hill. And then, we assume it goes from the Hill to the public, and it did” [87: 21-22; 88: 1-5] Regarding the confidentiality of the Raines letter (Attachment I), BLUMENTHAL was asked, “At the time it left your office, you were handling it as a confidential matter. Is that correct?” [89: 2-7]. BLUMENTHAL responded, “And that it was communicated to Mr. Raines. That's right [...] That's correct” [89: 9-12]. BLUMENTHAL further commented that it was “a confidential matter on the part of the agency. I didn’t think it was a confidential matter on the part of Fannie Mae. I thought they had an obligation to disclose it. And as far as sending things up to the Hill, I've also told you that I assume the Hill will not treat it confidentially” [89: 20-22; 90: 1-5]. BLUMENTHAL recalled, “Do we put out a press release? No, we're treating it confidentially” [90: 8-10]. BLUMENTHAL was shown a screen capture (Attachment J) of a page from the OFHEO Internet, site, wawst.ofhico.gov, showing a news release, dated February 26, 2004, of the Raines letter (Attachment 1) [90: 19-22; 91: 1-4}. Asked if the news release was familiar to him, BLUMENTHAL stated, “Yes. The fact that it was on the 26th would make sense as well. And that is that our putting it up on the website was sort of an action taken, well, the press has it. Let's make sure everybody can get it by putting it up on the website” [91: 10-16] ‘Asked, “How did you know the press had it?” BLUMENTHAL stated, “Because they contacted us [...] In the office, I don't remember somebody saying it, but that we had inquiries” [91: 20-22; 92: 7-11]. Sassy ee getemuned unde SUSCE SS 8 Hup0000588 Confidential‘SID-04-0034-1 ‘BLUMENTHAL Regarding who authorized posting the Raines letter (Attachment I) to the OFHEO web site (Attachment J), BLUMENTHAL stated, “But in this particular case, having no recollection, I'm going to assume the Director authorized to put it up there” [98: 18-20] BLUMENTHAL was shown an atticle (Attachment K), published February 26, 2004, in the Wall Street Journal (WSJ), with the headline, "Fannie Scolded for Obsolete Accounting Systems," by- lined John D. McKinnon and James R. Hagerty, containing the first paragraph: "Federal financial regulators said that Fennie Mae relies on 70 outmoded manual accounting systems that could lead to more problems similar to October's $1.1 billion error. In a letter to the company Tuesday, the Office of Federal Housing Enterprise Oversight said the mortgage giant's use of so many manual systems, as opposed to fully automated and integrated ones, raises concern. ‘The agency told Fannie Mae officials to submit a remediation plan within 30 days” (99: 13: 22; 100: 1-2], BLUMENTHAL commented, “The article seems to be just a recountment of what's in the letter. Ido not recall ever having any discussions with any reporters on this, Mr. McKinnon and Mr. Hagerty” (100: 9-13]. BLUMENTHAL was asked, “Prior to February 26, did you provide the February 24th letter to Mr. Raines [Attachment I], the substance of that letter, or a description of the contents of that letter. In other words, meaning not the physical letter itself, but it could be read to the person; it could be provided by description of whatever, to the Wall Street Journal, or anyone associated with the Wall Street Journal?” (101: 19-22; 102: 1-6] BLUMENTHAL responded, “No” [102: 7. BLUMENTHAL was asked, “Do you know who provided the February 24th letter to Mr. Raines [Attachment I], the contents, or a description of its contents to the Wall Street Journal, or anyone associated with the Wall Street Journal prior to February 26th?” and BLUMENTHAL responded, “No” [102: 8-14]. BLUMENTHAL was asked, “Do you know if the letter [Attachment I] itself, or its contents, or a description ofits contents was provided to the Wall Street Journal prior to February 26th?” and BLUMENTHAL responded, “No” [102: 15-20] BLUMENTHAL was asked, “Do you have any knowledge at all as to how this letter [Attachment I], its contents, or a description of its contents was provided to the Wall Street Journal, or anyone associated with the Wall Street Journal?” and BLUMENTHAL responded, “I could only make assumptions, I do not have any specific knowledge” [102: 21-22; 103: 1-7]. Asked what those assumptions would be, BLUMENTHAL stated, “I assume that it was provided to them by either the member of Congress or his staff, to whom it was provided by OFHEO, Congressman Richard Baker or the staff of the House Financial Services Committee” [103: 10-15} ‘Asked, “Do you have any knowledge or belief that any member of the OFHEO staff provided the arpa ret Os a pti ete neers yc ein nS eee uisouy te seuminaunoe SSC 5 5 HuD0000889 Confidential‘SID-04-0034-T BLUMENTHAL letter or its contents to the Wall Street Journal” BLUMENTHAL responded, “No” [103: 16-20] Asked if he had any knowledge that any OFHEO staff member had been directed to do so, or if he had directed any staff member to do so, BLUMENTHAL stated, “No” [104: 2-10] BLUMENTHAL acknowledged that he had previously given information or analysis to the WSJ onan unattributed basis: “For example, a reporter might call and say, Fannie has made a statement that the mortgage market -- that the growth of their company exceeds the growth of the mortgage market, and that this is a function of their ability to hedge or something; what do you think about that? I might say to them, all right, look. I'l give you my analysis of this, but [don't want it attributed to me, or OFHEO, or have it as background, or if you're going to use it, it's just asource. And my reaction to that is, yes, that's probably correct. That's how you could exceed the growth of -- your company could grow faster than the market; that kind of thing” [106: 5-20}, Asked if he had ever provided the news media with information about an ongoing examination being conducted by OFHEO at Fannie Mae or Freddie Mac, BLUMENTHAL stated, “No” (106: 21-22; 107: 1-7]. BLUMENTHAL commented, “No. The reason I wouldnt, in addition to all of the usual privacy laws, is, as Isaid, I'm a securities lawyer. There was a man who went to jail ‘years ago by providing information to a Wall Street Journal reporter, who then used it in a story, and the case probably went to the Supreme Court. But the point being, is that would be material, non-public information. I would be violating, in addition to all the privacy laws, those securities Taws” [107: 10-20] ‘Asked on what authority he provided unattributed information or analysis to the news mé BLUMENTHAL stated, “The interpretation of law and fact certainly on what amounts to be an unofficial and, in addition to that, non-attributed basis is part of our work” [109: 6-10] BLUMENTHAL commented, “sometimes very influential publications going out with a story that's wrong that can create a market reaction that we have to respond to” [110: 7-10} BLUMENTHAL advised that, although he has spoken with the media on a non-attributed basis, [110: 11-16], when there is a need to deal with the media, “Characteristically, we use Corinne Russell as the individual; send the reporter to them. She deals with it. And she will frequently — this happens on a weekly basis, several times a week sometimes. When there's a big story, it will happen several times a day. Will ask me to come into her office on a speakerphone to help flush [sic] out on a background basis something that the reporter's considering writing” [111: 6-15] Asked, “Now, is this done with the knowledge, and consent, and the approval of the Director, Mr. Falcon?” BLUMENTHAL responded, “Absolutely” [11 1: 16-19]. BLUMENTHAL added, “Lwould like to underscore for you the point I made about we