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A Gutsy David Takes On a Goliath

Falcon came to OFHEO in 1999 to find a paltry $16 million budget and 76 staffers to assure financial markets, investors and congressional overseers that the financial organizations in his charge were safe and sound. The agency was viewed as so ineffectual that former SEC chairman Arthur Levitt Jr. admitted he never heard of it during his tenure in Washington.

Falcon campaigned for more staff and money and the agency's budget eventually grew to $59.2 million and its staff to 188. He also reorganized the way OFHEO conducted its examinations.

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A former legal counsel for the House Banking Committee, Falcon, 44, had never been a regulator. But he had a hand in shepherding through Congress legislation that created the agency he now heads. He also witnessed firsthand the shortcomings of the regulators who were supposed to prevent the savings and loan crisis.

A former colleague characterized Falcon as a populist who followed in the footsteps of the late Rep. Henry B. Gonzalez, former chairman of the House Banking Committee and a fellow Texan. "Falcon has never been an apologist for the industry. Is he courageous? I think he wants to do the right thing. He is fair and pragmatic," said Amy Friend, who also worked on the banking committee and is now assistant chief counsel at the Office of the Comptroller of the Currency.

"It looked to me like he was persistent and fair, like a regulator should be," said Levitt, who said he wished he had pushed harder on some tough issues when he was SEC chairman.

James R. Barth, finance professor at Auburn University and a former banking regulator, said it was "commendable" and "appropriate" that Falcon's agency pointed out Fannie Mae's problems before there was a crisis. "Even by Washington standards, $9 billion is not small change," he said.

The investigation of Fannie Mae resulted in the proverbial heat being turned up in the kitchen. Sen. Christopher S. Bond (R-Mo.) -- who, as chairman of a Senate Appropriations subcommittee, has jurisdiction over OFHEO's budget -- tried to withhold $10 million of the agency's funds until Falcon was replaced. He also commissioned a report into whether Falcon's probe was motivated by politics. The inspector general found the agency had been so humiliated by missing the accounting problems at Freddie Mac that top OFHEO officials vowed to be particularly aggressive toward Fannie Mae.

Falcon recalled that executives at Freddie Mac didn't like his actions, either. He recounted a breakfast meeting he had with Leland C. Brendsel, the longtime chief executive of Freddie Mac, shortly after arriving at OFHEO. Falcon said Brendsel complained that the agency was releasing too much information about a housing index. When the regulator responded that Freddie Mac shared the data with Fannie Mae, Brendsel pounded on the table, saying it was his job, not OFHEO's, to determine antitrust compliance. "I can't tell you how many times these two companies have tried to tell me how to do my job," Falcon said.

Getting pressure from industry goes with the territory, said Mary L. Schapiro, vice chairman of the National Association of Securities Dealers. She recalled when she took over the reins of the Commodity Futures Trading Commission in 1994, the Chicago exchanges were in the habit of "pushing the commission around."

Schapiro, who was an SEC commissioner earlier in her career, said she gave a speech at an industry conference and laid it on the line: "The era of industry dictating to the agency was over," she said. "I wasn't going to let them impact my future credibility as a regulator."

She said the balance of power did shift, but not before she heard that an exchange executive told his board: "I'm not going to let any 5-foot-2 blond girl push me around."

It is difficult for very small agencies that lack a public constituency to be tough, Schapiro said. "Nobody has a lot of sympathy for regulators, but it can be very hard to stand up and do the right thing. But if they don't, there isn't much hope for our government."

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