Editor: Bob, please tell us about Freddie Mac.
Bostrom: Many people believe that Freddie Mac is a part of the government or serves as a lender. In fact, we are neither of those things. We are a stockholder-owned, NYSE-listed company that was chartered by Congress in 1970 with the mission of bringing liquidity, stability and affordability to the U.S. housing market and expanding homeownership and affordable housing rental opportunities.
Freddie Mac fulfills its mission in a number of ways. One is by purchasing residential mortgages and mortgage-related securities in the secondary market. After we purchase mortgages, we either bundle them into mortgage-related securities that can be sold to investors, or hold them in our own investment portfolio in the form of mortgages or mortgage-related securities. When we sell these securities to investors, we can then use the proceeds to purchase additional mortgages from mortgage lenders. In that way, we can provide a continuous flow of funds to mortgage lenders.
We finance our investment purchases and manage the associated interest rate and other market risks primarily by issuing a variety of debt instruments and entering into derivative contracts in the capital markets. What makes us unique is our Congressional charter which sets forth our powers and forms the framework for our business activities. It shapes the products we bring to the market and drives the services we provide to the U.S. residential housing and mortgage industries. The charter also limits what we can do, including the types of mortgage loans we are permitted to purchase, and requires us to devote a significant amount of our business to financing affordable housing.
A key charter limitation on what we can do is that we can only purchase mortgages with a principal amount under the conforming loan limit, which is currently $417,000 for most of the country. We are different from other mortgage investors in that we cannot buy non-conforming loans, such as jumbo loans. We also cannot buy other businesses except to the extent permitted by our charter. Congress has set us up to provide stability in the secondary market for conforming residential mortgages and to respond appropriately to the private capital market. We also provide ongoing assistance to the secondary market and access to mortgage credit by increasing the liquidity of mortgage investments and in many cases improving the distribution of investment capital available for residential mortgage financing. Our Congressional mandate to provide stability and continuous liquidity is most important at times like the present where we are seeing severe generalized market stress and resulting residential mortgage market illiquidity.
Freddie Mac has a retained portfolio of about $720 billion of mortgages and mortgage-related securities. We have a guarantee portfolio of approximately $1.6 trillion of mortgages and mortgage-related securities. In 2006 we issued over $780 billion of long and short term debt securities. In 2006 we were number 50 in the Fortune 500 list.
Editor: Why did you join Freddie Mac?
Bostrom: I was attracted by the public service character of its mission which (like that of Fannie Mae) is to provide stability and liquidity in the secondary markets and the conforming loan spaces. When I joined Freddie Mac, it was truly a lawyer's dream in terms of legal and intellectual challenges. The company was still facing an SEC enforcement action, a multi-billion dollar securities class action and shareholder derivative suits and related ERISA litigation resulting from the financial restatement announced in 2003, a Federal Election Commission investigation and was operating under a Consent Order with its safety and soundness regulator, the Office of Federal Housing Enterprise Oversight (OFHEO). And, it was an NYSE-listed company that was not yet able to file timely annual or quarterly financial statements. There were legislative, regulatory and political challenges facing both Freddie Mac and Fannie Mae - two government-sponsored enterprises. There also were the significant business challenges facing a Fortune 50 company with almost $2 trillion of mortgage assets. Looking back, it seemed as if our board was in almost constant session dealing with the restatement aftermath and regulatory issues.
When you think about all of that and add in the other responsibilities of a general counsel in a highly regulated company, it was a great opportunity to deal with all the complexities. And yet, the outcome has been very good. We have now successfully settled our restatement-related lawsuits. We have significantly satisfied the requirements of our OFHEO Consent Order. We have materially upgraded our corporate governance by continuing to implement best practices. And, we have returned to producing quarterly financial statements.
Editor: How is Freddie Mac's Legal Division organized?
Bostrom: We have a total staff of 175 people, including approximately 95 attorneys. They all report to me on a solid line basis. The issues we face and the transactions we handle frequently require the involvement of attorneys from different practice areas. By organizing around areas of expertise rather than functional lines or business units, the Legal Division is able to develop great expertise in a variety of legal disciplines, which enables the Division to provide a high level of legal service in a fast-changing business environment. In the event of a corporate or divisional reorganization, the Legal Division can address new legal issues and products immediately without having to reorganize to follow the organizational structure.
We actively partner with our clients to help them achieve their business objectives. Freddie Mac's business fundamentally involves transactions in legal instruments, including debt securities, mortgages, mortgage-related securities, equity securities, hedging instruments, servicing rights and guarantees. We are involved in virtually all aspects of the company's daily operations by assisting our business clients in structuring and negotiating transactions, advising on charter, regulatory and governance issues, and drafting and interpreting complicated contracts. In 2006, we provided legal support for almost 2,000 single-family and multifamily mortgage transactions, almost 1,200 debt offerings, over 1,000 swap transactions, over 190 mortgage securities offerings, a common stock repurchase and two preferred stock offerings.
We do the bulk of this work in-house, including all our securitizations. We send little work to outside law firms relative to the scope and nature of our business.
Editor: What is the involvement of the lawyers in compliance?