do it through Peter Brereton’s office. Ms. Russell is part of his office. That's the Office of External Relations. Their job is to deal with the press, and that I do not allow these reporters to come to me directly in my capacity of Deputy Director; rather, they go through the Office of External Relations, and they call me and say, can you help us with it” [112: 1-11]. “Tas rps property the tice f ataton conan tar commenters condos oth fics Ops Gam a eae Misa ofa deeninauacu sSe ee 10 HuD0000590 Confidential‘SID-04-0034-T BLUMENTHAL Regarding the time frame in which the Raines letter (Attachment I) was issued, BLUMENTHAL was asked, “Is there any reason the letter was issued at that time?” [113: 20-22] BLUMENTHAL responded: “The examiners had given us a report which was very disturbing, Prior to the time of that report, I had no idea that there were 70 of these systems. And in light of the enormous error that was made, a billion dollar error, and that it was made apparently by an individual without authorization just coming in and changing the spreadsheet, my reaction was that we needed to move immediately. And that was the Director's reaction, and everybody's, reaction. Considering what the action we're taking was to tell Fannie Mae to immediately ‘examine their own systems and come up with a plan of remediation, it was first -- the highest priority” [114: 1-17] Asked if there were any other factors that influenced the issuance of the Raines letter (Attachment 1) on February 24, 2004, BLUMENTHAL stated, “No” [115: 12-15] BLUMENTHAL was asked about the WSJ article of February 26, 2004 (Attachment K), which stated that Raines had testified on February 25, 2004, in a hearing before the Senate Banking Committee [115: 20-22; 116: 1-14]. Asked about Raines testifying on February 25", BLUMENTHAL stated, “Apparently. [don't recall. This was not a hearing which we were involved” (116: 20-22} BLUMETHAL stated he was unaware, at the time the Raines letter (Attachment I) was issued on February 24, that it would coincide with Raines testifying on the 25" [118: 2-6] BLUMENTHAL stated: “No, not at all. Nor, truthfully even -- because reading this, [have no idea what he was testifying about” [118: 11-13]. BLUMENTHAL was asked, “Did you ever iscuss his testimony in the context of this letter’s (Attachment I) issuance?” and BLUMENTHAL responded, “No. No” (119: 6-9]. BLUMENTHAL was asked: “Did you ever talk to a staff member under your supervision, and advise the staff member that this testimony was forthcoming, and that this letter needed to be in place by the time of the testimony?” and BLUMENTHAL responded, “No, absolutely not” (119: 10-16]. Asked, “Did Mr. Baker's staff, or Mr. Baker himself, ask you or other OFHEO managers to provide the results of your review of this SFAS accounting system to them in time for them to use the testimony that Mr. Raines was going to give?” [119: 17-22], BLUMENTHAL responded, “He never asked me, and I do not know if he ever asked anyone else” [120: 1-3]. Asked, “Did the Director ever discuss with you that the congressional testimony Mr. Raines was going to give on February 25th was an issue that needed to be addressed through this supervisory letter, or that the supervisory letter needed to be in place by the time of that testimony?” BLUMENTHAL responded, “Absolutely not, I don't remember anything like this at all” [120: 4-12] BLUMENTHAL added: “I don't remember it because it didn't happen” [120: 17-18]. ripe tt Sena USE OMY atte tlre to untae peor : ua HuD0000591 Confidential‘SID-04-0034-T ‘BLUMENTHAL BLUMENTHAL commented: “The Freddie Mac exam was a humiliating -- not exam, but the Freddie Mac failure, was a humiliating experience for OFHEO. And that is, the question that was asked publicly by our congressional overseers is why didn’t OFHEO know about this? [....] And when we examined, we concluded, of course, OFHEO should have known. We were asleep at the switch. So what did we do? We reorganized the agency. We changed people. ‘We went on a hiring -- we brought in many more examiners and restructured it, because it was an embarrassment. In that context, when a very few weeks, months later, Fannie Mae has a billion dollar error, we didn't want to be answering the same question; why were you asleep at the switch?” (121: 5-22; 122: 1-4] Returning to the issue of Raines’ testimony on February 25, 2004, BLUMENTHAL commented: “It was [sie] no discussion of Mr. Raines' testimony at all. In fact, until I saw this thing, I didn't ‘even remember that he had testified. And to this day, I don't know what he testified about. We were dealing with 149, because it was a 149 issue, not because of anything with Franklin Raines” 122: 6-13) With reference to the WSJ article of February 26, 2004 (Attachment K), it was suggested to BLUMENTHAL that the timing of the letter might be perceived as a way to counter-effect Raines" testimony, and that the issuance of the letter might have been timed to obtain that effect [125: 12-22]. BLUMENTHAL responded: “No. As a matter of fact, [think that is quite simply wrong. As I've explained, Mr. Raines’ testimony was not, in any of my recollection, ever discussed, or may not even been aware of it. And it was absolutely not any part of our decision about what action we would take on FAS-149 or where we would take it; that that kind of — speculation -- simply, it was not what we were doing, It was not part of our thinking” 126: 3- 13). BLUMENTHAL was asked, “Is it trie that shortly after you came to OFHEO, you held a staff. meeting, and gave a PowerPoint presentation. And among the issues discussed in this Power Point presentation was you showed some data that showed that the stock price of Fannie Mae and Freddie Mac typically dropped when public officials either made negative comments or issued negative findings about either of those enterprises?” [127: 20-22; 128: 1-7]. BLUMENTHAL. acknowledged that he had given such a presentation (128: 9-12]. BLUMENTHAL believed it had occurred “perhaps in the first six months of my being there” [128: 16-17] BLUMENTHAL explained that he had worked as a securities analyst; in the course of that work, he had analyzed why Fannie Mae and Freddie Mac stock was not trading at higher price levels, [128: 18-22]. BLUMENTHAL stated: *...ordinarily the theory in finance is that the price of a stock is the function of the earings of company, net present value, discount (inaudible) and future earnings. That's not the case in Fannie and Freddie. And as an analyst, when I went and did the research, and tried to determine, well, why isn't -- why aren't these companies selling at much higher prices, my conclusion was that they are subject to extraordinary amounts of political risk. And that was the presentation I put on for OFHEO” (129: 1-14]. 12 HuD0000592 Confidential‘SID-04-0034-1 BLUMENTHAL BLUMENTHAL was asked: “And so you had tracked the stock price of Fannie Mae and Freddie Mac, and correlated it to public announcements or public enforcement actions taken regarding them that would affect the stock price” [130: 2-7]. BLUMENTHAL responded: Not enforcement actions; just public statements, yes” [130: 8-9] BLUMENTHAL was asked: “Is it true that _you had informed the OFHEO staff, as a result of your analysis, that such vulnerability on the part of Fannie and Freddie to public pronouncements or to public actions by oversight or government officials could be used or exploited by OFHEO. to basically get Fannie and Freddie to do what OFHEO wanted to do?” [132: 16-22; 133: 1-2]. BLUMENTHAL responded: “That's absolutely correct as I stated it. But I think in the context of the presentation -- I think that, actually, my exact words was something along the lines of we can impose our will upon them” (133: 3-8]. BLUMENTHAL added that the “underlying assumption is that we are acting within our legal authority...” [133: 12-15]. BLUMENTHAL further stated: “...it was also said at that very same meeting that we have great authority, and that we must always be operating within this authority. It was never any suggestion of improper, somehow, manipulation of their stock” (134: 3-8] BLUMENTHAL denied that the Raines Fannie Mae stock {134: 16-17] letter (Attachment 1) would have a negative impact on BLUMENTHAL was asked, “So these public actions or comments, you do believe, can force Fannie Mae to do what you want it to do?” [137: 5-8]. BLUMENTHAL responded: “It's one facet. I don't believe that these public statements themselves are enough. But we're talking about public statements in connection with OFHEO taking regulatory actions; how do we go about getting them to do what we want them to do when we take regulatory action?” [137: 9-15]. BLUMENTHAL acknowledged that he holds weekly staff meetings with his Associate Directors [138: 4-11]. BLUMENTHAL was asked, ifin these meetings, “have you advised the associates that you're looking to get a headline a week regarding OFHEO's actions? You want to see a headline a week in the trade media?” (138: 12-16]. BLUMENTHAL responded: “There was a period where we were having a headline a week. Once again, the assumption here, which T insist upon in terms of evaluating my comment, is at no time have I ever suggested taking improper action, using the press somehow in an improper way” [138: 17-22; 139: 1]. Asked again about his comments to staff, BLUMENTHAL stated: “In the context of describing OFHEO taking official actions. I don't want the situation where OFHEO takes official action, and nobody knows about it. That traditionally is the way bank regulators operate. It is not traditionally the way securities regulators operate” [140: 12-18] BLUMENTHAL commented that there was a division within OFHEO: “We have, in fact, a conflict between those people who are brought up being bank examiners and come to OFHEO, ‘who don't want anything ever to get out. That's the nature of bank regulators. The last thing in alsa abe detemsned ease USC oe 13 HUD0000593 Confidential‘SID-04-0034-1 BLUMENTHAL the world they want is if a bank is in trouble, is for the world to know about it. The SEC will push an E.F. Hutton o Drexel out of business. When they'e in trouble, they want everybody to know about it, The critical underlying point here is that I'm not talking about creating headlines out of nothing. I'm talking about publicizing official OFHEO actions. That's the context of those remarks” [140: 21-22; 141: 1-13] Asked if he had directed his staff to look for things or find things that could be publicized, so that OFHEO could reach this headline a week level, BLUMENTHAL stated: “Ihave, as part of my work both as counsel to the Director and as Deputy Director, insisted upon the agency -- and to which Director Falcon agrees -- insisted upon the agency becoming a much more aggressive regulator. And the remark that you're referring to is the context of, I want you people to go out ‘your examiners to go out ~ and look at Fannie Mae, and find things that are wrong. Don't make them up, but find them if they're wrong. Zero tolerance. Write those traffic tickets. It's not your job as examiners to make decisions of whether or not to pursue this. That's made above you at the Director level” [141: 14-22; 142: 1-12]. BLUMENTHAL stated he had also presented another slide show to his staff, which concluded with a slide that stated that the performance of OFHEO in the Freddie Mac situation had been. “unsatisfactory” (143: 17-21]. ‘Regarding the former Chief Examiner, identified by BLUMENTHAL as Scott Calhoun, BLUMENTHAL stated, “There's no future for him at OFHEO. He was responsible for the — no ‘one office was responsible for failure in Freddie Mac. Certainly his office had primary responsibility. As a civil servant, he couldn't be fired or anything like that. But it was clear that, this performance had been unsatisfactory. He was going to get personnel evaluations that were very poor. He would get less money [....] So he found a job. And we worked with him, I believe, to allow him to - Office of Personnel Management, to allow him to retire early” (144: 8+ 22; 145: 1-8} BLUMENTHAL agreed that the timing of the Raines letter (Attachment I) and Raines’ testimony on February 25, 2004, was “coincidence” (146: 1-8]. BLUMENTHAL was asked about another OFHEO supervisory letter, dated May 6, 2004 (Attachment L), which states, in pertinent part: “The OFHEO examination of Fannie Mae has determined that Fannie Mae is not applying the proper accounting standard with respect to determining asset impairments and revenue recognition for manufactured housing and aircraft lease securities” (146: 14-20] BLUMENTHAL stated he was familiar with the letter (Attachment L) [148: 4-6] Asked if there were any factors that influenced or affected the issuance of the May 6 supervisory letter (Attachment L) [148: 17-22], BLUMENTHAL recalled: “The trade press for some time had speculation by analysts and others, that as a result of their examining of the public SEC filings of Fannie Mae, that they believed that Fannie Mae was inadequately recognizing the impairment ~ in other words, the number of defaults -- in these loans. That issue had arisen. It HuD0000594 Confidential‘SID-04-0034-2 BLUMENTHAL was in the press” [149: 13-20]. BLUMENTHAL did not know of any other factor(s) that influenced the issuance of the May 6, 2004 letter (Attachment L) [151: 12]. Asked if he had a completed examination report at the time of the issuance of the May 6, 2004 letter (Attachment L), BLUMENTHAL stated, “that’s not how we function. I explained earlier that one of the things that we have pursued is this idea we don't ~ we don't do this. The final report of the Fannie Mae exam is months away; that when we identify a problem, we deal with the problem at that point [....] Idid not have a final written report, but I had received ~ as the Director and all the other senior members ~ the report of the Fannie Mae examiners” (152: 17- 22; 153: 1-6]. Regarding the timing of the May 6, 2004 supervisory letter (Attachment L), BLUMENTHAL was asked if Raines’ speech, given on May 6, 2004, at the Federal Reserve Bank of Chicago, 40th Annual Conference on Bank Structure and Competition, was a factor in the timing of the letter (Attachment L) [160: 8-16]. BLUMENTHAL stated he had not been aware of this meeting [161: 3]. BLUMENTHAL also commented: No. It may seem obvious, but, in fact, itis not. And that is, personally, I will tell you, as a regulator, I would not hesitate taking action in any ‘case because Mr. Raines is speaking anywhere. We don't need his permission to take action with the public” [161: 5-11]. BLUMENTHAL stated, “If we took the suggestion that was made in Mr. Bond's letter (Attachment B) and is being explored here, that is that somehow these things have been timed, I can tell you, as Ihave said, that is never a consideration in my dealings, with that one exception where were [sic] literally responding to Mr. Greener” [162: 3-9] BLUMENTHAL was shown a text of Raines’s speech given on May 6, 2004 (Attachment M), in which Raines discusses the issue of derivatives [163: 1-8]. BLUMENTHAL was asked, “Was that a factor in your getting that letter [Attachment L] out on the same date?” (163: 9-10] BLUMENTHAL responded: “No. As a matter of fact ~ first, let me tell you, that this is the my knowledge and