Bostrom: In the wake of our restatement, Freddie Mac established a Corporate Compliance Division, headed by the Chief Compliance Officer (CCO). As required by OFHEO, our CCO reports directly to our CEO. Compliance at Freddie Mac involves a close partnership of the business units, Corporate Compliance and the Legal Division. The business units are accountable for managing the risks inherent in their activities, including compliance risk. Corporate Compliance provides oversight over compliance activities. The Legal Division works closely with Corporate Compliance to ensure that compliance obligations and risks are well understood, including providing interpretation of laws and regulations and guidance as to implementation.
On an ongoing basis, we consult with Corporate Compliance and the business units about the effectiveness of the implementation of policies and procedures designed to ensure compliance with law. Because the effectiveness for compliance purposes of such policies and procedures involves a legal judgment, the board and the CEO expect me not only to be thoroughly familiar with such policies and procedures, but also to let them know if improvements are required. In practice, if the need for a control improvement is discovered and after the CCO or I have briefed the CEO, we will design and launch implementation of an appropriate remediation plan, and inform the board as appropriate. It is a seamless relationship.
Editor: What role does the Legal Division play in heading off compliance problems?
Bostrom: We work with Corporate Compliance and the business units to help avoid compliance violations on an ongoing everyday basis and are available to help interpret and implement our advice so that they are able to take preventative measures in a proactive way. Both Corporate Compliance and the Legal Division are involved in that process as partners to try to avoid after- the-fact problems.
The Legal Division plays an important role in identifying potential violations at an early stage through our client relationships - both to answer their legal questions or resolve any uncertainties about the legality of proposed actions. We foster a close working relationship between the lawyers and the business clients to build the kind of trust that enables business clients to feel comfortable confiding in the lawyers - and not have them feel that the lawyers are in an unapproachable ivory tower.
Our lawyers are an integral part of the business teams engaged in the many business activities of the company. The true indicator of a good relationship between the business people and the lawyers is when lawyers are voluntarily included in staff meetings of the various business areas on a regular basis.
Editor: How seriously does Freddie Mac treat risk management?
Bostrom: We have an extremely well-developed risk management structure. At the senior management level, we have established an enterprise risk management committee (ERMC). At the board level, enterprise-wide risk oversight is assigned to the governance, nominating and risk oversight committee (GNROC). Highly technical areas of enterprise risk management are assigned to other committees of the board that have the requisite expertise. The Audit Committee reviews policies with respect to risk assessment and risk management, consistent with NYSE requirements. The Chief Enterprise Risk Officer, who also chairs the ERMC, reports on a regular basis to GNROC on enterprise risk matters, and to other board committees as appropriate.
Editor: Do you attend meetings of the independent directors or the audit committee without other members of management being present?
Bostrom: Executive sessions of our independent directors are without any members of management being present (including myself), except by invitation. However, I am often asked to join portions of executive sessions of the board and to participate in executive sessions of the audit committee, in many cases without other members of management being present.
Editor: What tools do general counsels need to be effective in their role as persuasive counselors?
Bostrom: To fully play the role of a persuasive counselor as envisioned by Norm Veasey in his cover interview in the July 2007 issue of The Metropolitan Corporate Counsel , the general counsel needs to know not only what is going on at the senior management and board levels, but also to have a pervasive knowledge of what is going on throughout the company, including issues that surface at the middle management level. By participating as a member of executive committees and by virtue of the information flow from the Legal Division, I have that knowledge. This knowledge and the ability of the general counsel to assess legal risk are circumstances that create a desire on the part of the board and the CEO to seek advice from the general counsel. I think that I have been successful in building up that kind of relationship. I am sought out not only for interpretive legal advice, but also for counsel on how that legal advice can be implemented in a way that will take into account business imperatives. I believe that m y advice about serious compliance issues, including about actions that need to be taken to avoid legal issues that are just over the horizon, has always been gratefully received and given careful consideration.
Editor: How do you acquire the pervasive knowledge that is required to play the role of persuasive counselor?
Bostrom: I attend all board meetings. As to board committees, I am a regular attendee at GNROC and audit committee meetings and attend other committee meetings at my discretion depending on what issues are being discussed. I serve as a member of our senior executive team comprised of our top seven executive officers. We meet on a regular basis both formally and informally. With this structure, the company has been able to respond quickly to business and legal challenges. I sit on a number of other significant management committees, including the enterprise risk management committee. Each of the other key committees in the company has a Legal Division lawyer who participates on it, whether it is the disclosure committee, new products committee or the asset/liability committee. This allows the lawyers to partner with the business areas and be aware of what is going on, thereby allowing them to function as a counselor as well as a lawyer and to acquire the pervasive knowledge of the business areas they serve that is necessary if they are to serve as persuasive counselors.
Editor: Do you have formal processes that assure the flow of information from the lawyers to you?
Bostrom: I encourage all the lawyers to let me know immediately of any significant matters that come to their attention. I also have regular meetings with lawyers at different levels and the various functional departments to make sure that I know of any significant matters. Each of those who attend these meetings learns about what the others are doing which facilitates the building of knowledge among our lawyers and the ability to spot issues from the perspective of different types of functional expertise.
My goal is to make sure that I have taken proactive steps to set up reporting lines and information flow systems to keep me advised of what is going on in the company on a holistic integrated basis. I just don't wait for a problem to come to me, but to proactively anticipate where problems can exist.