recollection, and I'll state categorically, it's the first time I've ever seen this speech. This is a speech about systemic risk [....] this is a different issue” (163: 11-18]. BLUMENTHAL reiterated that there was no connection between the issuance of the May 6, 2004 letter (Attachment L) and Raines’ speech (Attachment M) (167: 10-22]. to BLUMENTHAL was shown an OFHEO news release, dated March 31, 2004 (Attachment N), which states, “OFHEO announces fourth quarter minimum and risk-based capital classifications for Fannie Mae and Freddie Mac" [173: 20-22; 174: 1-5]. It was pointed out to BLUMENTHAL, that the last two sentences of the news release (Attachment N) contained the following text: “In addition, Fannie Mae's capital calculation is based on financial information and the application of accounting policies currently under review by OFHEO. The outcome of the review may result in restatement of prior period results and a revision of the respective capital calculations” [176: 3- 12) BLUMENTHAL wes asked why the news release (Attachment N) was released on March 31, ryote repressed mtn arte pein. Toe pat nFOR OFA. USE OMY ote. Poe aki bs samminaunous Use g ese HuD0000595 Confidential2004 (177: 5-6]. BLUMENTHAL stated: “We are required under the statute to report on & quarterly basis, to opine on the capital adequacy of Fannie Mae, and March is the end of the first Quarter” (177: 7-11} BLUMENTHAL advised that the capital classification report, part of the news release (Attachment N), was prepared by OFHEO’s Offfice of Capital Supervision, supervised by Associate Director Len Reid, based on information supplied by Fannie Mae and Freddie Mac (178: 17-22; 179: 1-4], Regarding the preparation of the news release itself (Attachment N), BLUMENTHAL stated, “The news release would be written by Corinne Russell. But I would wager that if we were to ook at the last six, or eight, or ten of these, that the news release is taken -- each time, it's the same news release, and they just change the figures appropriately” (179: 18-22; 180: 1-2]. BLUMENTHAL further stated: “Then we began the Fannie Mae exam. And this becomes difficult because I can't discuss what's going on. But certainly we had the manufactured housing issue, We had the control issue about FAS-149. And we are involved in an exam, and we'll be taking action at some point on that exam. We have felt that it is necessary, on the basis of what we've found so far and what we're finding in the exam, that we needed a similar type of hedge with regard to Fannie Mae's capital calculation” [182: 14-22; 183: 1-4]. BLUMENTHAL was asked, “Was there anywhere in the special examination or the special review that you're conducting, where you advised Fannie Mee that there might be a need for them to make a restatement of their financial position?” [184: 11-16]. BLUMENTHAL responded, “informally, yes. We've not sent them a~ as far as I know -- any written thing, but we've informed them” (184: 17-20]. BLUMENTHAL stated that Fannie Mae “have rejected the idea. They do not believe that it will be necessary. And it may not be until we have ~ we have not yet reached conclusion in the special exam about whether or not it would be necessary for them to restate” (185: 2-7]. BLUMENTHAL was asked who wrote the last two lines of the news release (Attachment N), relating to Fannie Mae, and he responded, “I don't know who actually came up with the words, but Iam in complete agreement that it's an accurate-- i's accurate” (186: 13-17] BLUMENTHAL reiterated that he did not know who wrote the last two lines [186: 20]. Asked, “Did the Director write it?” BLUMENTHAL stated, “I-- I don't know. I doubt it. That is ~ may, the actual drafting of a letter, of this kind of letter, would probably be done in the Office of Capital Supervision, for Mr. Leonard Reid is responsible” (187: 1-8]. Asked, “Do you know ‘who directed that the language be included?” BLUMENTHAL stated, “No, I don't. But I would assume it's the Director” [187: 14-17]. BLUMENTHAL speculated: “But it may very well be that Mr. Reid, as head of Capital, went to the Director of the agency and said, we must include a qualifying statement in our quarterly report” [188: 2-8]. BLUMENTHAL stated that, although he was not involved in the decision to include this language, the inclusion of this language was ean Se a gS Sasha te deumines nous uses eames * 16 HuD0000596 Confidential‘SID-04-0034-1 BLUMENTHAL “absolutely necessary,” and he was in “complete agreement” with its incorporation in the news release (Attached N) [189: 1-8]. BLUMENTHAL was asked if OFHEO was trying “to tar Fannie Mae with the same brush you tarred Freddie Mac” (191: 12-14]. BLUMENTHAL stated: “The idea that Fannie Mae is different, that's the official Fannie Mae position. But since -- before this letter was out, we had a $250 million correction by Fannie Mae in their manufactured housing. This isn’t a theory. This was an enforcement action by OFHEO. We told them their accounting was wrong [....] They agreed, and they came out with a $250 million - $260 million adjustment at that time. They'll make additional adjustments I think before it’s all over. I think it comes to about $400 million. ‘They had to make it for that quarter, and then subsequently. So that was one. This other thing is the billion dollar error in the 10-K ~ in the 8-K, which OFHEO then went out, looked at a safety and soundness view, and concluded another OFHEO enforcement action was necessary. And that is, we ordered them to come up with a plan of remediation for controls; that these are not ~ this is not little things. And it's not like Fannie’s out there clean. Furthermore, the decision at this point -- this is a March letter. At that point, we were about approximately three months into the Fannie Mae special exam. There are things that we dont cite, that we don't have to tell the Senate, or the public, or anything, that go into our decision-making of why we didn't want to put out a clean statement about the capital classification; that regardless of what Senator Bond may think, it was the opinion of our agency -- and as I've said to you several times, that Im absolutely in complete agreement that that language was necessary to qualify the capital position of Fannie Mac. Fannie Mae has very little capital, unlike Freddie Mac. And were there to be a ‘major adjustment in the accounting of Fannie Mae, they may very well be inadequately capitalized” (192: 11-22; 193: 1-22; 194: 1-13). ‘Asked if the qualifying language would remain in the capital report news releases, BLUMENTHAL responded, “Absolutely, until such time as either we require it or make a decision not to” (195: 2-6]. BLUMENTHAL stated: “Yes. That decision actually has been made by the Director. That was discussed” [199: 11-13]. Asked about comments made by Jonathan Gray, whom BLUMENTHAL identified as an analyst for Sanford Bernstein company, that the March 31" news release (Attachment N) was “scare- mongering,” BLUMENTHAL stated: “Mr. Gray hasn't got a clue of what OFHEO is finding in its exams. [fhe is, I go -- if you want to talk about lectures I give the staff. I attempt to terrify my workers, terrify the staff with their potential liability under the federal securities laws for leaking information. We have information that you could trade on. Mr. Gray hasn't got a clue. Consequently, he says it's scare-mongering. He doesn't know if we have a rock-solid case with direct evidence that will produce a summary judgment when we go to court or what have you. ‘This is just his speculation” (206: 2-17]. BLUMENTHAL noted that other analysts take the opposite view, and perceive OFHEO as taking effective action (206: 18-22] BLUMENTHAL stated: “We assume that if we take action, and they [Fannie Mae] go through alin te ernie vanes Useg 2" ™ 17 HuD0000597 Confidential‘SID-04-0034-1 ‘BLUMENTHAL their analysis, and they say, we've got OFHEO; they're wrong on this one. That they're going to ‘20 to court and publicly embarrass us by beating us, not to embarrass us because of some PR. side, But they're going to show the world that OFHEO iis an inadequate regulator. That kind of analysis, Ido on every document; that I talk to the Director about and counsel all the time, is if we had to go to court to support our action, could we do it? And that is what's involved. So when we've reached the conclusion, yeah, we're okay, we've got the case here, we don’t care what the analysts say, or what the reporters say for that matter” [207: 22; 208: 1-17] BLUMENTHAL was asked, “Is it trie that when you issued this March 31st news release -- the best way to describe this. I've been advised that you actually had Fannie Mae stock price, a chart I guess off Bloomberg in your hand, and you were checking. You were going around talking to people...” [208: 18-22; 209: 1-2]. BLUMENTHAL responded, “Absolutely. My fear is creating a market reaction” (209: 3-4). BLUMENTHAL stated that he checks Fannie Mae stock prices “every day” [209: 11-12]. BLUMENTHAL stated: “And we say, okay; we have a responsibility. We have to concern ourselves about the price of this stock, where it goes” [210: 20-22]. BLUMENTHAL farther stated: “So that part of my work is I track Fannie Mae stock every day. And, particularly, when we're taking action, Igo to the Director. I tell him where iti. Okay, Fannie Mae's been under pressure for some time, and we watch the reaction” (211: 8-13] BLUMENTHAL denied that he appeared “gleeful” at the possibility of a drop in Fannie Mae stock [212: 13-15]. It was pointed out to BLUMENTHAL that he had acknowledged in a staff ‘meeting, that he had talked to the staff about how public announcements by federal officials, could negatively impact the stock of Fannie Mae (214: 8-16], and could serve a means for ‘making the regulated entity “submit to the will” of the regulator (215: 3-6]. It was suggested that, based on his own thesis, he might have been pleased to “hurt” Fannie Mae “a little” in regards to its stock position in order to “make them more receptive” (215: 6-10], BLUMENTHAL commented, “You can't hurt them enough to matter. That kind ~ the kind of movement you're describing in the course of a day, where I was supposed to be gleeful, that ‘might have been a fraction of a point” (215: 18-22]. It was pointed out to BLUMENTHAL that such shifts might have been worth several hundred million dollars to investors, and BLUMENTHAL responded, stated: “. But investor protection is not part of our mandate. We do address that. That's the SEC. We're a safety and soundness regulator, and that's a very, very important track in this discussion” (216: 7-11] It was suggested to BLUMENTHAL that OFHEO might be “jeopardizing the safety and soundness of the institution” by making statements “that are speculative” [216: 12-15]. BLUMENTHAL denied that statements, such as those in the news release of March 31, 2004 (Attachment N) relating to Fannie Mae, were speculative [216: 19]. BLUMENTHAL stated: “No, no. That's the same assumption that Mr. Gray and perhaps Fannie Mae are making. You don't know if we have it in hand because we're not telling you. We will take action when we are satisfied that we have a strong enough case that was it challenged in court” [217: 8-14]. cass wt rte earch pes FOR OFFICAL Use ONL ae ler suru peans aha ae cumin une USC SS (oc fp ag HuD0000598 ConfidentialEs 4-0034-1 ‘BLUMENTHAL BLUMENTHAL commented: “But we have reached the conclusion that there's enough substance here that it may result in their requirement to restate. I suggest we have an obligation to say that, and that's why that statement is there” [218: 5-10]. BLUMENTHAL stated: “The altemative would be terrible, though. The altemative — if we said nothing, and in four months, we come out with a major report we've done -- we don't tell anybody anything until we come out with the final report. And we come out with the report that says they've got to restate because they have significant accounting problems, we would be subject, I believe, to valid criticism by our congressional overseer. ‘The people in the market might have said, how long have you known about this? At what point did it gel to the point where you should have at least put the marketplace on notice there might be a problem?” (219: 7-22]. Asked if he was indicating that OFHEO planned to take action soon, BLUMENTHAL stated: “A possibility. And it has reached the state where it is no longer theoretical conjecture; that it may not be at the point where it's publicly disclosed, but OFHEO in its examination has reached a point where we felt it was required, literally required, that we put people on notice that there may be a need to restate the financials” (220: 5-13]. ‘Regarding the accounting issues raised by impairments related to Fannie Mae’s manufactured housing and aircraft lease holdings, BLUMENTHAL acknowledged that OFHEO and Fannie ‘Mac had presented their views to the SEC, and that the SEC had ruled that if OFHEO wanted Fannie Mae to follow a certain accounting practice, Fannie Mae should do so going forward, but that Fannie Mae did not need to file a restatement [228: 10-18] It was suggested to BLUMENTHAL that, “Some people have suggested you were very disappointed by SEC” [229: 8-10]. BLUMENTHAL asserted that such comments were from “unhappy employees,” “people who don’t like me” [230: 1-5] BLUMENTHAL was asked, “Have you directed your staff currently working in that special examination -- have you told them that you wanted to get a financial restatement from Fannie Mae within the next month?” [232: 21-22; 233: 1-3]. BLUMENTHAL stated: “I don't have conclusions that I tell them to reach. I don't do that. What I have told them is I want zero tolerance; that I don't want the examiner saying, this is too small to worry about. I want a hundred percent report. The decisions of what actions will be taken, based on what the examiners find, is not a decision for the examiners. Thats the instructions I give them, But I haven't given them any conclusion” [233: 12-22]. BLUMENTHAL was asked if OFHEO was actively seeking to find something that would force a restatement by Fannie Mae [234: 1-7]. BLUMENTHAL responded: “I categorically deny giving those kinds of instructions to anyone. [ will tell you that it is very hard to believe, in my opinion ~- and we need to be very careful here because I don't want to discuss -- but it's very hard for me to believe that Fannie Mae will not be forced to restate simply on the basis of what has almost already been shown; that ~ Fannie Mae, throughout the Freddie Mac exam, would make statements to the fact that they were different; that they had the best control systems, and the best ‘stab cba setamined una SUS Co 19 HuD0000599 Confidential‘SID-04-0034-2 BLUMENTHAL accounting, Well, it's already been demonstrated that they make billion dollar errors, that they have 250 million openly -- somewhere around $400 million they need to restate. Every issue that is -- that they have inadequate controls over FAS-149 with end-user systems; is that at some point their board of directors has to look at the manager and say, you keep telling us that you're flawless. But each time they look into something, they find problems. Now the issue for OFHEO, as being raised by Mr. Bond and what have you, is that you're creating a real problem here for Fannie Mae, No. ‘The answer is Fannie Mae is creating the problem. So that at the end of the day, OFHIEO doesn't make the decision of whether they have to restate. I's their board that has to make it” [234: 8-22; 235: 1-17]. BLUMENTHAL further commented: “When you get audited by the IRS, they always find something wrong; same type of thing. But no matter what we say, the prudent action by the board is probably to do a restatement. But we're not going to order that, nor is that our goal” [236: 5-10] Regarding OFHEO’s current oversight posture, BLUMENTHAL acknowledged that the agency hhas taken a more aggressive approach: “So you're absolutely right. ‘There's no question — and Im sure that a lot of people are unhappy with it - that a conscious decision has been made, discussed with the Director, and we're in complete agreement, that OFHEO will be a much more aggressive regulator going forward than it has in the past. We believe that's a policy decision the Director's entitled to make” [238: 10-18] Asked, “Is there a possibility that you're overly aggressive” BLUMENTHAL stated, “T don't believe our actions constitute anything outside of the proper parameters of regulatory action. Look at the actions we're talking about here. We tell them to give us a plan of remediation. We tell them if you adopt -- the 149 thing, when we talked about the manufactured housing; here are the steps you take, They come and they say, we've got a better way. We review it. We say, okay, we agree; do it your way. I don't see these things as being outside the parameters” [238:19- 22; 239: 1-14] BLUMENTHAL was asked if he had told his staff, in a meeting, “we're playing the political game beautifully” [239: 16-19]. BLUMENTHAL responded: “Absolutely,” but asserted that the reference was to how the Director, with BLUMENTHALs assistance, was able to avoid having to resign, after an effort by Fannie Mae and Freddie Mac to force his resignation [239: 20-22; 240: 1-22; 241: 1-22]. BLUMENTHAL was shown a Washington Post article, "Agency Hints at Fannie Restatement,” published April 1, 2004, bylined David S. Hilzenrath and Kathleen Day (Attachment 0) [244: 9- 13]. BLUMENTHAL was also shown an OFHEO news release, dated April 1, 2004, "Statement of OFHEO Director, Armando Falcon Jr. regarding Fannie Mae Accounting Review" [244: 20- 22; 245: 1-3], ‘stalin its: Th pe FOR GPPEA Se OM dno ps eb. Pe . 20 HuD0000600 ConfidentialSID-04-0034-1 BLUMENTHAL It was noted that the Washington Post article (Attachment O) makes reference to the OFHEO news release dated March 31, 2004 (Attachment N), and specifically to the qualifying language relating to Fannie Mae. The article (Attachment 0) also stated: "The agency is discussing with Fannie Mae whether the company correctly accounted for and valued key assets, according to a source who spoke only on a condition of anonymity. The amount of money at issue cannot be determined” [246: 4-10]. The article (Attachment 0) also cites comments by a Fannie Mae spokesman, Charles Greener, that OFHEO’s special examination of Fannie Mac “started only recently, and will examine all aspects of the company's finances, and that OFHEO has reached no conclusion. He said the company has just filed its ‘fully audited’ annual report with the Securities and Exchange Commission. ‘We are not aware of anything that backs the assertion that there may be a need for us to restate our financial results as said. If anyone has evidence to the contrary, they should share it with us directly; otherwise itis irresponsible to speculate on this topic, and affect markets where billions of dollars of securities are traded every day. The Post should not use anonymous sources for such an irresponsible allegation’ (246: 11-225 247: 1-6]. It was pointed out, also, that the Washington Post article (Attachment Q) noted: "The disclosure came as the Senate Banking Committee prepared to renew efforts today to create a stronger regulator for Fannie and Freddie. There were signs that lobbying by the companies was affected by the debate on the proposal of committee chairman Richard C. Shelby of Alabama" (247: 7- 15]. The April 1, 2004 OFHEO news release (Attachment P) contains the statement: "A statement made by Fannie Mae in today's Washington Post concerning OFHEO's investigation was inaccurate and misleading" (247: 18-21] BLUMENTHAL acknowledged that Greener’s comment about a possible Fannie Mac restatement referred to the news release and capital classification report of March 31, 2004 (Attachment N) [248: 16-17; 249: 2-9]. BLUMENTHAL stated: “...we pick up the Washington Post, and he says the quote that you have read. “We are not aware of anything that backs the assertion that there may be a need for us to restate our financial results’. When we read that, I looked at that, and I said, I don't believe it. This is securities fraud. This is a material misstatement. Fannie Mae and OFHEO had been dealing for days and weeks on this issue. We had told them -- we mentioned that we thought it could produce as much as a $700 million restatement. It turned out the number was smaller. But certainly, they were aware of this point” [249: 12-22; 250: 1-5] BLUMENTHAL stated he “contacted Tom Donilon, the executive vice president at Fannie Mae, and told him that this was totally outrageous; that we were not going to tolerate this kind of thing” [253: 14-17]. According to BLUMENTHAL, “Tom Donilon and I went back and fort several phone calls, trying to work out a joint statement to correct this. So for what i's worth, Fannie Mae never attempted to defend Mr. Greener’s statement. They gave that immediately, and, in fact, said that he had -- he hadn't been really authorized” [254: 8-15]. BLUMENTHAL pointed out that, subsequently, Fannie Mae had a "$260 million change recognition in their accounting, When I use the term ‘recognition’, they had to restate their impairment, the losses they took on the manufactured housing bond for that period. So, in effect, we did get a Sotobiy eedeterined unser USE 21 Hup0000601 Confidential‘SID-04-0034-T ‘BLUMENTHAL restatement, and there's more coming in the next quarterly report” (255: 8-15]. twas pointed out to BLUMENTHAL that the third paragraph of the Washington Post article (Attachment O) cites an “anonymous source,” and BLUMENTHAL was asked, “Was that you (260: 6-12]. BLUMENTHAL responded: “TI will give you the answer to that. And that is, that is possible that that is me, but not in reference to this matter. That information, that the company, whether they had correctly accounted for and valued key assets, was the way I had worked up a response for our press people. It's not something we would ordinarily go to the Director with, ‘And that is, they come to me and say, people ate saying what is it that you're looking at. And I'd say, well, we can't discuss an ongoing examination. Well, you've got to give us something; we just can't say anything. So like that language, that looks like the kind of carefully crafted language that I do try and come up with. But in terms of discussing this matter, I don't know” [260: 18-22; 261: 1-13]. Asked ifhe had communicated with reporters Hilzenrath or Day, BLUMENTHAL stated, “I don't believe I've ever talked to Mr. Hilzenrath. And Ms. Day was the person who covered the Freddie Mac exam, And she and I would talk all the time. Most of the conversation would be, Kathleen, I'm sorry. I don't discuss ongoing investigations” [261: 17-22]. BLUMENTHAL, was asked if he had talked with Day on or about March 31 or April 1, 2004 and give her information” [262: 2-5]. BLUMENTHAL responded: “I don't recall. But I certainly would not - - the information that we're talking about, if that is what I gave her, that would be consistent with what I gave other reporters as well. And that is, that is the language that was worked up to say when people say, well, what is it that you're looking at? We say, we're looking to see whether the company is correctly accounted for and value key assets. That's the statement” (262: 6-16], BLUMENTHAL was asked, “So that's your wording, That's your language?” [262: 17-18] BLUMENTHAL responded: “Yeah. don't want to call it my official statement because it doesn't come out on the OFHEO thing. But that was the language that was worked up to sive to reporters” (262: 19-22; 263: 1] Iwas pointed out to BLUMENTHAL that the Washington Post article (Attachment 0) also noted: “The disclosure came as the Senate Banking Committce prepared to renew efforts today to create a stronger regulator for Fannie and Freddie." BLUMENTHAL was asked if the timing of the March 31 news release (Attachment N) was timed to coincide with the markup of a bill, as ‘mentioned in Senator Bond’s letter (Attachment E) [26S: 1-8]. BLUMENTHAL stated: “Ihave the answer for you, if may interrupt you, because Senator Bond is correct about the timing, but he misunderstands something [....] And that is that I met with the Director about the timing of that release in terms of we knew the markup was coming. ‘This wasn't a hearing; this is a markup, when they take pieces of legislation and report out of committee. And we thought, should we hold off because of the markup. And we reached the conclusion, since both of us had numerous sources that told us the bill was dead as a doomail, ‘ToiSSylustopuney une suse ge 2 22 HuD0000602 Confidential‘SID-04-0034-2 BLUMENTHAL that Fannie had killed it -- Freddie at this point was keeping their head down because of their own problem — that the bill ~ that there wasn't going to be a markup, They were going to sit and announce that the bill was dead and what have you; that we thought about this, and said, all right. ‘There's no reason to hold off because there isn't going to be a bill reported out. Now, as a technical matter, they report it out, but as you look at the public statements the senator has made, that's all dead, including the ones that went in the press. We actually made that decision that since there was no way that we could affect the outcome, there was no reason to withhold action wwe believed was required as a regulator” [265: 9-22; 266: 1-19]. Regarding current staff-related issues, BLUMENTHAL recounted the retirement of Calhoun, the former Chief Examiner (272: 10-18]. BLUMENTHAL stated: “We then restructured the Office of Examination. And that is split into a Fannie and a Freddie group with an examiner in charge ofeach one. We've only been able to fill one of those positions because of money and all the rest of it, But there are two positions now. In connection with the examiner in charge position, we have interviewed people who are on the staff, who undoubtedly wanted the job and didn't get it. So we have a situation where we have some dissatisfied, relatively high ranking examiners in the company. If that's where the dissatisfaction is coming from, fine. They've talked to Mr. Bond; they're free to talk to the senator any time they want. I'm not aware of anybody having been terminated” (272: 19-22; 273: 1-15] BLUMENTHAL further stated: “No. We're not allowed to demote anyone either. Personnel evaluations that were not as ~- you used to get high outstanding, and now they were fully satisfactory, that kind of thing, much lower personnel evaluations. But those evaluations ~- Mr. Falcon; excuse me. Mr. Calhoun ~- everybody knew what was happening, but we were cordial and professional about this. It was a business matter. It was nothing personal” (274: 1-11] ‘Regarding the personnel issue outlined in Senator Bond’s letter (Attachment E), BLUMENTHAL stated, “I remember specifically the first time I read it, and each time I read Mr. Bond's letter, I say to myself, what is he talking about? The chief examiner left, but he left voluntarily, and he left like a gentleman and professional, and we tried to meet our responsibilities [....] There's no question that I know as a management matter in this agency that there are some very unhappy examiners who believe that they were blamed for the Freddie Mac failure. And Blumenthal, who did this special exam, is the guy who's targeting them. And now Blumenthal gets promoted in this position, and they feel that they’re being picked on. All Tcan say to you is [don't do that. I-- I will defend any actions they've taken. As I say, the examiners were evaluated by the same guy that's always been evaluating, the chief examiner, Scott Calhoun. accepted 100 percent of his recommendations, and didn't change one of them” [275: 21-22; 276: 1-22; 277: 1-6). BLUMENTHAL commented that the new examiner in charge, John Kerr, “...is completely revitalizing that area with a more aggressive and professional but less collegial type of atmosphere. That's a very important point” [277: 18-21]. usta ote Stcrane aes USC — 23 HuD0000603 Confidential‘SID-04-0034-2 BLUMENTHAL BLUMENTHAL commented, “And, of course, Fannie and Freddie have always just been major points of this agency. It's their belief, as it is Mr. Carmack [phonetic] on Senator Bond's staff, that OFHEO was designed just to be a litle capital regulator; that all this other authority had ceased by itself. We disagree completely” [278: 9-16]. BLUMENTHAL further commented, “...there's been a great deal of animosity between the agency and its regulated entities. And, of course, these are very powerful political entities. And part of the reason that OFHEO didn't do anything, when all those years when it was (inaudible) Freddie Mac, is they were afraid to. Well, all that's over now. And now we have a situation where it's a tough regulator. I's looking for problems, and it identifies, it's addressing them. We go in and we had an examination force that still has some people that are in that old mode that Scott Calhoun brought [....] The point is, Scott's going to be the good guy, and he did this for three or four years, whatever it was. And the examiners were in this collegial, work with them type of mode, and everybody was happy. The reports would come out, yes, they're disclosures are as good as an SEC company, and their capital's fine, and this is fine, and that's fine. And then about 4:30 on June 6th, that Friday, I got a call from Mr. Dalk, the head of Government Relations for Freddie Mac, who said to me, we've just fired our Chief Operating Officer, the Chief Executive Officer has retired, forced resignation, and our chief financial officer has resigned. And he said, why didn’t our examiners know about the problems? And we did the special exam, they did know about it. They didn't take action. They were being collegial. Well, all that's over now” [278: 17-22; 279: 1-10; 280: 4-22; 281: 1] BLUMENTHAL also commented: “Mr. Calhoun, as an individual, we allowed him to leave with dignity and move on, and we hope he does very well. We have restructured the agency, hired new people, and brought in a new examiner in charge who knows that our job isto find everything. And then to bring it before the experts in the agency to determine whether or not this, is something to be handled by a private meeting; we think this is legal, but i's not best practice; or whether it rises to the level where the Director has to get involved and take action. That's the big change in the office” [281: 2-15}. Asked if there were other individuals with whom investigators should speak, BLUMENTHAL, stated, “I was a little surprised when you spoke to Mr. Reid, in that he wasn't part of any of this, as remember. Obviously, you can speak to whomever you want. But the people who were involved, you've met with; Peter Brereton, Corinne Russell; Alfred Pollard; the Director; me. I am unable to come up with anyone else off the top of my head. I don't remember anybody else being involved. So the answer to your question is no” (282: 8-18]. BLUMENTHAL was asked, “Do you have any other information or documentation relevant to the matters discussed during this interview?” [287: 16-18]. BLUMENTHAL stated: “It's with regard to the April 20, 2004 letter from Senator Bond to the Honorable Kenneth Donahue, the Inspector General [Attachment E]. There are a number of statements in here HuD0000604 Confidentialen ‘SID-04-0034-1 BLUMENTHAL would like to respond to [....] The letter states at one point, in reference to the February 26, 2004 Wall Street Journal article, the letter states, ‘A copy of the article and the letter are included. The Wall Street Jounal appears to be based on a selective leak of the letter or its contents.’ To my knowledge, and as we've testified, there was no selective leak. This document was sent to Capitol Hill. It was sent to Congressman Baker and his staff. As far as I know, that's how it got to the press. We did not give it — we did not leak it to anyone” [288: 6-22; 289: 1-5] BLUMENTHAL further commented: “With regard to the statement in the third paragraph of Senator Bond's letter [Attachment E], "To the effect that Director Falcon's letter of February 24th appears to contain the results and partial recommendations of a confidential regulatory examination of Fannie Mae," that is incorrect factually. It is not a partial recommendation, I think this was final action. It was upon supervisory response. And we believe that in this case that the Director has authority under the statute that I cited earlier, 12 USC 4522, to make these kinds of statements public” [289: 6-18]. BLUMENTHAL also stated: “With regard to the objection in Senator Bond's letter that's ‘contained in the paragraph that begins, ‘In addition, I can see no professional purpose for OFHEO to issue a news release that infers an ongoing review of Fannie Mae's accounting practices may result in a restatement of prior period results,” specifically I was very involved in that issue. And I will tell you that it was my official opinion conveyed to the Director, that I believe that Mr. Greener in that case had violated the federal securities laws. And I contacted Fannie Mae officially, and they took corrective action, which we were satisfied with. Had they not done that, had they taken the position, well, we think this was a basis for the statement, the line of questioning that you pursued, but had not heard until today, we would have taken action under our authority, and we would have sought action from the Securities and Exchange Commission” [289: 19-22; 290: 1-18] BLUMENTHAL continued his statement: “With regard to the markup, as I testified to you earlier, we did, in fact, discuss the timing of our release [Attachment N], and decided to go forward because we knew from every source, every conceived source, that the bill was dead, and it would have no impact on it” [290: 20-22; 291: 1-4] BLUMENTHAL also commented, regarding Senator Bond and Bond staff member John Carmack: “There is an issue that was not raised here, but I do want to put it on the record. And that is, its @ personnel {sic?] issue, I'm a former congressional staff, and so is Mr. Falcon, and OFHEO has any number of other ones. We know Mr. Carmack, John Carmack {....] He's the ~ he's on Senator Bond's Appropriation Committee staff [....] Mr. Carmack is a known opponent of Fannie Mae. Excuse me. My apologies; of OFHEO. He was a close friend of Bill Maloney, who was the head of Government Relations for Fannie Mae {....] What I do know is that Mr. ‘Carmack has made statements to other Congressional staff about OFHEO and his animosity towards this organization. And in the last two years, we have received three Inspector General investigations of our agency, one of which we came out pretty well. We hope these other ones also obs demons unser su Segoe HuD0000605 Confidential‘SED-04-0034-1 BLUMENTHAL we will as well. I don't think there's anything inappropriate in Senator Bond looking in these issues and raise these issues, but we are beginning to wonder if, a la the Keating Five in the past, there is some sort of an attempt on at least the part of this congressional staff member to somehow chill or otherwise interfere with the investigation of Fannie Mae. And I will put on the record that we will not be deterred in any way; that we will build a case based on facts, and law, and take what we believe is an appropriate regulatory action” (291: 5-22; 292: 1-22; 293: 1-4] BLUMENTHAL also stated: “We're beginning to wonder if there's an attempt to influence us on the examination, and we're watching for it. That was the statement I wanted to put on the record” [293: 15-20} BLUMENTHAL was asked, “Have you withheld any information during the course of this interview?” and BLUMENTHAL responded, “No. To the extent that you asked questions I could answer, I have attempted to answer them fully and completely. To the extent that [ am unable to recall situations or discussions, or what have you, Ihave honestly told you I do not recall them. I have attempted to answer every single question you've asked” [294: 7-16] BLUMENTHAL was asked, “Have you been truthful, candid, and complete in your responses?” and he responded, “Yes” [294: 17-20] The interview was concluded at 1:25PM. Attachments: During the course of the interview, certain documents were introduced and given exhibit numbers for identification purposes, as shown in the transcript of the interview. For cross- reference purposes, these exhibit numbers are included with the Attachments: ‘Transcript of taped interview (Attachment A); Advisement of Rights- Kalkines (Attachment B); E-mail from Leonard Reid (Attachment C; Exhibit 1); Memorandum regarding Varrieur inquiry (Attachment D; Exhibit 2); Letter from Senator Bond to Inspector General Kenneth M. Donohue (Attachment E; Exhibit 3); Letter, HUD-OIG Hosking to FALCON (Attachment F; Exhibit 4); Newspaper article, Dawn Kopecki (Attachment G; Exhibit 5); Russell e-mails re: Kopecki article (Attachment H; Exhibit 6); Letter, February 24, 2004, FALCON to Raines (Attachment I; Exhibit 7); Screen capture, February 26, 2004, OFHEO website (Attachment J; Exhibit 9); Wall Street Journal article, February 26, 2004 (Attachment K; Exhibit 10); OFHEO supervisory letter, May 6, 2004 (Attachment L; Exhibit 11); imyntverposces tina rte pemason Tsp POROFMN. USEOMY ed oncom tuto posanes patie Ne Euldbiy ote communes Sepa ‘awe pa - HuD0000606 Confidential‘SID-04-0034-2 ‘BLUMENTHAL + Raines speech, May 6, 2004 (Attachment M; Exhibit 12); ‘+ OFHEO news release and capital classification report, March 31, 2004 (Attachment N; Exhibit 13); © Washington Post article, April 1, 2004 (Attachment O; Exhibit 14); ‘+ OFHEO news release, April 1, 2004 (Attachment P; Exhibit 15). BLUMENTHAL provided a copy of Copy of 12 USC 4522, Public Disclosure of Final Orders, which is herewith attached as Attachment Q; Exhibit 8). INTERVIEW CONDUCTED BY: ATSAC Anthony G. Medict ana RZ ‘storney Bryan Howell DATE OF INTERVIEW: August 12,2004 INTERVIEW REPORTED: Memorandum of Interview based on notes taken at the time of the interview and upon a review of the transcript of the interview produced by BETA COURT REPORTING, 910 17" Street, NW, Suite 200, Washington, DC 20006-Af E> 27 HuD0000607 Confidential